GUIDEBOOK ON CAPITAL INVESTMENT PLANNING FOR THE CAPITAL CITY OF ULAANBAATAR August 2018 Disclaimer: . This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. . Copyright Statement: The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permis- sion may be a violation of applicable law. The International Bank for Reconstruction and Development/The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. Please cite the work as follows: Kaganova, O., Dash, B., Bat-Orig, K., and Chen, Y. 2018. “Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar.” Washington DC: World Bank. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750- 4470, http://www.copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. Cover Photo: © Khaliun Bat-Orig Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Table of Contents FOREWORD v ACKNOWLEDGMENTS vii ABBREVIATIONS ix INTRODUCTION x 1. CAPITAL INVESTMENT PLANNING AND ITS CHALLENGES IN ULAANBAATAR 1 1.1. Introduction to Capital Investment Planning 1 1.2. Capital Investment Planning in Ulaanbaatar 2 1.3. Foundations of the New Capital Investment Planning Approach 6 2. KEY ELEMENTS OF THE CAPITAL INVESTMENT PLANNING PROCESS 7 2.1. Sources of Suitable Investment Projects 7 2.1.1. City Development Planning 7 2.1.2. Asset Management 8 2.2. Financial Aspects 14 2.3. Public Private Partnership and Integration with Capital Investment Planning 22 2.4. Public Participation and Overall Transparency of the Capital Investment Planning Process 24 3. STEPS OF THE CAPITAL INVESTMENT PLANNING PROCESS 27 3.1. Lessons from FY2018 Capital Investment Planning Exercise 27 3.2. Steps for Capital Investment Planning Process in Ulaanbaatar 28 Step 1. Develop a plan for communication with key stakeholders in the Capital Investment Planning process and their engagement 29 Step 2. Review/modify policies on Capital Investment Planning 30 Step 3. Establish project scoring criteria and prioritization process 32 Step 4. Develop or modify schedules, forms, and instructions 35 Step 5. Prepare project requests 36 Step 6. Review project requests and sort them into line ministries or city lists 38 Step 7a. Prioritize project requests and send the prioritized lists to line ministries 41 Step 7b. Public Private Partnership screening 44 Step 8. Identify available funding and match city’s projects to funding 45 Step 9. Draft capital program and budget documents and officially adopt them 47 4. IMPLEMENTING AND MONITORING INVESTMENT PROJECTS 49 5. WHAT IS NEXT FOR ULAANBAATAR? 52 Appendixes Appendix 1. Mainstreaming Climate Resilience Considerations 54 Appendix 2. Draft Policy on Capital Investment Planning 59 Appendix 3. An Alternative Approach to Ranking Requests 61 Appendix 4. Municipal Asset Management: Guidelines on Estimating Operations & Maintenance Costs 62 Appendix 5. Assessing Local Government Financial Capacity 72 Appendix 6. References and Useful Resources 79 List of Boxes Box 1. How to Make Urban Planning in Ulaanbaatar More Realistic and Sustainable 7 Box 2. Typical Elements of Annual Life Cycle Activities 9 Box 3. Reserve Fund for School Facilities, Tokyo’s Chuo Ward 13 Box 4. Tokyo Waterworks: How to Finance a Water Pipeline Replacement Project 17 Box 5. Good Practices in the Preparation of Public-Private Partnerships at National Level 23 Box 6. Benefit of Long-Term Planning and Public Participation: Contra Costa Water District, California, United States 25 Box 7. New Technique for Increasing Citizen Participation in Government Decision-making Process in Ulaanbaatar 26 Box 8. Cost Savings from a Simple Life Cycle Costing Decision 37 List of Figures Figure 1. How Capital Investment Planning in Ulaanbaatar Is Related to Other Activities 4 Figure 2. Organogram of Ulaanbaatar City Administration, as of August 2018 5 Figure 3. Estimated Maintenance & Repair Costs for Different Facilities, Washington, DC, United States 12 Figure 4. Steps in Capital Investment Planning Process 29 Figure 5. Key Actions under Steps 6, 7 and 8 40 List of Tables Table 1. Example of Demand for Capital Investment: Budget Requests for 2018 3 Table 2. Example of Basic Property Inventory for Public Buildings 11 Table 3. Prioritization Criteria Considered for Testing for the 2018 Capital Investment Planning with Illustrative Example 34 Table 4. Fragments of List 1 Submitted to the Ministry of Education, Culture, Sports and Science for Funding in FY2018 42 Table 5. Sample Summary of Requested Project Costs, Allocated Budget Funding by Ulaanbaatar, and Unfunded Difference (Million MNT) 46 Table 6. Sample Fragment of Ulaanbaatar’s Approved 2018 Capital Budget (Million MNT) 48 v Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Foreword The capital city of Mongolia, Ulaanbaatar, is the political, economic, and cultural hub of Mongolia, where over 46 percent of the country’s population lives. The impact of climate change and the precarious livelihoods in rural areas have contributed to the rapid urbanization of the city over the past two decades. Ulaanbaatar’s population has grown from 600,000 in 1989 to about 1.4 million today and is expected to reach 1.7 million by 2030. This unprecedented growth creates a pressing demand for the Municipality of Ulaanbaatar to further invest in infrastructure and other assets to support economic and social development. Such investments require capital that often far exceeds available resources. This scarcity of capital, in turn, makes it even more important for the Municipality of Ulaanbaatar to build capacity to appraise and prioritize investment decisions. This guidebook is a customized adaptation of the original World Bank Publication “The Guidebook on Capital Investment Planning for Local Governments” (2011), tailored to the circumstances of Ulaanbaatar. The original 2011 publication was grounded in an approach that emerged more than thirty years ago in certain North American cities, which has since been tried and tested across the world. Over the past twenty years, this approach of integrating asset management and life-cycle costing with capital investment planning has been recognized as a “good practice” by various organizations and adopted (and adapted) by cities in many countries. This revised version of the guidebook aims to help the city improve and enhance its existing process of capital investment planning. I hope that all of those in capital investment planning at the city, district, and central government levels, including the staff tasked with capital investment planning and managers of various municipal entities seeking capital investment, will find the Guidebook helpful. James Anderson Country Manager for Mongolia vii Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Acknowledgments Preparation of this report was funded by the Public-Private Infrastructure Advisory Facility. Public-Private Infrastructure Advisory Facility is a multi-donor technical assistance facility aimed at helping developing countries improve the quality of their infrastructure through private sector involvement. For more information on the facility, visit http://www.ppiaf.org. The effort to mainstream climate change considerations into the Capital Investment Planning process in this report was supported by Just-in-Time Global Facility for Disaster Reduction and Recovery. The Global Facility for Disaster Reduction and Recovery is a global partnership that helps developing countries better understand and reduce their vulnerability to natural hazards and climate change. The Global Facility for Disaster Reduction and Recovery provides knowledge, funding, and technical assistance and is managed by the World Bank. For more information about the facility, visit https://www.gfdrr.org. The main author of this guidebook is Dr. Olga Kaganova. Yang Chen led the team to secure grant funding, led the research and consultations with the counterparts, and provided valuable professional insights into the report context. The team consisted of Khaliun Bat-Orig, who prepared the Public-Private Partnership related analysis and recommendations of the Guidebook in addition to overall support and quality review of the report context; Battuya Dash who updated the Ulaanbaatar city financial assessment that is used as the basis for this Capital Investment Planning exercise and provided overall support to the report context in addition to preparing the exploratory note on mainstreaming climate change considerations into the Capital Investment Planning process, including developing climate change prioritization criteria in Appendix 1 with contribution from Dr. Boldbaatar Shagdar in terms of client consultation and information sharing; and Xuan Peng, who provided general support to the team. Appendix 3 was authored by Gary Windolph, P.E. The authors thank Tasha Heidenrich and Tobias Fast for their editorial contribution. Also, the authors greatly appreciate Ms. Nomunzul Bat-Ireedui for her efforts in proof-reading and editing the report. This effort was a continuation of the Public-Private Infrastructure Advisory Facility-funded activity conducted by the World Bank urban team in FY2014, which developed the Capital Investment Planning core methodology for prioritization of projects. This served as a solid foundation and the current team greatly appreciated the effort from the urban team, including Meskerem Brhane, Rumana Huque, Gayatri Singh, and David Ryan Mason. viii This is a product of close cooperation with the Ulaanbaatar city government, in particular the Policy and Planning Department. The authors are deeply thankful to Mr. Ulziibayar, Mrs. Erdenechimeg and Ms. Tsendlkhagva from the Policy and Planning Department for their constructive and collegial collaboration. Peer reviewers of the book include Arturo Ardila Gomez, Jacques Bure, Wenyu Jia, Joanna Mclean Masic, Marc S. Forni, Georges Darido and Nupur Gupta. Binyam Reja, Practice Manager for Central North East Asia Transport Unit, provided overall supervision and quality control of the guidebook. ix Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Abbreviations ADT Average Daily Traffic CIP Capital Investment Planning or Capital Investment Plan DBM Development Bank of Mongolia DPPL Development Policy Planning Law FY Fiscal Year GFDRR Global Facility for Disaster Reduction and Recovery GIS Geographic Information System IDIA Industrial Development and Innovations Agency JIT Just-in-Time LDF Local Development Fund MNT Mongolian Tugrug MoF Ministry of Finance MUB Municipality of Ulaanbaatar O&M Operations and Maintenance PPD Policy and Planning Department PPIAF Public Private Infrastructure Advisory Facility PPP (P3) Public-Private Partnership SME Small Medium Enterprise SNTA Sub-National Technical Assistance UB Ulaanbaatar UBDC Ulaanbaatar Development Corporation USD United States Dollars WB World Bank x Introduction This Capital Investment Planning (CIP) Guide- there is inefficient coordination between the book is developed as part of a technical assis- main funding sources. The fragmentation of the tance provided by the World Bank (WB) team system applies to the screening and selection of funded by a Public Private Infrastructure Advi- PPP projects, where the off-budget accounts re- sory Facility-Sub-National Technical Assistance sulting from PPPs have pushed the budget defi- (PPIAF-SNTA) grant and a supplemental grant cit and debt level over the edge at both the mu- from Just-in-Time-Global Facility for Disaster nicipal and national level. Also, there is no clear Reduction and Recovery (JIT-GFDRR). The tech- methodology of how the projects are screened nical assistance aims to help the City of Ulaan- and selected to be included in the CIP list of baatar (UB) strengthen its financial capacity projects, which is sent to seek the City Council's through increased transparency and objectivity approval. The proposed CIP list of projects is of UB city's CIP process which integrates Pub- revised at the City Council level before approv- lic-Private Partnership (PPP) project prioritiza- al and submission to the Ministry of Finance tion processes and streamlines climate change (MoF) for final approval and inclusion in the considerations. budget. To meet the growing demand of infrastructure in UB, it was estimated that a capital investment Objectives of This Activity of approximately USD 5 billion is needed to im- plement the capital investment projects for the Given the fiscal constraints and the growing initial period of 2014-2017 as planned in the need for infrastructure investment, the WB Ulaanbaatar City Master Plan 2020. Another initiated an effort in 2014 to improve the CIP USD 20 billion is estimated to be required to process in UB city and to enhance the capacity reach the mid-term and long-term goals (until of the Municipality of Ulaanbaatar's (MUB) of- 2030) as stipulated in the Master Plan. How- ficials who oversee the CIP process. The activ- ever, UB reported total revenues of, inclusive ity was brought to a halt due to funding issues of government transfer, equivalent to USD 655 and was resumed in 2017 with the grant fund- million in 2016. This evidently shows the enor- ing from PPIAF-SNTA. During the earlier phase mous financing gap for public infrastructure de- of the WB team's activity with regards to CIP, livery in UB. a preliminary diagnostics of the CIP system was carried out and an interim CIP prioritiza- Despite UB's plan to invest in its infrastructure, tion methodology was developed. However, the the city has its challenges regarding the CIP methodology was not used. Objectives of this process. The investment prioritization process current phase of the activity is to i) revise the lacks a unified approach at the city level, and CIP prioritization methodology that reflects xi Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar current socio-economic agenda of UB city gov- The guidebook consists of five chapters. Chap- ernment; ii) provide training to a broad range ter 1 overviews the CIP process and the chal- of public officials in MUB who are involved in lenges of that process in UB, including how the preparing, submitting, reviewing, prioritizing, CIP process is linked with other areas of gov- and approving capital investment projects for ernment activities such as long-term planning, UB; iii) guide UB city to pilot the prioritization asset management, and financial planning and methodology for the Government of Mongolia's budgeting. Chapter 2 considers more specifical- FY2018 budget cycle; iv) revise the prioritiza- ly how urban planning, strategic planning, and tion methodology based on lessons learned asset management serve (or should serve) as from FY2018's CIP and budget process; v) pre- the foundation of potential capital investment pare a guidebook for UB city to mainstream projects. In particular, this chapter details how and institutionalize the recommended CIP life cycle costing, a key component of asset man- methodology; and to vi) carry out a prelimi- agement, should be incorporated into UB’s CIP nary study and suggest a methodology to main- process. This chapter also provides an over- stream climate considerations into the CIP pro- view of the standard financial arrangements cess. of the CIP process (in particular how local gov- ernments typically fund and finance their capi- tal investments) and practical instruments for Intended Users of This Guidebook public participation. This chapter refers readers to specialized sources of guidance on such sub- The purpose of this guidebook is to summa- jects as asset management, municipal credit- rize practical advice to UB government on how worthiness, and PPP. to improve and advance its existing process of planning and funding capital investment. The Chapter 3 presents a step-by-step outline of guidebook builds upon both the existing pro- the CIP process in UB, along with suggestions cess and the new good-practice principles that for new approaches and strategies that could UB has already started to test and implement be added based on international good practic- while preparing its 2018 capital budget. The es. Chapter 4 discusses some issues associated guidebook is written for decision makers, tech- with implementing and monitoring investment nical experts, and managers at all government projects. These chapters are designed to pro- entities – at the district, city, and central gov- vide practical advice on how the CIP process in ernment levels – who are engaged or should be UB can be improved. engaged in the CIP process. Chapter 5 presents recommendations for next steps in the city’s journey towards more effi- How to Use This Guidebook cient and sustainable capital investment. It con- siders both short and medium-term improve- UB’s city government has well-established ad- ments and strategic directions. ministrative processes and is administratively very dynamic and self-improving. Therefore, this Finally, the appendices provide materials that guidebook focuses on conceptual and strategic may not be sufficiently known in the UB prac- changes to the CIP process that could benefit the tice and hence can be useful for CIP-related ac- city, rather than on administrative detail. How- tivities. Appendix 1 presents an exploratory ever, it still provides a number of recommenda- note on mainstreaming climate change into the tions on short- and medium-term improvements CIP process in UB city and proposes a climate to administrative processes. change criterion. Appendix 2 presents the draft xii CIP policy UB city can consider when drafting steps discussed in this Guidebook. its CIP policy. Appendix 3 presents an alterna- tive approach to ranking requests. Appendix 4 Note: Chapter 2 is important for understanding presents international best practice guidelines the context of the CIP process and its intrinsic on municipal asset management. Appendix 5 links to other activities. Thus, it is recommended presents a sample methodology to assess a lo- as mandatory reading for decision-makers. How- cal government’s financial capacity. Appendix ever, technical experts interested only in the or- 6 lists the references and resources useful for ganizational and technical aspects of the process a more detailed study of recommendations and can read Chapter 1 and skip directly to Chapter 3. 1 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar 1. Capital Investment Planning and Its Challenges in Ulaanbaatar 1.1. Introduction to Capital Investment Plan- gations of the city government; and ii) that the ning city government does not engage in activities that the private sector can provide, if economi- In the context of the public sector, capital in- cally feasible. vestment is understood as investment in the ac- quisition or building of new assets (buildings, The CIP process follows a number of general infrastructure, equipment), or as major repair rules to optimize the use of limited financial re- and replacement of existing assets that have an sources for public benefits: economic life longer than one year and a value above a specified threshold. ŠŠ First, there is a transparent and systematic process that evaluates the competing needs A capital investment plan (CIP) is usually a mul- of various municipal services. In the face of tiyear (generally between 3-6 years) program limited financial resources available to a city of prioritized capital investment projects, with government for capital projects, a process anticipated beginning and completion dates, should be established to allocate the limited annual estimated costs, and proposed financing financial resources to the city government’s methods. A capital investment program is nor- priority areas; mally approved by a local elected body. Each ŠŠ Second, a local financial policy that outlines year, the program is reviewed, revised, and pro- the priority areas for capital investment and jected for the coming year. In particular, an ap- sources of financing is formulated and enact- proved CIP connects mid-range plans with the ed; annual budgetary process. Once the CIP process ŠŠ Third, CIP is a multiyear approach, which in- is established, the CIP becomes a rolling plan, volves planning for the medium term, based linked to the annual budgeting process: (1) the on the city development agenda and forecast- previous year is removed from the CIP, and a ed capital repairs. new year is added at the end of the CIP peri- ŠŠ Fourth, capital investment decisions are con- od; and (2) current-year capital budget expen- sidered within the frameworks of life cycle ditures are approved as parts of the city’s total costing. This framework considers not only budget. the capital cost, but all costs during the use- ful life of an asset, particularly annual opera- CIP is based on two important assumptions that tions and maintenance (O&M) costs. The cor- guides management of assets in modern cities: nerstone of modern CIP is a recognition that i) that a city government is only responsible for capital investment – whether it is in new con- assets that provide public services to constitu- struction, acquisitions, or in capital repair – encies or assets that perform mandatory obli- is intrinsically linked with the O&M costs that 2 this asset will incur during its useful life (see Conceptually, several strategic and mid-term Box 2). development planning documents guide the CIP ŠŠ Lastly, the CIP process and its results are decisions at the city level, although there is no inclusive of and transparent to all relevant clear project selection and prioritization rule in stakeholders, including city-affiliated depart- effect. Specifically, the guiding principles of the ments and agencies, the local legislative body CIP process in UB are as follows: (e.g. City Council), the business community, and the public. ŠŠ The Mayor’s Action Plan – defines the in- vestment directions of the current adminis- tration based on its political platform; 1.2. Capital Investment Planning in Ulaan- ŠŠ The City’s Master Plan – the central spatial baatar planning document; and ŠŠ The Socio-Economic Development Guide- The Budget Law of Mongolia (2011) defines lines for UB – the principal socioeconomic the national capital investment projects as de- development document. velopment and infrastructure projects that sup- port long-term economic growth with total val- In terms of the institutional framework, the ues higher than MNT30 billion (USD12.5m) and planning, funding and implementation of cap- provides the criteria for prioritizing investment ital investment in UB involves three levels of projects. The prioritization is based upon avail- governments. MUB reviews and selects over able documentation regarding proposed proj- 2000 capital investment project requests from ects (e.g. project feasibility studies, land permit over 70 public entities in UB each year (Ta- status), and their progress status (if on-going). ble 1). MUB sorts the capital investment re- However, the Budget Law prohibits land acqui- quests by funding sources – UB city budget or sition spending as a part of capital investment. line ministry budgets – and sends the requests This creates delays and complications for in- to approving entities. Projects to be funded by vestment in public infrastructure and should be the UB city budget require approval by the City remedied in forthcoming revisions of the law. Council, while the projects to be financed by state budget are approved by line ministries. The legal framework governing CIP is insuffi- The MoF reviews and includes selected projects cient for the MUB. Moreover, there is no legal in the annual budget allocations. definition of capital investment project for UB City. The MUB’s Policy and Planning Depart- The review process of capital projects request- ment (PPD)1 is mandated by law to prepare the ing city budget funds – either at the MUB level capital investment plan within the territory of or City Council level – does not follow clear se- UB. The challenge is that the relevant laws are lection and prioritization criteria. The lack of a silent about the specific content, quantities, and formal prioritization process has resulted in a qualities of the services that the Capital City practice where MUB selects capital investment must provide. Many public capital investments, projects without knowing the priorities of the especially commercially-oriented ones (e.g., a requesting entities. Similarly, line ministries business center or a market for used cars), are fund projects submitted by the city without not explicitly prohibited by law and their poten- knowing the city’s priorities. tial scope is not formalized. 1 The PPD mandate includes preparation of CIP. 3 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Table 1. Example of Demand for Capital Investment: Budget Requests for 2018 Number of Number of projects No Organization categories entities & activities 1 Local Administrative Organizations of the Capital City 2 122 2 Districts 9 391 3 Implementing Agencies of Capital City Governor 27 612 Capital City Budget Entities under Capital City Governor & 4 18 244 Ulaanbaatar City Mayor Enterprises under Capital City Governor and Ulaanbaatar City 5 16 657 Mayor TOTAL 72 2026 Source: Governor’s Office of Ulaanbaatar In addition to capital investment project re- ment in districts; quests submitted by local entities to MUB, 2. The city budget (including the City Road many large investment projects proceed to the Fund), which supplies approximately 40% final capital investment project portfolio of UB of the total capital funding for UB in 2018; through channels outside the CIP process. Proj- the city budget is partially funded by in- ects procured through PPP methods and proj- ter-government transfers; and ects financed with loans go through a separate 3. The state budget, through ten line minis- selection and approval process. As a result, a tries, which supplies the other 60% of the substantial portion of the city’s capital expenses total capital funding in 2018. Reported- comprise debt obligations to the Development ly, decisions on which requested projects Bank of Mongolia (DBM), and this debt has not a ministry decides to fund have not been been properly considered in the planning stag- transparent. Moreover, the size of each min- es. Similarly, “build-transfer” contracts impose istry’s available funds varies significantly additional debt burdens on the city. As a result, from year to year. in 2017, 38% of the approved capital funding in the Capital City budget went towards repaying However, since 2013, a fiscal crisis at the na- capital debt. tional level has reduced available funding for UB. Both national budget deficits and debt bur- On the funding side, there are three2 main dens exceed the limits permitted by law, and sources of funding for capital projects in UB: both have reached a crisis level. In particular, off-budget accounts pushed the budget defi- 1. The Local Development Fund (LDF), which cit and debt level over the edge. The national is managed by both UB city (70%) and dis- government mitigated the crisis by introduc- tricts (30%) and used for small-scale invest- ing a new national policy to reduce expenses and budget deficits, improve transparency, and 2 Until April 2017, there was a fourth source: off-budget avoid off-budget accounts. For UB, this meant a funding by the DBM, which borrowed funds and channeled them to UB, separately from the regular CIP reduction of the overall available capital invest- process. ment funding, and in 2014 and 2015 only 63% 4 and 69% of planned capital investment were proper data for monitoring past and current executed, respectively.3 Furthermore, no new projects, priorities and project selection have capital investment was approved for 2017.4 not been well-coordinated. There is no city- wide, cross-departmental database linked to a In summary, CIP decisions have been insuffi- geographic information system (GIS), contain- ciently coordinated not only among the three ing past and current capital investment proj- levels of government, but also among submit- ects. More importantly, the lack of a formalized ting entities as well as the public, resulting in and transparent capital investment process to an opaque CIP process which has had a seri- choose priority projects among the thousands ous, negative impact on UB’s municipal finance. of competing requests amid different stake- With multiple channels for selecting and fund- holder incentives and needs, has resulted in in- ing projects (including off-budget), and without efficient and excessive capital spending in UB. Legal mandate; Societal norms and expectations; services and responsibilities re- level of public wealth quired by law and regulations Scope of local government services/functions that require property; standards for service consumption/provision City development planning (strategic and mid-term): Capital ŠŠ City budgeting ŠŠ Master Plan Investment ŠŠ Line Ministries ŠŠ Capital City Planning budgeting Development Visions ŠŠ Mayor’s Action Plan Asset management needs for government and municipal enterprise Funding by Development property and infrastructure Bank of Mongolia (DBM) (capital maintenance, repair, asset (borrowing) replacement and expansion, and new assets) Financial health of the local government Figure 1. How Capital Investment Planning in Ulaanbaatar Is Related to Other Activities 3 According to Finance & Treasury Department of the Governor’s Office of Ulaanbaatar. 4 “Brief Introduction to the 2017 Consolidated Budget of Mongolia.” 5 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Figure 1 presents a generalized overview of the Capital City has taken an initiative to mod- how CIP in UB relates to other key planning and ify its CIP process, with support from the WB. political functions and activities. It acknowledg- The initiative aims to establish a better orga- es the fact that CIP, along with budgetary and nized and more rational CIP approach with borrowing policy, determines the city’s finan- more transparency and objectivity. It is a con- cial health and ability to provide services to its tinuous process of tests and improvements; inhabitants for years to come. the city government and the PPD in particular made substantial progress in the preparation Due to a complicated institutional CIP frame- of the 2018 capital budget. This guidebook re- work, a fiscal crisis at both the national and flects this process and documents the lessons municipal levels, and a lack of coordination, learned. CAPITAL REPRESENTATIVE CITY COUNCIL (45 Members) Governor of Capital City/Mayor of Ulaanbaatar City Manager - Municipal Services: ŠŠ Water & Sewage Vice Mayor Vice Mayor of Vice Mayor Vice Mayor Authority of Green Infrastructure of Poverty of Social ŠŠ Electricity Network Development & & Ger Area Reduction & Development (UBDEN) Air Pollution Redevelopment Employment ŠŠ Water Infrastructure ŠŠ Landscaping General ŠŠ Road Maintenance Architect 33 Agencies, 25 Budget Entities & 24 City-Owned Enterprises, including: Chief of Mayor’s Office - Policy, Administration & Urban Internal Functions: Planning & Master Plan ŠŠ Property Relations & Agency Registration Agency ŠŠ Strategic Planning & Budgeting ŠŠ Air Pollution ŠŠ Road Development ŠŠ Education Agency ŠŠ Social Welfare Reduction Agency Agency Agency ŠŠ Finance Department ŠŠ Health Agency ŠŠ National Parks ŠŠ Transport ŠŠ Employment ŠŠ City Attorney, Clerk’s ŠŠ Central Cultural Office ŠŠ Bagakhangai Department Palace Agency Meat Processing ŠŠ Ger Area ŠŠ SME Support ŠŠ Public Safety ŠŠ Water Sport & Factory Infrastructure Training Center Center Agency ŠŠ Food Supply ŠŠ Housing Center Corporation ŠŠ Children’s Palace Source: authors’ compilation Figure 2. Organogram of Ulaanbaatar City Administration, as of August 2018 6 1.3. Foundations of the New Capital Invest- need to be made compatible with the compli- ment Planning Approach cated realities in which the city government op- erates. A cornerstone of a modern CIP is the recogni- tion that capital investment – whether it is in This CIP approach is based on ideas and prin- new construction, acquisitions, or in capital re- ciples that have shaped understanding of the pair – is intrinsically linked with the O&M costs management of government issues in a growing that this asset will incur during its useful life number of countries. The proposed concepts (see Box 1). For many types of infrastructure, have been tested and proven in international O&M costs are quite high; in fact, over sever- best practice. The approach has also influenced al years, they can equal – or even exceed – the governments to understand asset management original capital cost. This implies that prudent as an integral part of the CIP process. These ex- CIP should consider not only capital costs, but periences and lessons learned translate into the future O&M expenses as well, before decisions following very practical attitudes and measures are made. At the very least, entities that re- for UB to adopt to improve its CIP process: quest capital investments must have a good sense of the associated future O&M costs. They ŠŠ All investment needs are compared objective- also need to know how these expenses will be ly and prioritized against the same criteria; paid. Additionally, city financial planners need ŠŠ MUB does not spend its limited resources to be involved in CIP to make sure that the to- on unnecessary investment in projects that tal scope of newly-added annual O&M expens- could be financed by the private sector; es is realistically estimated and budgeted for. ŠŠ Prudent long-term fiscal policy is exercised Appendix 4 provides some guidance on how to (e.g. future payment obligations are consid- estimate O&M costs for various infrastructure ered before entering into contracts that stip- systems. ulate such commitments); ŠŠ Innovative solutions at the project level are The fact that this proposed CIP framework bal- considered (e.g. if a better-quality road sur- ances the conflicting interests and preferences face can reduce future O&M costs and quickly of different stakeholders (residents, businesses, recoup the additional capital costs required, municipal enterprises, and numerous other city such a solution would be implemented); and entities) is perhaps its strongest feature. This ŠŠ Stakeholders in capital investment – both en- balance makes the framework itself reasonably tities and individuals – have effective chan- resilient even in the face of political or ideolog- nels through which to express their prefer- ical change. Nevertheless, the above principles ences and priorities. 7 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar 2. Key Elements of the Capital Investment Planning Process 2.1. Sources of Suitable Investment Projects diate needs and other plans of line ministries, districts or enterprises responsible for services Potential investment projects for CIP are the such as roads, water supply, sewage, or public product of two main processes: city develop- transit systems. These multiple entities do not ment planning, which comprises of urban and always operate according to the spatial concept socio-economic planning; and asset management. of the Master Plan. In addition, the provision of infrastructure typically lags far behind the city’s 2.1.1. City Development Planning own planning documents. Several major documents and plans guide de- Box 1. How to Make Urban Planning in velopment planning in UB, from urban planning Ulaanbaatar More Realistic and Sustainable and socio-economic development perspectives. ŠŠ Urban planners must be required to at- Urban Planning. Urban Planning deals with tach financial impact studies to their spa- the spatial aspects of development. The Capital tial plans: City’s plan, Ulaanbaatar 2020 Master Plan and -- How much will it cost the public sec- Development Approaches for 2030,5 outlines tor to build infrastructure stipulated spatial plans for the entire city as well as short- by these spatial plans? These cost es- term, detailed spatial plans for specific urban timates should be based on a credible areas. Spatial plans include required compo- methodology; nents related to both physical (e.g. roads, public -- How much new public revenue (such as transportation, water, sewage) and social (e.g. land and property tax) can be expected schools and healthcare facilities) infrastructure from such new development? to achieve their goals. In UB, an important com- ŠŠ Private sector interest in developing re- ponent of spatial planning includes the retrofit- mote areas in regional towns and satel- ting of infrastructure in areas previously devel- lite cities should be tested in independent oped, both formally and informally. market studies before public investment in related infrastructure is made. There are several challenges to incorporating ŠŠ More broadly, both citizens and city gov- the infrastructure stipulated by the Ulaanbaatar ernment should be more conscious about 2020 Master Plan into CIP projects. First, the the sustainability of land use patterns in Master Plan vision competes with the imme- UB and the high financial and social costs associated with non-compact spatial de- 5 https://asiafoundation.org/resources/pdfs/1- velopment. MasterPlanPublicSummaryEnglish.pdf 8 Another layer of complexity is that, in UB as in channel from CIP, as discussed in Chapter 1. many other cities, Master Plans are often not responsive to the signals of economic demand It is important to note that the CIP process is for land, for development or redevelopment. the exact point at which spatial planning inter- For example, the Ulaanbaatar 2020 Master sects with financial capacities and realities. One Plan stipulates the development of ten region- of the functions of CIP is to link these two com- al towns and three satellite cities to be built by ponents. private developers and bought and/or occupied by private companies and households. Howev- Socio-economic Development Plan. Another er, the Master Plan chose remote locations for major city development planning component these developments, although there is already currently exists under the umbrella of the De- an oversupply of real estate (apartments and velopment Policy Planning Law (DPPL) that was office space) in more central locations. enacted in 2016. The law states that its objec- tive is to “set the phases, principles, roles and Furthermore, the cost of building public infra- responsibilities of the stakeholders in planning, structure for newly developed areas depends, implementing and monitoring the develop- to a very substantial extent, on how far they are ment policy documents and setting up a com- from developed, central areas (i.e. are they wide- prehensive framework for development policy ly dispersed new towns and satellite cities; or, is planning.”7 In substance, the DPPL systemizes development more compact and builds on exist- previously random yet ubiquitous policy docu- ing growth?). By planning a more compact city,6 ments, sector policy documents, national pro- planners can shorten the length of all the re- grams, etc. The law categorizes development quired linear infrastructure networks (e.g. roads, policy planning by time (short-term; mid-term; streets, water lines), thus substantially reducing and long-term) and geographically (state, re- the capital and life cycle costs of the infrastruc- gional, provincial, Capital City). Critical docu- ture networks and their financial burden on tax- ments include the Mayor's Five-year Action Plan payers. This would also reduce the high social (2016-2020), which formulates the city’s admin- costs of dispersed living in UB’s severe climate. istrative development vision and policy, and provides a background for the annual Socioeco- In addition, many projects from the 2020 Mas- nomic Development Guidelines of UB. The latter ter Plan, especially those related to large infra- document is one of the key sources of invest- structure, are too expensive for the Capital City ment projects for CIP. to finance, even if it borrowed funds. Examples of such projects are new, major ring/radial However, similar to the Master Plan, the above roads, bridges, passenger rail systems (under documents are not directly linked to the Capital and above ground), and major water treatment City’s financial capacity, and the likelihood for plants. Implementation of such projects then full implementation is limited. becomes dependent on whether higher levels of government are ready to co-fund or fully fund them. The implementation of these projects is 2.1.2. Asset Management often reviewed and decided through a separate Asset management is the primary city function 6 Orientation toward compact cities is a world-wide that creates a need for CIP, regardless of wheth- trend, including in OECD countries, and is promoted by er the term “asset management” is used. The various governmental policies (OECD (2011). Compact City Policies: A Comparative Assessment – Final Report). 7 Article 1 of the DPPL of Mongolia, 2016. 9 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar capital assets under city control include large numbers of buildings, roads, parks, water and Box 2. Typical Elements of Annual Life sewage systems, city landfills, vehicle fleets, and Cycle Activities numerous other assets. Among other things, asset management means managing each prop- Operations: Management, cleaning, erty or facility for its entire life cycle, as long as securing utility connections (energy, it is owned or controlled by the city or its enti- water, sewer, communications), garbage ties (i.e. institutions or enterprises). Asset man- removal, site landscaping, and security. agement addresses the costs associated with a property’s life cycle: the acquisition cost; oper- Maintenance and repair: Preventive ation, maintenance, and repair costs during the maintenance and minor repair, life of the asset; and replacement or disposition corrective (scheduled and unscheduled) cost when the property exhausts its useful eco- maintenance, restoring and replacing nomic life. parts. Whether life cycle costs are included in CIP, or are part of operating budgets, is a matter of capital repairs and extension of existing in- convention. Which costs are included also de- frastructure, and investment in new infra- pends on existing laws. For example, to the sub- structure. This is not only an engineering or stantial disadvantage of UB, the payment for economic issue but a political one as well; it land needed for capital construction is not al- is well known that politicians tend to prefer lowed to be categorized as capital costs by the supporting “flashier” new construction in- Budget Law.8 However, some life cycle costs – stead of more mundane replacement of invis- such as conducting capital repairs, modernizing ible pipes and pumps. A good way to address an existing facility, or replacing worn out com- allocation choices is to create policies (ideally ponents of a building (e.g. the roof) – are a part formal, written ones) that give priority to the of CIP in UB. repair and replacement of existing core infra- structure over the construction of new facili- There are some fundamental issues related ties. to asset management that UB faces, similar to ŠŠ The initial construction cost of most govern- those faced by other cities around the world: ment capital assets – from general municipal buildings to city roads – constitutes only a ŠŠ In UB, where a great deal of infrastructure al- fraction of the total life cycle costs incurred ready exists, a proportion of capital expenses by the local government during the use- needs to be appropriated not for new con- ful life of these assets (the useful life can be struction, but for the repair and replacement lengthy; e.g. around 50 years for buildings). of existing assets. An important policy issue This fact demonstrates very clearly that cap- is how to allocate limited resources between ital investment is only the first, and not the main, cost related to government assets. The 8 By contrast, in most countries, acquisition of land implication is that planning any new con- needed for public capital construction is an element of CIP, and the cost of the land is included in the struction or capital reconstruction must be overall capital cost. However, in the case of UB, linked to simultaneous planning for the fu- the compensation costs of land needed for capital ture institutional and financial operation of construction are bundled into a budget item called the new property. In particular, the city gov- “land acquisition compensation” with overall amount ranging from MNT640 million to MNT15 billion in the ernment should define (1) which entity will planned capital budgets of UB for FY2016-2018. manage and operate the new infrastructure, 10 and (2) from which sources the operating entities (such as districts and enterprises) do expenses will be funded. Thus, the arrows have rather premature level of inventories of in Figure 1 indicate that CIP has an impact their assets, no consolidated database exists at on both asset management and city budget- the municipal level, and therefore no unified ing. If any new capital asset is planned to be reporting requirements are in place. In recent built or purchased, managing it during its years, UB has started taking steps to create a life as government property would become city-wide, cross-departmental asset database a task under asset management. In addition, linked to a GIS. Additional financial and human future operating costs should be factored resources, and more specific regulations out- into obligations for the city operating bud- lining the specifications required to consolidate get (unless this asset is managed by a fully and complete the registry of all necessary infor- independent and financially self-sustaining mation of the Capital City’s assets, are needed operator). to fulfill the effort. It is recommended that the Capital City: For cities with advanced asset management, all asset activities originate from a Strategic Asset ŠŠ Systematically reviews which of its entities Management Plan, including capital planning. has inventory data, and what type; Such a plan defines the government’s long-term ŠŠ Requires those who do not have complete in- goals and strategies regarding assets based on ventory data to start creating a basic invento- its service and program needs; it also estimates ry within a simple database. As the scope and long-term repair and replacement needs for the sophistication of asset management in the entire asset portfolio. When a Strategic Asset city grows, Ulaanbaatar can advance incre- Management Plan does not exist, two areas of mentally to a more sophisticated database, basic asset management become critically im- such as one linked to GIS; and portant for the capital planning process and as- ŠŠ Engages all key holders of public capital as- sociated budgeting: sets in discussion and development of basic inventory requirements; especially import- ŠŠ Inventorying assets; and ant is active participation of entities that ŠŠ Tying capital investment to life cycle costing. have the most advanced inventory databases. Inventorying assets. To reflect the condition To give an example, a basic initial invento- of the assets and their maintenance and repair ry template includes a brief description of the needs in the CIP process, UB needs an asset in- asset (or group of assets), its location, condi- ventory that covers all capital assets that the tion, year of acquisition, and remaining useful city and its entities own. The inventory must life. Often it includes an asset’s book value (as contain all relevant information of a specific defined by a country’s accounting rules). In a asset that can be used to maximize the value of more advanced version of the inventory, it will that asset through timely maintenance and ac- also include the replacement cost.9 The initial curate recording of asset values (e.g. asset defi- inventory can be a simple spreadsheet (see nition, location, condition, year of construction Table 2 for an example), which later can be and repairs, maintenance costs incurred etc.). imported into a more sophisticated database. While some entities (such as the property re- Even basic inventory information can help in lations department of UB city) and municipal prioritizing capital project needs. 11 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Table 2. Example of Basic Property Inventory for Public Buildings value (thousands, Total floor area occupancy (%) local currency) Building book construction Cadastre no. Land area condition Property Building function Address Current current Year of (sq. m) (sq m) Notes No Administrative Chapichi 1 170,477 7,500 2,600 1985 Good 80,670 80 building St., 4 Sevani 2 Kindergarten # 1 NA 580 350 1980 Satisfactory 3,500 100 St., 2 River 3 Kindergarten # 2 NA 990 690 1964 Poor 5,018 33 St., 57 Karmin 4 Culture center NA 6,500 4,500 1984 Poor 61,732 50 St., 39 Source: Urban Institute project archives. Furthermore, assets are usually grouped by cat- inventory database depends on the tasks for egory in inventory databases, e.g. by asset type which the data will be used. The data outlined or by holder/manager (department, municipal above is needed to plan capital investment enterprise, etc.). Typical groupings may include: and life cycle costing. However, for other asset management tasks such as optimization of the ŠŠ Utility and sanitation assets, including sewer building portfolio, the city government would and water systems, solid waste facilities, and need to collect and maintain other information municipal electric and lighting systems; (e.g. the level of vacancy of each building). ŠŠ Highways, roads, and bridges; ŠŠ Public buildings (in large cities like UB, this portfolio could be further specialized as fol- Life-cycle costing. Life-cycle costing is an im- lows: government use, education, sport, cul- portant economic analysis used in the selection ture, public housing); of alternatives that impact both pending and fu- ŠŠ Land or rights to land; ture costs of infrastructure investment. Life-cy- ŠŠ Certain improvements to land other than cle costing estimates a cost of an asset for its buildings; and entire useful life including both initial costs and ŠŠ Certain equipment, vehicles, and furnishings.9 future O&M costs. It compares the initial invest- ment options and identifies the least cost alter- It is important to note that the content of the natives of an asset for its life duration.10 The useful life of buildings and infrastructure facili- 9 In asset management, a common practice is to express ties/networks can range from 15 to 75 (or even various expenses associated with maintenance, longer). The costs associated with the useful life repair, and operations of a property as percentages include: of replacement cost. In this document, replacement cost includes the base construction cost; supervision, inspection, and overhead (typically 6% of base construction cost); design and planning (9%); and contingencies (5%). (Whitestone Research 2010–11). 10 United States General Services Administration, 2018. 12 ŠŠ Construction/acquisition; the importance of a life-cycle costing method to ŠŠ Annual expenses; and capital investment: ŠŠ Disposition. ŠŠ Asset Type: Annual O&M costs, compared The annual costs, which depend on the type of with replacement costs, vary significantly by facility, materials and equipment used, climate, type of asset and may constitute a substan- and labor costs, have several components that tial amount (please refer to Appendix 4 for a are usually grouped into operations costs and more detailed discussion on how to calculate maintenance/repair costs (see Box 2). More- O&M). over, as mentioned above, there can be differ- ŠŠ Initial Capital Cost vs O&M: The O&M costs, ing interpretations regarding which expenses taken over an asset’s lifetime, can be much should be paid from the operating budget and larger than the initial or replacement cost. which from the capital budget. Operations costs also vary substantially by geographic area. The following characteristics are commonly ŠŠ Asset Components: O&M costs for various com- recognized with regards to O&M, that highlights ponents of complex infrastructure, such as po- Legend: horizontal axis - years of facility life; vertical axis - $ per sq. feet 600 Central Plant, Boiler 400 200 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 150 Pump House 100 50 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 40 Municipal Building 20 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 20 Public Library, 3 Story 10 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 Source: Whitestone 2010a. Figure 3. Estimated Maintenance & Repair Costs for Different Facilities, Washington, DC, United States 13 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar table water or wastewater (sewage) systems, useful life of the assets and the initial invest- vary substantially as well. For example, O&M ment in their construction. costs of the collection systems and outfall ŠŠ Third, the “best practice” method for accu- pipelines for wastewater can constitute 1%- mulating the proper resources for mainte- 3% of the capital cost, while O&M of treat- nance, rehabilitation, and replacement of ment plants may account for 12%-20% of the public facilities and infrastructure is to set up capital cost (see Appendix 4). special budgetary funds for these purposes. ŠŠ O&M over time: Maintenance and repair costs Box 3 illustrates how special funds have been are distributed unevenly during an asset’s used by local governments in Japan. life and depend on the type of asset (Figure 3). As already mentioned, these costs vary The above practices have constructive implica- geographically as well, so in UB they would tions for UB’s asset management in general and be different than in Figure 3. for the CIP process in particular: Asset management is a vital aspect of CIP that ŠŠ Planning any capital expense should be ac- ensures efficient use of public resources and companied by planning for future annu- maximizes the useful life and quality of infra- al O&M costs. This is good practice even if structure assets. There are recognized methods these costs initially can only be approximat- that underpin good public-sector asset manage- ed. Based on Appendix 4, entities submitting ment policies and practices around the world: capital investment requests can make rough initial estimates of future O&M expenses ex- ŠŠ First, the quality of design and construction pressed as percentages of the capital cost. materials are directly linked with the O&M costs for the rest of the life duration of an asset. Quite often, annual O&M costs, along with the overall life cycle costs, can be re- Box 3. Reserve Fund for School Facilities, duced by building facilities or infrastructure Tokyo’s Chuo Ward with higher quality design and construction materials, resulting in somewhat higher con- As do many other administrative areas struction costs. The same is true for the costs in Japan, Chuo Ward, 1 of the 23 wards of of certain types of repair, replacement, or Tokyo’s metropolitan government, keeps a fund for the maintenance, rehabilitation, renovation. For example, replacing energy-ef- and replacement of school facilities. The ficient windows and doors in schools and ward annually sets aside an amount close kindergartens can result not only in better to the depreciation amount for the ward’s conditions for children, but in heating cost 16 elementary schools and 4 lower sec- savings as well (if that investment in reno- ondary schools. The fund may be used only vation is recouped by O&M savings in a few for the intended purposes unless the ward years). Thus, choosing the lowest cost for council decides otherwise. construction can unintendedly make overall life cycle costs more expensive over an as- At the end of FY 2009, the balance of the set’s life span, and it is important to consider fund stood at approximately ¥10 billion immediate cost savings with a view to their (USD 100 million), which was sufficient to long-term implications. replace three school buildings that were ŠŠ Second, failing to properly fund O&M costs identified in the long-term investment plan. results in deferred maintenance, repair, and Source: Suzuki and others 2010. recapitalization. These, in turn, diminish the 14 ŠŠ When projects are evaluated during the CIP left to cover this cost after contract expiration? process, if funding sources for future O&M Other cases with potentially significant dispo- expenses for new capital assets cannot be re- sition costs are those in which substantial dem- alistically planned, it is advisable to consider olition/debris removal is required, or a land whether this capital investment should be site requires decontamination before it can be postponed. disposed of or reused. For UB, it is important to ŠŠ Property and facility managers in each de- make provisions for such disposition (or end- partment or municipal company dealing with of-contract) costs in the initial contracts with a specific portfolio of assets should establish land or property lessees/concessioners or us- and maintain systemized logs of all mainte- ers. nance, repair, replacement, and operations works performed; in addition, they should Another important note related to CIP is that log the annual expenses associated with the construction cost and the life cycle cost these works for each capital asset under their combined still do not constitute the total cost. care. The managers should group the works/ The total cost includes additional components, expenses into meaningful classes, similar to such as the cost of land and borrowing. If bor- those shown in Box 1. Grouping enables man- rowing is a financing option, the city govern- agers to total the annual costs for each type ment should examine the financial viability of of expense. This data can be used for plan- projects with the cost of borrowing included. ning O&M expenses in the future. The cost of land should also be accounted for in ŠŠ In addition, managers should set up a sys- many cases, even if a land site is taken from the tem to evaluate the condition of assets and municipal land stock and no monetary outlay is set reasonable schedules for maintenance, needed. In some cases, the final “product” of an repair, and replacement. Accumulated over investment will not be a mandatory city func- time, the records of actual past expenses, tion or could be delivered by the private sector combined with an evaluation of the condition (e.g. housing or parking garages). To know the of the assets, will become an important basis total cost of the investment to society, the city both for objectively allocating the next year’s administration must include the market value operating budget among different assets, and of the land in the estimated investment cost. for developing CIP requests. When land must be acquired – e.g. by expro- priation to widen streets – this cost obviously Note that one element of life cycle cost that is must be included, even if land is purchased out- not discussed here is disposition cost. It usu- side the CIP process (which is the case in UB, ally consists only of the transaction cost if the according to the Budget Law). property is sold at the end of its useful life. The transaction cost would include the administra- tive costs of the municipal lawyer and other 2.2. Financial Aspects staff, and of the documents needed for dispos- al. However, in some cases, the disposition cost CIP is closely related to two elements of finan- can be very substantial and should be foreseen cial planning: capital financing and budgeting. over the asset life cycle. A typical example is the Capital financing deals with identifying and cost of closing a landfill and rehabilitating the securing funding and financing for capital in- land. If a city government signs a contract with vestment projects. Budgeting is a process of a private operator to operate the landfill for aligning resources to needs for a given fiscal twenty years, does the contract stipulate how period. In UB, as in most municipal systems in- the closure will be paid for? Or will the city be ternationally, the annual city budget has two 15 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar components: the operating budget and the cap- the UB government to have an in-depth under- ital budget. As such, the key input in the capital standing of the benefits and risks of incurring investment process is knowledge of the city’s and managing debt. financial capacity to fund capital investments. This capacity includes the feasibility of incur- Finally, some capital investment needs can be ring debt and the policy toward borrowing. The addressed through the use of non-financial list of projects prioritized through the CIP pro- or non-traditional solutions. On the demand cess is nothing more than an expression of local side, as mentioned, UB can reduce the need needs and preferences in a situation of limited for new infrastructure by planning for more available funding. compact development and higher density land uses. On the designing, building, financing, op- Therefore, there are fundamental links between erating, and maintaining side, engagement of CIP, capital financing, and budgeting. First, the the private sector in the process through vari- financial resources available for capital invest- ous forms of PPPs can be a solution for some ment define what can be implemented. There- well-selected infrastructure projects. Finally, fore, selecting projects within these funding the use of such non-traditional instruments as constraints is a core task of the CIP process. land-based financing can enhance a govern- Second, in a well-established budgeting pro- ment’s financial capacity.11 Private sector par- cess, capital investment spending will not take ticipation and other non-conventional financing place without being approved as part of an inte- methods are detailed in the next section. grated city budgetary cycle. The total capital investment for any period of In this regard, UB’s financial management time (i.e. the entire CIP), and the individual needs improvements, to make sure that chan- projects included in it, can be funded through nels such as borrowing by the DBM or PPPs do a combination of sources. Usually, sources of not operate separately from the city budgeting funding are defined separately for each capital process, as is currently happening. In addition, project (or for a group of similar projects, such as discussed earlier, the implementation of a as street repairs in different parts of the city). CIP has an impact on future operating budgets. Often one project, especially an expensive one, Indeed, the government needs to consider the has several sources (e.g. co-funded by the cen- post-construction life-cycle costs of new or ren- tral and city governments). ovated assets, and these costs must be planned for and incorporated into budget forecasts, Typically, potential sources include:12 preferably during the CIP stage. ŠŠ Targeted transfers (grants) from upper lev- In a well-developed financial management sys- els of government. Often, transfers/grants tem, a city government would analyze its finan- are allocated for specific sectors or specific cial capacity for capital investments as a part of projects – quite similar to what takes place a CIP process. Such an analysis provides projec- in UB. tions of future revenues and expenditures and 11 Land-based financing includes the mobilization of determines the financial resources that can be the economic value of the government-owned land used to fund investments or finance debt. In- and government’s power to impose fees and charges, struments for such an analysis are detailed in in particular on developers, or to sell “development the next chapter. Moreover, given that the use rights” to generate additional revenues to fund infrastructure. See Peterson 2009. of debt financing has long-term implications for 12 Modified from Peterson and Clarke-Annez 2007 and a city’s financial health, it is very important for Peterson 2009. 16 ŠŠ Local budget. This may include such sources ment of essential capital assets. These as: funds usually cannot be used for other -- Surplus from the annual operating budget. purposes. Often, local governments have This can be the surplus from the previous several such funds, each dedicated to a year or the expected surplus from the cur- particular infrastructure system or group rent year. Sometimes this source for capi- of properties (e.g. roads and streets; water, tal expenditures is called “pay-as-you-go”. sewage, and rainwater; general immovable The surplus can be created either from properties). The existence of such funds own-source revenues (or savings of ex- and regular contributions to them often penses) or from general (not earmarked) indicate that prudent long-term financial transfers from upper levels of government. planning and asset management policies -- Users’ contribution. This one-time contri- are in place. bution can be a substantial funding source. For example, hook-up/connection charges For infrastructure systems that provide are commonly used in many countries for user-paid services (e.g. water or sewage), water projects. In most South Asian coun- some part of the user fee can be dedicat- tries, this charge covers approximately ed to capital investment (i.e. for paying for 10% of investment costs. In Jordan, citi- capital components of maintenance and zens contribute up to 50% for local roads repair costs and setting aside funds for de- (street pavement). Allowing users to con- preciation). Tariffs for such fees are critical tribute to the cost can to some extent build (Box 4). citizens’ sense of ownership and influence in selecting priority projects and con- A good practice is that tariffs should be trolling implementation. based on full cost recovery. Usually, this -- Dedicated local taxes and fees for capital implies that the tariff would cover the op- projects. Such taxes and fees (e.g. land de- erations costs, maintenance and repair velopment fees) are usually charged to costs, debt service (i.e. payment of loan in- developers and used to fund city-wide ex- terest), depreciation, and, for private com- tensions of public infrastructure. In some panies, profit. With the full cost recovery cases, the fee amount is linked to the need tariffs, the loan principal is repaid from the for additional infrastructure caused by the depreciation part of the tariff. new development (impact fees). In UB, a similar instrument is the City Road Fund The amount calculated for depreciation, if which receives money from the road use not consumed by debt repayment, should fee and the vehicle tax, and which funds go into a special reserve fund/account works on the city’s roads and streets. for capital investment to replace assets as they reach the end of their useful lives. As A good way to manage dedicated local tax- a good practice, such reserve funds should es and fees is through a Special Reserve be supervised independently by a special Fund. This is a special, permanent (multi- board. Moreover, these special funds must year) budgetary fund established through be protected by local regulations from use a formal local government resolution. This for other purposes and be available only fund accumulates specific earmarked re- for capital investment by the designated sources identified in its establishing doc- service. For example, if water and sewage uments for the future repair and replace- are provided by a special municipal com- 17 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Box 4. Tokyo Waterworks: How to Finance a Water Pipeline Replacement Project When determining the appropriate level of reserve funding for revenue-generating enterpris- es such as water companies, it is important to take into consideration fees and charges. The Tokyo Waterworks, which serves 12.5 million people in metropolitan Tokyo, has been financ- ing its operating expenses and capital expenditures by relying on water tariff revenues. Vari- ous reserve funds have been set aside to cover fluctuations in its costs. Currently, the utility is facing the daunting task, beginning in 10 years, of replacing old water pipes. The total invest- ment required is approximately ¥1 trillion (USD 10 billion), which represents 40% of the utili- ty’s total assets of ¥2.5 trillion (USD 25 billion) in current yen. To meet this challenge, Tokyo Waterworks started identifying ways to level out the ¥1 trillion planned investment over a reasonable period by planning for maintenance and rehabilitation well ahead of the project and by establishing a detailed construction plan. Meanwhile, the util- ity has already started accelerating debt repayments so that outstanding debt may be main- tained at the current level of ¥0.5 trillion even after project financing has been undertaken. The accelerated repayments are covered by water tariff revenues even though the Tokyo met- ropolitan government lowered the water tariff on January 1, 2005. The utility plans to finance the ¥1 trillion replacement project by implementing a reasonable tariff adjustment. Source: Suzuki et al 2010. pany, the Water Reserve Fund should be and commercial users; and (2) in more ad- available for the water company to use ac- vanced cases, targeting subsidies directly cording to a pre-approved CIP. to households in need so that they can pay the full tariff. However, two problems are common. First, tariffs often do not recover the full cost ŠŠ Borrowing. Loans from financial institutions due to concerns that the full-cost tariffs such as commercial banks, specialized banks would not be affordable for some users. and financial entities (common in Europe), To address the resulting budget shortfall, or municipal bonds (common in the United the first sacrifice is the reserve for recap- States) are the most common forms of long- italization (depreciation). Second, mu- term borrowing from the financial markets nicipal service enterprises often include by local governments. However, entering the depreciation in the tariffs but spend this financial markets requires a certain level of portion of the fees on operating instead of financial management maturity and sophis- capital expenses. They make this choice for tication. Local governments also need to es- a number of reasons, one of which is lack tablish their creditworthiness to be able to of a proper supervision of their activities. obtain credit on favorable conditions. When tariffs are set below full cost-recov- ery due to concerns about affordability, Long-term debt means infrastructure that there are two good-practice solutions to is used by more than one generation is paid consider: (1) cross-subsidizing residen- for by more than one generation. Short-term tial users with fees charged to industrial debt, such as debt with a pay-back period of 18 five years or less, is more problematic be- loans. If, as a result of borrowing, the city cause debt service then becomes a larger ex- has no remaining borrowing capacity, fi- penditure and significantly reduces the local nancing other projects can become prob- government’s near-term investment capacity. lematic. The most appropriate candidates for financ- ŠŠ Local balance sheet - Mobilization of land and ing with borrowing are facilities and systems property assets owned by local governments. that generate revenues during operations, Many local governments around the world which would help recoup capital expens- are “cash poor, but land rich”. They have lim- es and repay debt. Further, borrowing must ited fiscal autonomy and/or insufficient bud- be associated with improving efficiency of gets. Nevertheless, they control substantial facility/systems operations (e.g. if a water holdings of land and built-up properties that treatment plant was built with a loan, finan- they do not need for public use now or in the cial and operational efficiency of the munic- foreseeable future. Being “land rich” is partic- ipal water company that operates the plant ularly true for cities in many former central- needs to be improved), along with increased ly planned economies. Identifying such “sur- tariffs for the service (matched, if needed, by plus” land and built-up properties and selling well-targeted public subsidies). In the CIP them at auction can generate substantial rev- process, projects that have such a potential enues to fund capital investment. should become the main candidates for bor- rowing. Strategically, this implies that users For UB, maximizing revenues from land allo- should pay a higher share of infrastructure cations and improving use of these revenues costs, assuming that efficiency of systems is is highly relevant. In the past, a significant improved. amount of land was allocated to commercial developers without charging market value, It is important to follow these rules for debt even in prime locations in the heart of the financing: city. Over years, this resulted in substantial amounts of forgone potential revenues. -- Use debt to finance only strategic infra- structure projects that service mandatory Public land and property are practically city functions; unrecoverable resources – once sold, they -- The life of a loan should not exceed the cannot be recouped without significant ex- useful life of the asset acquired with the pense. Therefore, good governance principles loan; should be applied carefully in decision mak- -- When possible, use loans to cover any gaps ing: in financing after own sources and grants; i.e. the city should prefer grant financing to -- The “surplus” nature of properties should loans; be established following an inventory of -- Make a careful forecast of the capacity to all public land and property under city repay the loan, because the limitations control, and after public-use land has been on borrowing established by law may reserved for future development (most be insufficient to prevent the city from importantly for UB, “rights-of-way” for over-borrowing. Not exceeding legal debt streets, engineering and social infrastruc- limits does not guarantee that the city is ture). This careful preparation helps cities able to repay its debt; and to avoid selling land for private develop- -- Exercise caution when taking out large ment that is needed, e.g. for school con- 19 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar struction or other public use. KOICA, and JICA. However, such funding has -- Land sales should be planned for sever- certain disadvantages: al years ahead, but flexibly adjusted to conditions in the real estate market so as -- It may be available for specific types of not to oversupply land and to avoid sales projects only, and qualified projects may during downturns of the real estate market not be the highest priorities on the city’s (“time-to-market”). CIP list; -- Sales should take place in the form of sim- -- Grant funding requires substantial addi- ple auctions, in most cases for the highest tional preparatory and reporting work; price offered. Note that “auction” does not and only imply a transfer to private ownership. -- The amount of grant money is usually lim- Long-term (and even short-term) land ited, and there is a risk of discontinuation leases can be auctioned as well. In such as a result of fiscal deterioration or chang- cases, a winner would offer the highest an- es in priorities in donor countries. nual land lease rate. -- To increase revenues, the value of city- Nonetheless, it makes sense for UB to be owned land should be enhanced before familiar with available funding of this type. sale. A very useful step is to remove exces- Obviously, availability of international do- sive land use restrictions and conditions nor grants should be investigated before by permitting broader combinations of the city turns to borrowing. land uses and higher densities. Fiscal ben- efits to local budgets can be very substan- ŠŠ Private sector participation. Private sector tial, with no harm to public interest. participation including the following forms: -- The sale revenues should be placed in a special permanent budgetary fund used -- Lease (or installment purchase). Like PPPs, only for capital investment and repaying this is another less traditional form of ac- long-term debt, as discussed above for quiring capital assets. A lease is a contract Special Reserve Funds. whereby a private party conveys equip- -- Sales of undeveloped land (land without ment, services, etc., to the government for infrastructure) should be coordinated with a specified time, in return for a periodic infrastructure provision for this land (ei- payment. An installment purchase is sim- ther by the government or its entities or ilar, but at the end of the payment period by private developers as a binding require- the government would in fact own the as- ment for them). set. Under such an arrangement, the costs -- Expropriation of land from sitting tenants to acquire premises or equipment are sim- should be avoided or minimized. ilar in some respects to purchases made with debt proceeds in that they are funded ŠŠ Grants from international donors. In some over multiple years, are subject to certain regions of the world, cities can “shop” for terms and conditions, and create future grants from various donor-sponsored sourc- payment liabilities. es. Mongolia has access to grants and conces- sional financing from various International As UB already discovered, deploying this Financial Institutions such as the WB, the form is prudent only if: Asian Development Bank, the Asian Infra- structure Investment Bank, the European - Projects are selected through a regular CIP Bank for Reconstruction and Development, process; and 20 - The impact of future repayment obliga- venture. Please refer to the next section for tions on the municipal budget was well an- more detailed discussion on private sector alyzed and approved as a part of a budget- participation and PPPs. ary process.13 -- Developer exactions. This form of private Private partners in PPPs can play several sector participation is widely used around roles, which include providing financing, the world and in UB and implies that de- expertise, and efficiency; and, if a PPP is velopers build on-site infrastructure on well structured, taking on specific risks their own, with no public funding. This that the private party can better manage form sometimes morphs into a “negotiat- than the public sector. However, long-term ed” contribution of off-site infrastructure PPPs associated with capital investment by the developer, in addition to on-site in- can be the most complex investment in- frastructure. For example, a developer is struments of infrastructure finance, pro- required to build an access road to its de- curement, and delivery methods that local velopment site, or complete off-site infra- governments might use. structure that was supposed to have been built by the government or its utility com- On the financial side, there are two prima- pany but was not. ry PPP models, with a continuum of hy- -- Voluntary and negotiated contributions. brids in between. The first model applies These are instruments such as business to PPP projects that are completely finan- improvement districts, in which proper- cially self-sufficient and do not require ty owners in a specific area agree to pay a public funding. In such cases, investors re- predefined amount for specific improve- capture their costs and obtain profit from ments of infrastructure and services in the the revenues generated by the property/ area, before investment in these improve- facility they build, while citizens have ac- ments is made. cess to a price-controlled public-use facili- -- Public-private partnership (PPPs or P3) is ty built without public capital outlay. one kind of procurement methods which is widely defined as a long-term contract The second – and most common – model between a private party and a govern- requires public funding via methods such ment entity, for providing a public as- as Availability Pay15 to the private entity, set or service, in which the private party but the initial capital costs are borne by bears significant risk and management the private partner in a PPP. In this case, responsibility, and remuneration is linked the local government’s financial obliga- to performance14. The prevailing form of tions are very similar to debt repayment. PPPs is based on a contractual relation- The reason behind such a PPP is to obtain ship between the government and the pri- capital financing otherwise not available, vate partner (which can be a consortium allocate specific risks to a private-sector of private entities). A less common form is developer, and benefit from the innova- a joint legal entity established by the gov- ernment and the private partner – a joint Availability Pay is a PPP contract arrangement where 15 the Government pays monthly/annual payments to 13 None of these two preconditions were followed in the the SPV, conditional on the facility being available and initial UB’s experience of engaging in projects of this performing to agreed standards or Key Performance nature (“build-transfer” concessions) in 2014-2016. Indicators. On-going payments are subject to 14 World Bank, Public Private Partnership Reference deduction for failures in service delivery of the facility Guide, 2014. or parts thereof being available for use. 21 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar tions and efficiency of the private sector. curement, negotiation, and contract man- In many countries, various local facilities agement. Without this support, complicat- such as schools and jails have been con- ed PPPs often lead to arrangements that do structed or reconstructed this way. not represent the public interest as well. PPPs can also provide savings on life-cycle In recent years, the UB city authority has costs by integrating stages of capital proj- increasingly emphasized the importance ects that are fragmented in the traditional of PPPs in implementing and financing ur- public-sector approach. For example, the in- ban development projects, and has made tegration of design, building, and operation changes in its institutional structure and under the direction of one private partner made efforts to improve its capacities to can lead to very substantial savings. An- gear towards PPPs. For example, UB city other major benefit is that well-structured has established two new institutions with PPP contracts protect public budgets from corporation status to enable the city au- the risks of budget overruns and funding thority to enter into contracts with the pri- running out before project completion. The vate sector – the UB City Development Cor- project costs and funding for the entire poration (UBDC) and the UB City Housing project are stipulated in the PPP contract, Development Corporation, as well as a PPP before construction starts. management agency – Industrial Develop- ment and Innovations Agency (IDIA). Nevertheless, as already noted, PPPs as- sociated with capital investment are com- UB city’s ambitious plans to leverage pri- plex transactions with high transaction vate capital to fill the financing gap to costs and require specialized expertise. achieve its Development Plan of 2030 The local government must have the ca- was brought to a halt when the previous- pacity not only to prepare, procure, and ly signed Build- Transfer (BT) contract negotiate a PPP, but also to manage it. In payments started to create heavy fiscal particular, PPP contracts should be perfor- burdens on the municipality’s budget. mance-based, with quality/performance Over the past few years, UB city has im- indicators clearly defined, and private plemented a number of PPP projects, the partner’s compliance with the contract majority of which are Design-Build-Trans- should be rigorously enforced. Therefore, port (DBT) projects in the education and the recommendation for UB is to engage culture sector, some Build-Transfer (BT) in PPPs gradually, starting with simpler projects in the road transportation sector forms such as outsourcing O&M of selected and Build Own Operate Transfer (BOOT) municipal services or facilities under two and Build Operate Transfer (BOT) in ur- to three-year performance-based contracts ban construction projects. UB city, as well (e.g. for street cleaning). It is advisable to as the national government, defined nu- enter into long-term PPPs associated with merous projects as PPP-potential and have capital investment only after gaining ex- been actively searching for private part- perience with simpler contracts. Interna- ners to take on these projects16. tional experiences show that starting with complex long-term PPPs is risky unless In the light of the national and munici- qualified (and often expensive) technical pal government’s plan to leverage private assistance is provided to the local govern- ment at all stages of PPP preparation, pro- 16 IDIA, 2018. 22 capital, and of the recent experiences with CIP process. Only later in the process should regards to recently executed PPPs, it is vi- projects be screened for their potential for im- tal to assess the factors that contribute to plementation through PPPs and further as- the heavy burden of PPP. One of the most sessment be carried out to determine their vi- fundamental factors that affect successful ability as PPP projects.18 The objective of this PPPs, and the factor which is potentially screening is to identify, based on the available leading to the failure of PPP projects in UB, information and with institutionalized criteria, is the lack of institutional coordination in whether the project may provide better value the prioritization and selection of potential if procured via PPP. In international practice, PPP projects and the capital investment governments carry out PPP screening at differ- process of public investment projects. ent stages of the CIP process. Due to a limited amount of information at the prioritization and selection stage of capital investment projects, 2.3. Public Private Partnership and Integra- some countries introduce criteria or checklists tion with Capital Investment Planning for PPP-potential, against which PPP projects can be compared. The central features that set PPPs apart from traditional forms of procurement and imple- In UB, PPPs have been prepared, appraised, mentation are bundling of project phases to selected, budgeted, and monitored separately create synergies, transfer of risks to the party from traditionally implemented projects. IDIA who is able to mitigate them most efficiently, is responsible for facilitating the PPP program and quality and/or performance-based con- in the MUB, and projects are proposed by var- tracts. Regardless of how infrastructure proj- ious municipal entities such as the UBDC and ects are procured, they should be identified other municipal enterprises. This PPP project and prioritized in the context of the public in- selection process has no clear linkage to the vestment planning process. A well-structured PPD’s CIP process, other than the City Council and managed PPP will not be effective unless it acting as the approving authority for both PPP addresses clearly identified objectives that are projects as well as CIP projects. This dispari- central to sector needs – particularly since the ty and lack of coordination creates numerous long-term nature of PPP contracts effectively shortcomings for UB. First, it creates the risk locks in asset and service specifications over a of municipal enterprises promoting their own long-term period – and are included in the gov- commercial interests instead of public priority ernment agenda. needs. Second, it undermines the municipality’s public financial management and therefore cre- As a consequence, PPPs should emerge from ates undue fiscal risks and opacity. this broader public investment planning17 and Mongolia is not an exception in this regard on In some international cases, PPP project ideas 17 the international platform. The Benchmarking may emerge from other sources than the standard PPP Procurement report developed by the WB CIP process. These could include: i) Sector reform (and applied to national-level PPPs only) found processes – governments undertaking reform of an under-performing infrastructure sector may consider that only 19 out of 84 countries assessed had a PPP among a range of options for introducing private participation to improve performance in a particular This can be a way to capitalize on the ideas of sector; ii) Unsolicited proposals from businesses – the private sector on how to solve infrastructure some governments provide ways in which businesses challenges. and other non-government entities may originate PPP 18 World Bank, Benchmarking Public-Private project ideas, for consideration by the government. Partnerships Procurement 2017, 2016. 23 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar regulatory framework that detailed a procedure will not only help UB to avoid the shortcom- for ensuring that the identification and prioriti- ings mentioned earlier, it will also help improve zation of PPPs is combined (or consistent) with transparency related to PPP projects. public investment priorities. The remaining 65 countries left the requirement to the discretion As mentioned, UB lacks a clear process to iden- of the procuring authorities.19 Mainly due to the tify projects suitable for PPPs as part of the CIP lack of integration of CIP and PPP prioritization, process. This is aggravated by the: i) short pe- Mongolia scores only 27 points out of a total riod of timing allocated for project submitting of 100 with regards to its capacity in prepa- entities to prepare project requests (May-June) ration of PPPs – an assessment whether the in an annual CIP preparation cycle; and ii) the identification of a potential PPP happens with- low capacity of the submitting entities to carry in the broader context of public investments out a preliminary analysis and survey for the and thereby its consistency with government priorities. Among the four themes in the PPP Box 5. Good Practices in the Preparation benchmarking assessment, Mongolia earned of Public-Private Partnerships at National 27 points on preparation of PPPs, 58 points on Level procurement of PPPs, 75 points on unsolicited proposals, and 69 points on PPP contract out At the national level, good practices which of a total of 100 in all four categories. The main help ensure that the decision to procure shortcomings that the report found, with re- a PPP is justifed and that the procuring gards to Mongolia’s PPP preparation, were that: authority is ready to initiate the procure- PPP projects do not need central budgetary ap- ment process are: proval at preparation; the PPP prioritization ŠŠ The MoF or central budget authority ap- process is not consistent with public invest- proves the long term-financial implica- ment prioritization; the PPP preparation does tion of the project. not formally mandate the assessment of risks, ŠŠ The project is assessed and prioritized and; studies of the market’s appetite and capac- along with all other public investment ity to accept PPPs are not fully formalized in the projects in the context of the national PPP preparation process. Similar shortcomings public investment plans. were typical for city-level PPPs in UB as well. ŠŠ The project is adequately justified, on the basis of: Thus, well-defined processes and methodol- -- Socioeconomic analysis ogies for CIP that is inclusive of potential PPP -- Fiscal affordability assessment projects, are prerequisites to successful PPP -- Financial viability programs in UB, especially as PPP is a way to -- Risk assessment deliver a public investment project. This inte- -- PPP vs public procurement compara- gration ensures that PPP projects are subject tive assessment to the same level of scrutiny as any other public -- Market assessment ŠŠ The procuring authority prepares a investment projects from the socio-economic, draft PPP contract and includes it in the fiscal affordability, and financial viability per- request for proposals. spectives. Projects that meet the MUB’s devel- ŠŠ The procuring authority has standard- opment agenda and social demand among other ized PPP model contracts and/or trans- CIP prioritization criteria will then be screened action documents to expedite and guar- for PPP-potential. Integration of PPP and CIP antee consistency. Source: Benchmarking PPP Procurement 2017 Benchmarking PPP Procurement 2017. 19 24 proposed projects. Given the above-mentioned and monitoring process. As such, it enables the constraints, and to ensure the sustainability of government to effectively assess the real bur- the recommendations provided in this guide- den of PPP commitments and risks within a me- book to improve the objective nature of CIP dium- and longer-term fiscal framework. process, UB is advised to follow the integrated framework in screening for PPP-potential proj- With PPP arrangement for project procure- ects proposed in Chapter 3, Step 8. Integration ment and delivery, the private party will take of the CIP and the PPP screening process gener- on some or all of the responsibilities to design, ates several advantages: finance, build and maintain the infrastructure, and provide services. However, the government First, a unified framework helps to ensure that should remain responsible for ensuring that the decisions on public investment projects are public service is provided to the expected qual- consistent in maintaining the value-for-money ity standards in a way that achieves good value objective throughout the project cycle. for money. Therefore, in setting up the institu- tional framework that manages PPPs, not only Second, a unified framework helps to accom- is it vital to avoid the disintegration between plish optimal risk transfer. It is important to CIP and PPP, it is also important to set up the note that all service delivery mechanisms – institutional framework in a way that avoids whether they are public, private, or partner- inherent conflicts of interests. As mentioned ship models – are exposed to risks. Failures by earlier, IDIA is the responsible agency to pre- the government to mitigate these risks may not pare the PPP pipeline and prepare PPP proj- only have fiscal consequences for the govern- ects. However, because IDIA’s responsibility is ment but also affect the quality of service de- to promote PPP in UB, there may be a conflict livery. The key difference of PPPs is that a large of interests in the current institutional arrange- part of their efficiency or value-for-money ben- ment. Based on international best practices, efits is derived from the effective identification, PPP-responsible units are better mainstreamed pricing, and transfer of risk from the public to and centralized within the traditional CIP insti- the private sector. Good risk management al- tutional arrangements. locates risk to the party best able to manage it. If each type of project (whether traditional or PPP) is subject to separate management ar- 2.4. Public Participation and Overall Trans- rangements, the concept of optimal transfer parency of the Capital Investment Planning from one entity to another may not be ensured; Process and separate management arrangements also open the door to inadequate risk shifting at “Public participation” should provide channels different steps in the project cycle. A unified not only for citizens but also for the business framework, therefore, might be considered as community to have a say in the CIP process and one of the conditions for achieving optimal risk outcomes. Public participation ensures that transfer in both traditional and PPP options. what is funded and how these capital invest- ments are paid for is transparent. It reflects the Third, but not least, a unified framework may views not only of politicians and technical ex- help to avoid unmanaged fiscal risks and to im- perts from the government, but also of a broad- prove transparency in the public financial man- er constituency of local taxpayers, both indi- agement system. It could lead to the incorpo- vidual and corporate (Box 6). At the same time, ration of all PPP fiscal commitments and risks public participation in the CIP process enables into the government’s routine fiscal screening the government to convey to the public unpop- 25 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar tions for taxpayers. Without such communica- Box 6. Benefit of Long-Term Planning and tion, there is a risk of a very common problem: Public Participation: Contra Costa Water people like services to be improved but tend to District, California, United States ignore the fact that improvements cost money. The Contra Costa Water District, which The overall transparency of CIP – both within serves approximately 450,000 custom- the government and to the public – is no less ers, developed a 10-year CIP as part of its important than the direct contribution of non- annual cycle, which includes operating and capital budget development and tariff governmental players. Transparency is essen- setting. In addition to a first-year plan for tial to keep the government accountable, espe- funding capital projects, the CIP estimat- cially since government investment and con- ed O&M and debt service costs, projected struction projects around the world have been reserve balances, and projected revenue prone to corruption. Practical transparency in- requirements. By projecting rates over struments are discussed in Chapter 4. ten years, the district was able to absorb one-time revenue shortfalls or unexpect- There are at least three public participation en- ed expenditures without being forced to try points in the CIP process, each with specific react with large tariff increases. Moreover, instruments to be used. These key opportuni- increasing tariffs in small annual incre- ties are: ments – rather than steep, sudden hikes – was aligned with the financial plan and ŠŠ Active engagement of the elected representa- has slowed the rate of inflation. These in- tive body in CIP; creases went virtually unnoticed compared ŠŠ Public input during the preparation of proj- to most tax or rate increases. Area devel- ect requests; and opers even agreed to substantial increases ŠŠ Public input into the draft CIP and capital in the district’s “facility reserve charges” budget. after participating in a technical advisory committee to review these charges relative These entry points are presented in Chapter 3, to the plant investments required to serve along with the related steps in the CIP process. growth. Furthermore, in addition to “standard” methods Source: Adapted from Westerman 2004. of public participation, there are endless oppor- tunities for UB to employ creative approach- ular truths: the true cost of new or improved es to engage citizens in addressing the specific services and the associated tariff/fee implica- challenges of CIP (see Box 7). 26 Box 7. New Technique for Increasing Citizen Participation in Government Decision-making Process in Ulaanbaatar In 2015, the MUB successfully tested “deliberative polling” – a new technique of citizens’ en- gagement in long-term CIP. This two-day event brought together a scientifically selected ran- dom sample of 300 citizens representing UB’s residents to prioritize the projects planned by its Master Plan for 2020. It was Mongolia’s first-ever deliberative polling exercise for citizen participation in government decision making, in which the citizens actively participated by re- viewing the presentations and documents provided by the city officials, and worked in groups to discuss and debate the pros and cons of the proposed projects in the Master Plan for 2020 before prioritizing them. The citizens’ preferences were surveyed before and after the deliber- ation. Following the deliberative polling exercise, 14 projects with the highest priorities were included in the Action Plan for the Implementation of the Master Plan 2020, which was ap- proved by the Government of Mongolia in 2016. Source: Adapted from First Deliberative Polling Results Report, Asia Foundation, 2016. 27 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar 3. Steps of the Capital Investment Planning Process 3.1. Lessons from FY2018 Capital Invest- semble and submit their project requests; ment Planning Exercise ŠŠ Insufficiently consolidated CIP process and insufficient considerations of financial conse- As presented in the introduction of this guide- quences of investment decisions. In particu- book, the CIP prioritization methodology de- lar: veloped as part of this technical assistance was -- Decisions on borrowing for projects in the piloted for the FY2018’s CIP. The methodology territory of UB, which impose direct or im- along with the prioritization criteria was intro- plicit repayment obligations on UB, have duced during a stakeholder workshop to the been processed outside UB’s standard an- submitting agencies, line ministries, and other nual CIP (e.g. borrowing by municipal en- relevant stakeholders before the deadline of terprises and by state entities for city rede- project proposal submissions. velopment projects); -- Consideration of potential PPPs has been The prioritization criteria and the overall CIP separated from the standard CIP process, methodology were developed in close cooper- and hence potential PPPs lack the prop- ation with the PPD and therefore, the recom- er screening on whether they serve public mended CIP process was carefully implemented priority needs; and by PPD. However, during the pilot process, cer- -- City Council makes decisions that affect the tain shortcomings from the prioritization cri- city’s capital budget outside the CIP pro- teria were identified which reflect the complex cess. As a way of illustration: from 2014- and challenging CIP environment in UB. Below, 2016, 139 “build-transfer” projects were common challenges experienced in UB during included in a special Capital City Conces- the FY 2018 CIP exercise are summarized: sion List. They were stipulated by several decrees of the City Councils, separately ŠŠ The number of investment requests that the from the annual capital budget, despite the PPD had to collect, process, and prioritize as fact that they were imposing future pay- a part of the CIP process was very large; ment obligations on the city’s future bud- ŠŠ Lack of capacity and information to complete get. After the impact of these agreements the CIP project template. Additionally, some on the budget was recognized, most of submitting entities submitted duplicate proj- them were canceled in consideration of the ect requests – one to the PPD directly, and financial difficulties facing UB. one to the line departments, which in turn ŠŠ Politicians favoring projects that only bene- forwarded them to the PPD; fit their specific constituents and/or are well ŠŠ Challenges related to the CIP schedule: the visible (like a swimming pool) over more PPD does not give entities enough time to as- urgent projects that benefit the common 28 good or are less flashy (like replacing leak- Learning from the experience of adopting the ing pipes). Similarly, members of parliament CIP prioritization methodology (the process and from the ruling party individually control a the criteria) during FY 2018, the methodology portion of the central government’s capital was revised to be as practical as possible to the budget, and they can allocate these shares for circumstances in UB. However, MUB is encour- discretional investment; aged to implement the changes that have been ŠŠ No accounting for future life cycle costs when advised throughout this guidebook and update making capital investment decisions; its prioritization process (such as establishing ŠŠ Managing PPPs through separate channels a communication plan for key stakeholders, in- (e.g. the IDIA, the UBDC, and other munic- tegrating PPP with CIP, creating inventory of as- ipal enterprises), without close coordina- sets, integrating the life-cycle costing methodol- tion with the CIP process, creates the risk of ogy etc.) and its criteria to reflect these positive municipal enterprises promoting their own and vital changes that could bring UB’s CIP prac- commercial interests instead of public prior- tice to international standards. ity needs; ŠŠ Insufficient communication between the UB city government and line ministries about in- 3.2. Steps for Capital Investment Planning vestment priorities, and a lack of alignment Process in Ulaanbaatar and harmonization of capital investment pri- orities between these levels of government. This chapter presents a CIP step-by-step guide- This results in line ministries responding line for UB city’s improved CIP process, which to the city requests inconsistently (i.e. one enables a more transparent, more objective, ministry funding a higher portion of city’s re- and more efficient planning procedure of cap- quests than another, or a ministry allocating ital investments. The CIP guideline is based on funding without knowing or simply ignoring a transparent and consultative approach which the city’s priorities); builds on the development guidelines of UB ŠŠ Insufficient transparency of capital invest- City, the project readiness, project viability in ment decisions, which is rife with opportuni- terms of cost, and maximization of benefits to ties for all sorts of abuses, such as unneces- the society. The CIP process presented below sary “pet projects” promoted by local politi- consists of 9 well-defined steps, each vital to cians or officials, conflict-of-interest deals, or successful processing and preparation of a cap- even outright corruption; and ital investment plan for UB city that maximizes ŠŠ Limited public participation in investment the value of public investment. As presented in decisions, including the fact that the private Figure 4, the CIP and budgeting is a dynamic sector business community is not consulted. process. 29 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar City Council Review/modify STEP 1 STEP 2 policies on capital investment planning Develop a plan for Treasury PPD Ministries communication with key stakeholders in the CIP process Districts Establish project STEP 3 scoring criteria and prioritization process Modify calendar, STEP 4 forms and instructions Implement and monitor investment projects Prepare Project STEP 5 Requests Draft city capital program Review project STEP 9 and budget documents STEP 6 requests, sort and adopt them them out into line ministries and city portfolios Send prioritized requests Prioritize project STEP 8 to line ministries and STEP 7 requests match city’s projects to available funding Figure 4. Steps in the Capital Investment Planning Process Step 1. Develop a plan for communication The CIP process in UB is established partly by with key stakeholders in the cap- laws, partly by MoF regulations, and partly by ital investment planning process the city of UB’s own decisions. Organizationally, and their engagement the PPD is tasked with assembling, sorting, and processing capital investment requests and pre- Issues addressed: paring a draft annual CIP to be funded from the ŠŠ How can the PPD engage various stakeholders Capital City budget and from the Capital City in consensus building regarding the approach Road Fund. The PPD also forwards requests to CIP preparation and related policies and that should be funded by line ministries to the priorities? appropriate ministry. 30 However, the process has multiple stakeholders central and city government. However, there is and decision makers, such as the district admin- no single recognized document that summariz- istrations, the Finance and Treasury Depart- es the most important rules for all participants. ment, the City Council, and line ministries fund- Most importantly, there are some uncertainties ing projects in UB. Therefore, the PPD needs in the decision-making process which allow in- means for keeping them informed and, ideally, vestments to be launched outside the CIP pro- in consensus regarding project prioritization cess. This, obviously, fragmentizes the process and related policies. For example, the PPD may and creates unnecessary risks for the city. For want to convince line ministries on the impor- example, there are no unequivocal rules that tance of respecting the city’s expressed priori- potential PPPs and projects requiring bor- ties when allocating funding to the city’s project rowing by municipal enterprises must first go requests. through a prioritization screening within a reg- ular CIP process. Similarly, establishing an early-in-the-process communication channel with a few City Coun- A good policy, be it formal or informal, should cil members could serve as an information and cover at least the following: influence bridge to the whole Council, one that keeps them informed and builds support for -- Period covered by the capital investment the principles and results of the CIP process plan. In UB, there is no such formally that the PPD implements. This way, when it be- pre-defined duration yet. On average, proj- comes time for the Council to vote on the CIP ects included in the CIP last for two years, draft, they better understand the priorities un- but some last for 4-6 years. derlying this draft. -- Eligible types of investment. The policy should list the types of investment eligible A simple instrument of such communication for inclusion in the CIP and identify which can be a workshop for stakeholders conducted types/components of costs should be in- early during an annual CIP process – similar to cluded. For example, the items eligible for the one that was organized by the PPD and the inclusion into rehabilitation, replacement, WB in April 2017. and reconstruction should be the follow- ing: existing infrastructure, public-use fa- cilities, and social-use and government-use Step 2. Review/modify policies on capital properties under the mandate of the city investment planning government; also included should be the cost of acquiring land for these uses. In Issues addressed: addition, eligible as well are the construc- tion of these types of new infrastructure ŠŠ Why would it be useful to assemble the key facilities (if and when construction is eco- rules of capital investment in UB into one poli- nomically and financially justified), and cy document? the acquisition of land for such construc- ŠŠ What are the typical issues included in such a tion. Acquisition of equipment and vehicles document? for public functions under the mandate of the local government is also allowed. With In UB, policy rules and initiatives related to cap- respect to cost components, the policy ital investment are spread over multiple regu- should clearly state which expenses must latory and policy documents issued by both the be funded and from which budget – capi- 31 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar tal or operating. Note that, if the CIP policy also be useful to identify other revenue identifies eligible types of projects clearly, sources earmarked for capital investment; and the policy is actually followed, it can such revenues may include a certain por- prevent (or reduce) spending on “pet proj- tion of the operating surplus. ects” by politicians lobbying for private in- -- Borrowing policy and limits. While UB’s terests, which do not directly provide pub- government itself is not allowed to bor- lic services and can be delivered by the pri- row, it has both direct and indirect debt vate sector (e.g. production facilities, trade liabilities from its associated entities. For centers, business centers, market places, example, UB is paying back loans from in- etc.). ternational lenders taken by the MoF for In UB, the CIP policy may repeat priorities redevelopment projects in UB. In addition, for capital investment from the Mayor’s borrowing by municipal enterprises both Action Plan, priorities that should then be domestically and internationally created reflected in the project selection criteria. implicit liabilities for UB. Therefore, es- The policy should clearly state that no tablishing explicit limits on such liabilities projects that require public investment – would help secure the financial health of either directly (from the city or line min- UB. Borrowing policies and limits should istries’ budgets) or indirectly (through be linked to a detailed analysis of the city’s municipal enterprises, PPPs or borrowing) financial capacity for the previous year and – may be approved without going through for the planned year. the CIP process. -- Criteria for prioritizing projects: The re- -- Definition of what constitutes a capital in- sponsibility and methodology. The policy vestment project. In effect, this definition should establish that PPD is charged with sets a minimum size for project requests developing these criteria, in consultation and a minimum useful life for an asset in with key stakeholders. It should also stip- order to be considered for inclusion in the ulate that the criteria can be modified next CIP. Until recently, the CIP process in UB year, if lessons from the previous year jus- was overwhelmed by small investment re- tify such a modification. quests that would not qualify in most cities -- Methods and timing of public participa- of comparable size. tion. The policy may state who is respon- -- Assignment of organizational responsibility sible for securing public participation and for capital investment plan preparation and during which periods but may leave it to submission. Some aspects have been dis- the PPD to define specific methods. cussed under Step 1. -- Methods of financing capital projects. The An important issue is to define the legal status CIP policy should list specific sources of this policy. Ideally, it would be approved by available for capital investment that the the City Council and would become binding for UB government intends to use, accompa- all city- and district-level participants. The next nied by the specifics for these sources. For best solution would be to issue this policy as a example, it would be useful to state in the Mayor’s resolution/regulation, to make it bind- policy that net revenues from the sale of ing for all executive entities and municipal en- land and property should be used for cap- terprises. However, even if the policy was writ- ital projects only, as should all the various ten as an internal PPD document, it would serve land-based revenues, such as the land de- as a useful guide. A sample draft policy on CIP is velopment fees and lease fees. It would included in Appendix 2. 32 Step 3. Establish project scoring criteria American cities show that it is advantageous if and prioritization process the priority setting process has the following characteristics: Issues addressed: -- Is understandable to participants of the ŠŠ How would formalized criteria help improve CIP process; the CIP process? -- Is practical in terms of cost, time, and per- ŠŠ Two typical approaches to project ranking and sonnel available to carry it out; prioritization. -- Considers all major consequences of an in- ŠŠ The criteria testing in UB for the 2018 CIP and vestment project; lessons learned. -- Is supported by reliable, relevant informa- tion; If selection criteria are clearly defined before -- Avoids double-counting evaluation criteria an annual CIP process starts, the project evalu- (i.e. use of two highly interrelated criteria); ation and prioritization process is more objec- -- Indicates clearly whether the key value tive, rational, and protects the administration judgments (e.g. assigning “weights” to each from accusations of unreasonable biases. While criterion) are to be made by technical ex- the PPD defines the criteria, it can be helpful to perts or elected officials; discuss them with such stakeholders as district -- Identifies critical and non-critical projects; administrations and members of the City Coun- -- Is applicable to a wide range of projects; cil. Public participation through focus groups and and suggestion boxes can be used to provide -- Considers the interdependence of the sug- citizens and the business community with an gested projects. opportunity to participate in the formulation and review of selection criteria. To provide A common approach, which the PPD planned to guidance to those drafting the requests, evalu- test, is based on multi-criteria scoring of each ation criteria should be established prior to the requested project. More specifically, each proj- preparation of project requests and conveyed ect is assessed based on the pre-agreed criteria to participating entities under Step 4. and obtains a specific number of “points” for each criterion. Then, these “points” are summed However, no evaluation system is perfect. Not up over all criteria, resulting in a project’s total all criteria will apply to every project. Good score. A project’s resulting priority is defined by judgment, common sense, and political consid- its score: the higher the total score, the higher erations will continue to play roles, particularly the priority. Sometimes the score for each crite- when the City Council approves a CIP in which rion is weighted, with predefined weights. projects were prioritized using the pre-defined prioritization criteria and process. Neverthe- Table 3 below presents the eight criteria with less, carefully prepared criteria can sharpen which the PPD planned to experiment for the distinctions among projects, narrow the range 2018 capital budget, along with the maximum of disagreement, provide a basis for discussion, score (“points”) and scoring rules for each crite- and, hopefully, make the entire process more rion.20 It also illustrates how this system works, transparent. However, it is critical that project using a hypothetical example of three projects. selection is supported by accurate and relevant information. Moreover, practical experiences from many Criteria were changed during the process. 20 33 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar As Table 3 shows, the set of criteria reflects sev- form, the PPD tests how these forms would be eral very important aspects of investment proj- filled in by participants. In other words, the PPD ects that the PPD (on behalf of the administra- staff should examine how the data/information tion) considered for testing, in order to balance needed for applying the criteria can be collect- various viewpoints on municipal investment. In ed. It would be very useful to consult on each particular, criteria include: criterion with experts from the participating entities as well. Critical issues to consider in- -- How well a project reflects the state and clude: city investment policies (Criterion 1) and whether it is within the city’s formal in- -- Are the criteria formulated unambiguously vestment mandate (Criterion 6); enough, so that different people would un- -- Whether a similar project was already im- derstand them in the same way? plemented relatively recently (Criterion 4) -- Do participants have data or information and whether the project is ready for com- needed for responding or can it be ob- mencement (Criterion 2); tained reasonably easily? -- The scoring also gives some advantage to projects associated with resulting cost If it turns out that the technical specialists have savings or new revenues (Criterion 3); to difficulties filling in some data, this should projects that repair, replace, or expand ex- serve as a red flag indicating that the same isting facilities vs. new construction (Crite- would happen when agencies prepare their rion 5); and to projects benefitting a larger project requests. In such cases, PPD needs to number of people (Criterion 7); and analyze whether more guidance should be pro- -- Finally, the scoring takes into consider- vided on how to obtain required data or if the ation the project’s importance for the re- criterion should be removed or reformulat- questing entity (Criterion 8). ed. For example, during the preparation cycle for the 2018 CIP, the most challenging criteri- While testing the scoring/prioritization system, on was “Estimated annual O&M costs”, as only the PPD learned some useful lessons, consistent about 15% of projects had this amount includ- with international experiences. In particular, ed. Given the strategic importance of this crite- the process needs to: rion, the PPD experiment indicates that entities need systematic guidance on how to estimate -- Make and firmly enforce a rule that ex- O&M costs. Details are provided in Appendix 4. cludes a requested project from consider- ation if the request provides incomplete Furthermore, a critical question is to which information or the project conflicts with projects the prioritization criteria should ap- the requirements of the relevant laws and ply. First, as is clear from Table 3, these crite- regulations; ria target new projects. According to the PPD, -- Make the scoring criteria more clear and they are obliged to fund all on-going projects unambiguous and provide good guidance (i.e. projects started in previous years) which to submitting entities on how to fill out re- must be completed, and therefore do not re- quired data/information; and quire prioritization of this type. Second, should -- Simplify the request preparation process the formalized procedure of a type presented in for submitting entities. Table 3 apply to all submitted requests for new projects, or can some projects be prioritized in It is recommended that before the PPD includes a simpler way? International experiences vary; a suggested set of criteria in the project request for the sake of efficiency, especially in large ju- 34 risdictions similar to UB, local governments and put less effort into evaluating projects sometimes decide to simplify the scoring and that clearly should be included in the CIP. prioritization process. For example, they might: Finally, it is important to stipulate that scoring/ -- Focus the review on the most important prioritization results may be adjusted to some projects; or extent by the PPD. The scoring/prioritization -- Focus on projects near the “cut-off” point, should not just be a mathematical exercise and i.e. projects whose inclusion in the CIP is should allow modifications if they benefit the problematic (e.g. controversial projects), community. Table 3. Prioritization Criteria Considered for Testing for the 2018 Capital Investment Plan with Il- lustrative Example 2 • Project has 1 • Relevance to feasibility study, 3 • Project cost will long-term and mid- engineering design, 4 • Similar project Criteri- be offset by operat- Total Prior- term national and land permit and is implemented in on ing cost savings or score ity city policy docu- technical specifica- mid-term increased revenues ments tions required for its commencement Maxi- mum Sum score 20 15 10 10 of all (# of points points) 20 - if project is 15 - if project has all 10 - if credible quan- 10 - if not implement- relevant to 3 or more documents required titative estimates of ed in the past 9 or policy documents; for its commence- expected cost savings more years; ment; or new revenue are 5 - if implemented in 10 - if it is relevant to provided; the past 5-8 years; 1-2 policy documents; 0 - if it lacks one or more required docu- 5 - if a reasonable 0 - if implemented 0 - if no relevance ments qualitative explana- with in the past 4 tion of expected cost years savings or new reve- nue is provided; 0 - if no evidence is provided Project 20 0 0 10 56 2 1 Project 0 15 0 5 40 3 2 Project 10 15 0 10 75 1 3 35 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar 6 • Project is rele- 5 • Project is a 8 • How important vant to Article 58 of necessary repair or the project is for the Criteri- Budget Law (appli- 7 • Number of bene- Total Prior- replacement of exist- submitting entity on cable only to project ficiaries score ity ing capital equip- (district, agency, requests to Capital ment or facility ets.) City’s CIP) Maxi- mum Sum score 15 10 10 10 of all (# of points points) 15 - if capital repair or 10 - if relevant to at 10 - if above a popu- 10 - if a project has complete replacement least one function of lation average of 152 the highest priority of facility; city budget; khoroos of Capital for the submitter; 0 - if no relevance City; 6 - if a project has the 10 - if extension of facility; 5 - if below the aver- medium priority for age but above the half the submitter; 0 - if new construc- average; 3 - if a project has the tion 0 - if below the half lowest priority for the average submitter; 0 - if priority is not shown Project 10 10 0 6 56 2 1 Project 0 0 10 10 40 3 2 Project 15 10 5 10 75 1 3 Step 4. Develop or modify schedules, forms, high-quality requests. The submitting entities and instructions need to have at least two months between the time when all forms, instructions, and training Issues addressed: are delivered to them, and the deadline for sub- mission. ŠŠ What is especially important to modify in the current CIP schedule in UB? The PPD needs to prepare an official CIP sched- ŠŠ How to address challenges of keeping the ule, have it signed by the Mayor as an official forms manageable? document, and send it to all participating enti- ties no later than February or March – and well Schedule before any actions are required from the enti- ties. Capital investment request evaluations should begin well before the operating budget cycle to The schedule should be binding not only for the avoid an excessive staff workload and ensure submitting entities but for the PPD as well. If, adequate time for review. In general, the prac- for example, training on how to complete forms tice of getting an early start on CIP is already in is scheduled for late April, the PPD should not place in UB. However, the calendar needs to be postpone it because this will reduce the time modified, as entities submitting their requests available to the entities for preparing their proj- have not been allotted enough time to prepare ect requests. 36 Forms and Instructions ten instructions on how to complete the forms, especially regarding new requirements in the Project request forms are used to collect de- forms. In addition, providing hands-on training tailed information on each proposed project. for the submitting entities is a good practice Obviously, there should be consistency between (and one that the PPD already implements). the project scoring/prioritization criteria and the project request forms: the completed forms Starting the Annual Cycle should contain the information and data need- ed for project scoring. As already indicated, the annual cycle should start with internal work by the PPD (Steps 1-3). A central challenge in UB, at least during the After this work is completed, the PPD should preparation of the 2018 CIP, was that the stan- send out requests for project proposals, in- dard form (mainly designed by the MoF) has 52 structions for their completion, and conduct points of required information even before add- training on filling out forms to all contributing ing the data needed for scoring, as presented in entities (e.g. departments, enterprises). As with Table 3. Finalizing such comprehensive forms the CIP schedule, the forms should be accompa- for each project is challenging for many submit- nied by an approval letter signed by the Mayor. ting entities. At the very least, they need clear instructions and training on how to complete this. Step 5. Prepare project requests In the longer term, the PPD can collaborate with Issues addressed: the MoF to shorten and simplify the standard form. In particular, they should work together ŠŠ What are common challenges faced by the to make sure that all the required information submitting entities and how can they be han- is truly needed for project evaluation and deci- dled? sion making. In addition, it might be useful to agree that for less expensive projects, less infor- Section 2.1 provided a general overview of how mation is required. investment projects can be identified at this stage of the CIP process. Note that in UB, which Finally, it is important to note that even rela- has some amount of deferred maintenance and tively sophisticated request forms are usually repair of existing public assets, the submitting less detailed and have fewer supporting mate- entities should be encouraged to submit re- rials than may be required at later stages. The quests for unfulfilled needs for capital repairs, need for additional information usually arises replacement, or extensions as high priority. after the project is approved as a part of the CIP, especially if the project will need external Addressing challenges. When departments or financing from lenders or grantees. Therefore, enterprises prepare project requests, they may “packaging” the CIP-included projects to pres- encounter a number of challenges. Therefore, ent them to lenders and grantees is a separate the PPD needs to be available to these entities activity (further reviewed under Step 5). This to provide clarifications and guidance. In UB, is an additional reason why the project request particular challenges – in addition to those al- forms are not intended to cover all the data ready mentioned – may include: needs for the entire investment process. -- Are all costs recognized and accounted for? The submitting entities need very clear writ- In the CIP processes, governments and 37 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar their departments commonly recognize components of the investment costs21 and Box 8. Cost Savings from a Simple Life Cycle include them in cost considerations and Costing Decision planning. However, governments rarely in- clude other cost components in their anal- The Park District of Urbana, Illinois in the ysis and decision making, such as the cost United States, keeps detailed expense re- cords for each of its land and property as- of financing and future O&M costs (Chap- sets. The business office, which maintains ter 2). As already discussed, including even the records, discovered that the heating ex- rough estimates of these as part of the fi- penses for one of its properties were very nancial analysis is important. Guidelines high. An inspection and cost-benefit anal- for making these estimates are suggested ysis revealed that changing the old heating in Chapter 2 and Appendix 4. system to gas would pay for itself in two years and permanently decrease operating Note, however, that the project request expenses. This replacement was included in form used in UB thus far does not ask for the Park District’s budget and implement- estimates of future O&M costs, and the cur- ed. rent investment decision-making process Source: Kaganova and others, 1999. does not factor in this information. Chang- ing this practice should be one of the next steps in improving the CIP process in UB. -- Can simple life cycle savings be found? Sav- -- Are material cost savings attempted in proj- ings of this kind are not necessarily com- ect requests? Construction technology and plex, or difficult to achieve (Box 8). All materials are changing rapidly. However, entities should be encouraged to look for municipal enterprises and departments of- such opportunities as a part of asset man- ten either are not familiar with these new agement and CIP throughout UB. opportunities, or they are not concerned with potential cost savings from the use of -- When should projects for donors be “pack- cheaper contemporary materials, equip- aged”? Some projects, especially expen- ment, and technology. For example, a mu- sive ones, can be expected to be co-funded nicipal utility may suggest upgrading a through external funding (e.g. grants, bor- sewage network using cast iron pipes, rowing). These projects will require much which were used in the past, but plastic more careful and detailed preparation alternatives could save up to 33%. This in- (“packaging”) for presentation to poten- dicates that scrutinizing technologies and tial sponsors than is typically needed for the costs of material inputs is very import- financing through the city’s own budget- ant for CIP. A challenge for the PPD is to en- ary process. The implication is that after a sure that the technical staff has the capaci- standard project request is presented for ty, time, and incentives to keep up to date city CIP and prioritized for external fund- on cost-effective technical solutions. ing, it will need to undergo a second, in- depth appraisal and “packaging”. Lenders and grantors typically ask whether a proj- The investment costs include feasibility and planning 21 ect under consideration is explicitly includ- studies, engineering and architectural design, land ed in a CIP or an official development plan. acquisition, demolition, construction and construction management, contingency, site improvements equipment, and furnishings. -- Who should suggest sources of funding for 38 CIP projects? Finally, although the Finance -- Is the information complete and accurate? and Treasury Department and PPD should -- Is the project justification clear? provide recommendations for capital fi- -- Does the project overlap with or duplicate nancing alternatives, it is beneficial for the submissions from other entities? submitting entities preparing project re- -- Are cost estimates reasonable? Can these quests to recommend financing sources. estimates be used to develop a capital pro- Individual staff in these entities sometimes gram and budget? Note that this question possess financing source information not may require an expert review because de- otherwise available. Suggestions of oth- partments and municipal enterprises are er proposed financing methods should be not always realistic in their assumptions recorded as specifically as possible in the and can underestimate cost components project request forms. or, on the contrary, overestimate the costs. -- Can projects with large costs be broken down into phases that can be financed and Step 6. Review project requests and sort built separately? them into line ministry or city lists Developing a detailed checklist for PPD special- Issues addressed: ists for reviewing project requests can acceler- ate their work and increase consistency. ŠŠ Practicalities of reviewing project requests. ŠŠ Initial, pre-prioritization sorting of the re- A common issue in UB and elsewhere is that quests. some project requests contain incomplete/ missing data. Difficult choices for the PPD are: Once project request forms have been submit- ted to the PPD by all the entities, the next steps -- Deciding if, and how much, extra time and (Steps 6-8, Figure 5) are as follows: the PPD’s help to give to submitters to fill in gaps; first action is to review the forms, checking each and for completeness and accuracy. During this ini- -- Deciding if they should eventually exercise tial screening, no judgment is made regarding an administrative will to exclude projects the merits of the proposed projects. In this first with missing information from further round, the PPD technical experts review project consideration. This will be much easier if request forms to determine whether the infor- this is stipulated in advance in written doc- mation appears “reasonable”. In particular, proj- uments to submitters (e.g. in the invest- ect justifications should demonstrate the level of ment policy, instructions for submitters, or planning and care that has gone into preparing both). these project proposals. After unacceptable requests are excluded, and In reviewing the applications, the PPD special- a list of projects accepted for further consider- ists need to ask the following questions: ation is formed, the PPD should sort them into separate lists (Figure 5). First, PPD should sep- -- Does the project fit into the definition of arate projects for which funding is the city’s a capital investment? If the amount is too small, can the request be bundled with an- such consolidations themselves while preparing their requests. A clear definition of a minimum amount other into a single request?22 and a requirement to bundle together smaller projects should be included in the instructions to the Ideally, the entities should be instructed to make 22 submitting entities. 39 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar responsibility (according to the Budget Law, 2b – new projects. Article 58) from those which will go to line min- istries for funding consideration. The projects The on-going projects must be funded accord- going to the line ministries (List 1) are then ing to the Budget Law and, therefore, they have grouped by sectors. Within each sector, they an absolute priority over new projects. Hence, are further split into List 1a – the projects al- prioritization of on-going projects from List 1a ready started under the previous years’ budgets and 2a is generally not needed. New projects, (on-going projects); and List 1b – new proj- however, will always go through prioritization ects. The city-responsibility projects also have (further discussed in Step 7). groupings reflecting UB’s administrative struc- ture. Then, the group of the city-responsibility In sum, an output of Step 6 consists of four projects is further split into two groups: List 2a “clean” lists of project requests ready to go into – the projects already started under the previ- prioritization or further steps, with each list ous years’ budgets (on-going projects); and List further split by sector or administrative branch. 40 STEP 6 Requests Requests List 1 - collected reviewed for line List 1a: on-going from and ministries projects, by sector entities disqualified ones eliminated List 1b: new projects, by sector List 2 - for city List 2a: on-going funding projects, by category List 2b: new projects, by category STEP 7 THREE SUB-LISTS ŠŠ Ongoing Scored/ List 1b: new prioritized PPP ŠŠ Potential PPP in the order projects, by sector within each screening of prioritization sector ŠŠ All other new (by sector, scored and prioritized within each sector) Scored/ PPP-POTENTIAL List 2b: new prioritized PPP The list prioritized projects projects, by category within each screening are sent to IDIA for PPP category appraisal NOT PPP-POTENTIAL Scored and prioritized within each category to be matched for available funding STEP 8 Draft list for CIP Funding allocated ŠŠ Available funding ready for review first to on-going identified and approval projects (List 2a) ŠŠ Allocated by category Remaining funding matched to prioritized List 2a, within each category, starting from the top, until funding exhausted Figure 5. Key Actions under Steps 6, 7 and 8 41 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Step 7a. Prioritize project requests and send sending them to the ministries. The PPD’s next the prioritized lists to line minis- action is to score and prioritize new projects tries that need to go to each line ministry for funding consideration according to the selected criteria Issues addressed: and procedure (i.e. from Table 3). This list of prioritized projects constitutes List 1b. All proj- ŠŠ How can the prioritization process work in ects selected and included in List 1b shall be practice in UB? subject to PPP-potential screening, as described ŠŠ Practical issues to discuss with the MoF. in Step 7b. Those projects that meet the prelim- inary PPP-potential screening will be sent to the If Steps 3, 5, and 6 have been done carefully, relevant agency responsible to further screen Step 7 is much easier. and appraise potential PPP projects (i.e. Nation- al Development Agency). The remaining proj- List 1, for line ministries. As already mentioned, ects stay on the list that is forwarded to the line ongoing projects (List 1a) would not require ministries, as described below. prioritization as all of them should be funded, according to the law. Therefore, in principle, An output from Step 7a is a combined list of all sector-specific parts of List 1a could be sorted eligible projects – on-going and new – for each into sectoral sub-lists for appropriate line min- particular sector (e.g. education, urban devel- istries. However, in practice not all on-going opment, health, etc.), where new projects are projects submitted to ministries obtain funding. listed in the order of priority. A fragment of this Thus, it is highly recommended that the PPD type of prioritized list of projects is shown in prioritizes on-going projects from List 1a before Table 4. 42 Table 4. Fragments of List 1 Submitted to the Ministry of Education, Culture, Sports and Science for Funding in FY2018 Title, Capacity & Khoroo No District Location of Project or Unit Capacity Object Type no. Activity X.1 Education X.1 I. Capital Investment On-going ("transfer") Not prioritized Construction of X.1.1.1 Chingeltei 18 kindergarten in Khoroo Bed 150 Kindergarten 18 School building 1500 X.1.1.2 Bayangol 4 Seat 1500 School seats School building 960 seats X.1.1.3 Bayangol 3 Seat 960 School /School no. 73 New School School building, 920 X.1.1.4 Songinokhairkhan 28 Seat 920 School seats /Khoroo 28 School expansion to School X.1.1.5 Songinokhairkhan 12 add storeys on Ireedui 480 Seat expansion primary school no.1 ……. Prioritized within this group, listed in order of priority X.1.1.23 Kindergarten Demolition & X.1.1.24 Chingeltei 9 Construction of Bed 240 Kindergarten Kindergarten no.43 Kindergarten building, X.1.1.25 Bayanzurkh 25 Bed 240 Kindergarten 100 beds ….. Prioritized within each group, X.1.1.34 listed in order of priority X.I.2 II. Capital Repair New Capital repair of X.I.2.1 Bayangol 12 Kindergarten no.12 the building and plumbing repair Roof and X.I.2.2 Bayangol 18 Kindergarten no.87 plumbing repairs …. X.I.2.72 43 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Note that providing the line ministries with pri- can be done. oritized lists – as opposed to non-prioritized ones as has been done in the past – is a criti- Option 1: All new projects that might be funded cal step toward aligning the ministries’ invest- by UB are considered together and scored and ments with the city’s needs and preferences. prioritized as one group (again, using a pre- defined criteria and procedure such as in Table However, further improvements are still need- 3). Under step 7(b), all projects that are select- ed in the PPD’s process of conveying city priori- ed to be included in the CIP will be screened for ties to the line ministries. In particular, it is rec- PPP-potential. Then, under Step 8, the projects ommended that: with the highest priority, but not PPP-potential, are included in the draft CIP, until the available -- The PPD, on the city’s behalf, discusses funding is exhausted (Figure 5). The remaining further collaboration possibilities with the projects are cut. Then, included projects are MoF, on how the city’s priorities can be sorted back into groups according to catego- better presented on investment request ries used in UB’s capital budgets (e.g. new in- forms; the best solution would be to obtain frastructure, capital repairs, capital acquisition, MoF consent that the official form would social care services, small medium enterprise contain a relevant column showing the (SME) development, pastoral management, city’s prioritization of each project; and housing, flood protection, public transport ser- -- Meanwhile, the PPD should continue to vices etc.). With this option, the amounts of present projects in order of priority on the funding for each category will emerge “passive- submission lists, and explicitly (in writing) ly,” as the sum of costs of projects from each inform line ministries on how the priori- category that scored high enough on the aggre- ties are expressed (e.g. which sections of gate city list (List 2b). the lists are prioritized, which are not; that the higher a project is in a subsection, the Option 2: Project requests are scored and pri- higher its priority is, etc.). oritized within their budgetary categories (e.g. new infrastructure, capital repairs, capital ac- List 2, for city funding. The city-funded on-go- quisition, social care services, SME develop- ing projects (List 2a) must obtain budget allo- ment, pastoral management, housing, flood cations, according to the law. Therefore, List 2a protection, public transport services etc.), sep- would go to the next step of assigning required arately from other categories. PPP-screening amounts to each project (Figure 5). If, however, is carried out on prioritized projects, same as expected funding seems insufficient to satisfy in option 1. Under Step 8, each category re- the budgets of all ongoing projects as planned, ceives its own amount for projects which do the PPD will need to make decisions about how not make it into the PPP-potential group, and to allocate smaller amounts to some projects project cut-off takes place within each catego- for the coming year. These decisions will be ry separately. mainly dictated by technological considerations (e.g. stage of construction, etc.) and will not re- Option 2 is closer to a traditional approach than quire formalized multi-dimensional criteria Option 1, because it pro-actively divides fund- such as those in Table 3. ing among sectors/categories, thereby under- taking a sort of implicit or explicit policy/deci- Finally, the scoring and prioritization of proj- sion of assigning preference by budgetary cat- ects should be applied to new projects to be egories. This option was used during the 2018 funded by UB (List 2b). There are two ways this CIP preparation. 44 In any case, as already mentioned, the scoring/ -- Contractible quality and performance prioritization process should leave the possi- specification – is there reason to believe bility for the PPD to hold discussions about in- UB can prepare a PPP contract that will dividual projects and to revise their evaluation hold a provider accountable for its perfor- scores if needed. mance? -- Opportunities for risk transfer – is there a good reason to believe that some of the Step 7b. Public-Private Partnership screen- risks associated with implementing this ing project can be allocated to the private sec- tor (i.e. those risks that are best managed Issues addressed: by the private sector) and that the private sector will be willing to take on these risks? ŠŠ How to screen projects for PPP-potential? -- Market capability and appetite – is it a po- tentially viable commercial project and is All capital investment projects, irrespective there private market interest in the proj- of the envisioned procurement method (ei- ect? ther PPP or traditional procurement), should be channeled through the standard annual CIP Those projects that meet all four PPP-potential process. Submitting entities should submit all criteria will be considered for PPP, and taken project requests, irrespective of PPP-potential out of the CIP prioritized list and forwarded to or not, as part of the CIP process. If a submitting the appropriate responsible entity – such as the entity believes that a project has a PPP-poten- IDIA – for review. IDIA’s role should be to con- tial, it should be indicated in the request. All duct the necessary appraisal of whether prepar- projects will be screened and prioritized as de- ing and implementing the project through a PPP scribed in the earlier sections of the guidebook. makes sense.24 The CIP process should include an additional, The final products of Step 7 (“a” and “b”) in- separate set of criteria specifically designed and clude: applied to testing the potential for the project to achieve value for money. These criteria will -- Sub-lists of eligible projects from Lists 1a be used to screen PPP-potential projects among and 1b sent to the line ministries and ar- those projects which have passed the general ranged by sector. For projects from List 1b, CIP screening and are prioritized for consider- the order of priority should also be noted; ation of the annual CIP budget. Taking interna- -- Lists 2a and 2b of all projects eligible for tional best practice and adopting it to UB’s con- funding from the Capital City Budget and text, certain criteria are suggested. These crite- from the Capital City Road Fund, arranged ria look at the key features of a successful PPP by category, and for List 2b, in order of pri- and can be judged by the reviewing officer at ority; and PPD for initial PPP-potential screening:23 -- Two separate lists of projects appropri- ate for (i) borrowing and (ii) PPP-poten- -- Scale of the project – are transaction costs tial projects, also in order of priority, to likely to be justified? UB can set a mini- be sent to responsible entities (e.g. IDIA in mum size for PPP-potential projects. case of PPPs) for further appraisal. Discussing which studies should be conducted while 24 These four criteria are used in South Africa to test PPP- 23 considering and preparing a PPP goes beyond the potential projects. scope of this guidebook. 45 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Step 8. Identify available funding and ally do not receive funding, but the next proj- match city’s projects to funding ects in line do. Being passed over can occur for several reasons; e.g. such projects can be expen- Issues addressed: sive or complex and are skipped temporarily or forwarded for further studies and search for ŠŠ How does matching funding with prioritized grants or considerations for co-funding through projects work? borrowing, which usually implies that the proj- ŠŠ Useful information to add to the CIP, to inform ects will not make it into a current-year CIP. further planning. The central product in this step is a draft CIP. Ideally, one output of the financial analysis It shows a list of the projects suggested for in- would be a table of revenue sources available clusion in the CIP, preferably listed in the order for capital financing for the first year of the of priority. Each project is shown with the sug- CIP, and forecasts for its subsequent years (see gested years of implementation, cost allocations Chapter 3). among finance sources (if multiple), and with the suggested annual expenditures during the However, if such in-depth analysis and forecast implementation period. The projects are usu- are not practiced yet (which is currently the ally arranged according to the categories for case in UB), the PPD must turn to other sourc- which funding allocations were made. es for an indication of the amount of funding available for Capital City Budget Investment. In Other Summary Schedules the current practice, this input comes from the annual socioeconomic guidelines that contain Other documents should be prepared as well, budgeted costs allocated by sector. including: In most cities, it takes several iterations be- -- A list of unfunded projects from the CIP tween the entity in charge of the CIP prepara- process, as it can be an important refer- tion, such as the PPD, and the city’s financial ence source for the next year’s CIP or even management to reconcile the funding and the earlier; high priority unfunded projects list of prioritized projects. may get funding later in the year as new funding sources become available; When the available capital funding amount is -- Debt and debt service schedules; determined, the procedure for choosing proj- -- A rolling summary table showing the his- ects is simple in principle: the projects with the tory of total capital needs, capital fund- highest priority are included in the draft CIP ing from budget revenues, and unfund- until the available funding is exhausted (Fig- ed amounts. In UB, it is recommended to ure 5). The remaining projects are cut. This maintain two such tables: one including process is repeated for all categories that are the projects funded from the city resourc- funded separately, according to their allocated es only (as Table 5), and another for proj- amounts. ects requested from and funded by the line ministries;25 and Due to limited funding, it is common that many -- A list of capital investment projects in UB projects will not obtain funding. For example, in funded by line ministries and from other many US cities, available annual funds can meet only approximately 10% of the total need. Fur- 25 Though a structure of this second table can be more thermore, projects with high priority occasion- complex than Table 5. 46 sources, such as borrowing and PPPs, if incorporate them (Chapter 3 and Ap- any. Ideally, this list would indicate who pendix 4); and will be responsible for each project’s fu- - A comprehensive appendix may result ture O&M expenses, and in particular in modifications to schedules or oth- whether UB or its entities will be respon- er details of local projects and prevent sible. waste of local resources. For example, it would not make sense for UB to put new In addition, it would show the locations pavement on a street in June if it sees and schedules of expected construction that the central government plans to dig works. At least two benefits can be expect- the street up in August to replace a wa- ed from adding such an appendix to the ter main. CIP: - If the future annual O&M costs are ex- The PPD submits the results of this step into pected to be paid out of the local budget, UB’s CIP funding/budgeting channel for consid- the budget forecast will then be able to eration and approval. Table 5. Sample Summary of Requested Project Costs, Allocated Budget Funding by Ulaanbaatar, and Unfunded Difference (Million MNT) 2016 2017 2018 Requested Project 1,935,000.0 2,245,600.0 4,067,935.39 Costs Budgeted From 2016 Budgeted From 2017 Budgeted From 2018 cost budget cost budget cost budget Allocation by UB, Total 347,965.8 149,304.7 444,131 174,400 301,701.3 153,047.9 From Capital City 300,809.6 115,325.8 406,774 138,592 240,845.8 116,185.0 Budget Investment From Capital City Road 47,156.2 33,978.9 37,357 35,808 60,855.6 36,862.9 Fund Investment Allocation by Line Not available Not available Not available Ministries Unfunded difference Not known Not known Not known 47 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Step 9. Draft capital program and bud- CIP prior to its adoption. A public hearing get documents and officially adopt reaches a large number of people and pro- them vides opportunities for them to comment directly on an issue. Open hearings enable Issues addressed: major objections to the program and bud- get to be discussed before the City Coun- ŠŠ How to add public participation to the process cil formally adopts the CIP. A public hear- of reviewing the draft CIP? ing may result in the need to amend the preliminary capital program and budget. Internationally, a typical practice is that the These changes should be made before sub- Mayor’s office reviews and finalizes the recom- mitting the final capital program and bud- mended capital program and the budget, and get to the City Council for adoption. then submits them to the City Council for ap- proval. The practice in UB is very similar. -- Community Meetings. Meetings with lo- cal residents can be held at the neighbor- For UB, it is recommended that the official CIP hood, khoroo, or district level. Meetings includes separate annexes with lists of proj- can be scheduled during the CIP process ects prioritized but sent for further studies and to solicit citizen input on proposed capital considerations for potential borrowing or PPPs projects. The informal structure of these (see Step 5). meetings enables in-depth discussions, di- rect and immediate responses to questions The CIP annual schedule should stipulate con- and comments, and clarification of facts or crete actionable steps and it should include ideas. enough time for the public and members of the City Council to review the program and To enable adequate public participation, the budget. PPD or its partners should advertise public meetings well in advance. The advertisements The first step in engaging the public is for the should detail where and when the meetings PPD and its partners to disseminate informa- will take place, and should be placed in the lo- tion about the CIP process through multiple cal newspaper, radio and television programs, channels (see below). Second, the public should the official UB website, and on social media. The have a chance to provide input; focus groups PPD or other responsible coordinators should and public hearings are good methods of ob- develop a process for conducting public meet- taining input from businesses and residents. ings. When the citizens and businesses participate in the process, they develop a better apprecia- Organizational issues to consider include: tion of the challenges facing local officials and the tradeoffs involved. Public hearings also pro- -- Who will represent the PPD and the city; vide the residents with an opportunity to con- -- What procedures will be used for obtain- sider how the program affects their community. ing public input, including who is eligible Public meetings typically take two forms: public to speak and the time limitations on re- hearings and community meetings. marks; -- Whether written comments will be accept- -- Public Hearings. A public hearing is a struc- ed; tured event used to gather residents’ and -- How information collected through the businesses’ comments concerning the public hearing process will be used; and 48 -- How meeting results (including changes comments, and public opinion, the City Coun- to CIP) will be reported back to the pub- cil adopts the capital program and capital bud- lic. get. Adoption of the program, however, is not a binding commitment to fund projects beyond After completing its review of the CIP draft, PPD the first year (Table 6). Table 6. Sample Fragment of the Ulaanbaatar’s Approved 2018 Capital Budget (Million MNT) Budgeted Amount to be No Title, Capacity & Location of Project or Activity Period Cost Financed in 2018 I CAPITAL INVESTMENTS BY CAPITAL CITY BUDGET   240,845.8 116,185.0 58.1.1 Implement Capital City management   9,485.2 6,417.9   Transfer   1,877.1 877.1 Expansion building of police department III 1 2017-2018 1,877.1 877.1 (Khoroo 13, Songinokhairkhan)   …     New   7,608.1 5,540.8 1 Police department building (Khoroo 1, Baganuur) 2018-2019 2,000.0 1,000.0   …   Urban planning, construction and establishing new 58.1.2   108,946.9 70,157.7 infrastructure   Transfer   18,545.5 5,151.0 Extension of GIS based integrated urban database of 1 2017-2018 3,954.0 1,200.0 the Capital City and introduce it to the public use   …     New   90,401.4 65,006.7 UB’s share of repayment for the ongoing Asian 1 Development Bank soft loan on “Investment support 2018 17,000.0 17,000.0 program for developing public utilities and ger area-1”   …   Capital maintenance of construction and buildings 58.1.3 owned by the capital city, establishing new property   27,919.0 16,078.1 and making investments   Transfer   20,086.1 8,988.1 Kindergarten construction, 240 beds 1 2017-2018 1,738.9 738.9 (Khoroo 26, Songinokhairkhan district)   …         New   7,832.9 7,090.0 Hospital construction for Tuul village 1 2018-2019 2,742.9 2,000.0 (Khoroo 13, Khan-Uul)   …       49 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar 4. Implementing and Monitoring Investment Projects Responsibility for managing an approved cap- to effectively manage design consultants and ital project is normally delegated to a city line contractors; department. However, the implementation of ŠŠ Engage project professionals from the pri- capital projects requires multiple steps and ac- vate sector, either to support government tivities by various departments and actors. At project managers or to manage projects en- this stage, multiple inefficiencies and delays can tirely, especially in the execution of exten- occur, even if the land and financing are avail- sive, complex, or ambitious capital programs; able. ŠŠ Seek methods to streamline interdepartmen- tal project elements such as procurement, Several lessons learned from good practices in- contract and payment processing, and con- ternationally can be followed by UB to increase struction approvals; the effectiveness and efficiency of capital proj- ŠŠ Review intradepartmental processes, organi- ect implementation26: zational structures, and workloads to identi- fy opportunities to eliminate roadblocks and ŠŠ Centralize responsibility for overall program enhance accountability; oversight in the financial department; ŠŠ Leverage economies of scale by consoli- ŠŠ Treat project management as a professional dating schedules (e.g. solicitation of pro- function. Have project management duties posals), standardizing processes and prod- performed by a central agency, as opposed ucts (e.g. correspondence and “boilerplate” to a line department; this will help prevent sections of project specifications), and in- fragmentation and promote a relatively ob- creasing automation and accuracy through jective orientation toward the basic goals of electronic tools; and project delivery. The project manager should ŠŠ An entity within the administration should focus on the management of resources, time, maintain up-to-date information on each product, and risk, not on individual techni- project. Quarterly meetings with represen- cal tasks such as design – such tasks should tatives of entities responsible for implemen- be delegated to contractors. In addition to tation should be held to report progress and project management skills, project manag- discuss problems in implementation. ers need ready access to project information, such as budget, expenditure, and contract in- formation; they also need sufficient authority Preparing Projects for External Financing Westerman, Nicole. 2004. “Managing the Capital 26 As discussed in Chapter 3, typical project re- Planning Cycle: Best Practice Examples of Effective Capital Program Managements.” Government Finance quests submitted to the PPD during the city’s Review, June. CIP process do not contain all of the data and 50 information demanded by external lenders and on schedule and on budget, and if not, what the specialized grantors. Therefore, for projects overruns are. A good CIP database is essential that seek external financing through special for monitoring project implementation. The fol- grants or borrowing, an important task in pre- lowing are the basic categories of information paring requests is to present (“package”) the that should be maintained and updated quar- projects according to the requirements of the terly during the construction implementation particular grantor or lender. period: In general, commercial lenders are concerned ŠŠ Project title; about the financial standing of the borrower ŠŠ Responsible department; and its ability to repay the loan (creditworthi- ŠŠ Key contact name; ness), and about the project’s viability. Donors ŠŠ Total project cost; (e.g. the European Union for its pre-accession ŠŠ Project phases (schedule); funds) typically focus on the net economic im- ŠŠ Estimated expenditures/phase; pact of the project instead. They want to see a ŠŠ Actual expenditures/phase schedule by cost-benefit analysis that reflects not only the phase; and financial but also the economic and social ben- ŠŠ Fiscal year/quarter. efits of the project. For UB, if such cost-benefit assessment is required by a donor, additional Close communication between the CIP monitor- analyses will be needed beyond those required ing entity, project managers, and the city finan- by commercial lenders; e.g. presenting a proj- cial managers is necessary to monitor timely ect’s net impact would include an investigation draw-downs of funds and to make sure pay- of economic welfare as measured by several dif- ments are not exceeding the level of completed ferent indicators. work. In any event, donors often indicate that the ex- Finally, it is critical for UB that the CIP monitor- istence of an approved CIP improves the chanc- ing entity builds a database of project history, es of a local government receiving a grant. by retaining key data on projects after they are Therefore, CIP can be an effective tool for the completed. city to lobby for the city’s capital funding prior- ities not only with the MoF, but also with inter- Internationally, local governments that do not national donors. have a long history of budget discipline and capital planning face at least two major chal- lenges in implementing their CIP: Monitoring Projects in the Capital Budget and Their Implementation ŠŠ The list of projects included in the CIP (and approved by the City Council) can be easi- The credibility of the CIP process rests, to some ly changed during a fiscal year; so often that extent, on the timely implementation and com- other projects not included in the CIP are pletion of the approved projects. Having a sys- funded instead; and tem in place for monitoring and reporting on ŠŠ Cost estimates for projects included in the CIP projects is critical to the entire process. CIP often prove to be insufficient and need to The system should monitor both the manageri- be increased, thus consuming funds planned al and fiscal aspects of projects, so that the PPD for other investments. or other responsible entity would know and re- port, on a quarterly basis, whether a project is Overcoming shortcomings in budget discipline 51 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar and capital planning requires better govern- ment must make a concerted effort to keep the ment accountability and planning and effective public informed about the status of projects. In- public participation. viting the public to City Council meetings when CIP status reports are being presented can be Status reports are a crucial aspect of project one important method. monitoring and oversight. The format and fre- quency of the reports should reflect the infor- Transparency of the process can be achieved mation needs of the monitoring entity, May- through simple, inexpensive means if the po- or, and the City Council. Typically, reporting is litical and administrative will exists. For exam- done quarterly. In general, the reports should ple, while UB is still establishing the monitoring contain sufficiently detailed information on and reporting system on its capital investments, each project (see the above bullet list suggest- it can simply publish a list of planned and exe- ed for the database), but also summary figures cuted projects, including related costs. The list and tables, along with narrative explanations of could include capital projects funded during delays, cost overruns, funding and construction the past year, including their costs, and a list of problems, and proposed corrective actions. projects planned for the past year (and upcom- ing year as well). These lists would be very in- formative for residents and would show how Transparency and Public Information much discipline had been associated with CIP implementation. “Publishing” can be as simple To maintain public support, the city govern- as posting a table with the list on a city website. 52 5. What Is Next for Ulaanbaatar? Improving and modernizing the CIP process in manual for entities that submit project re- a large city is always a work in progress – not quests; disseminate it, together with the UB just for UB, but for all large cities. At its current Investment Policy, to all participants of the stage, the city would benefit from both tactical process. Combine this with hands-on training improvements and more strategic thinking and for participants; actions. ŠŠ Ensure in the CIP official schedule that the submitting entities have at least two months between the time when all forms, instruc- Summary recommendations on short- and tions, and training are delivered to them, and mid-term improvements: the deadline for submission; ŠŠ Proactively communicate with MoF on how ŠŠ Consolidate the main rules of the CIP cycle the city should present its priorities on offi- into a single official regulation, the UB Invest- cial submission forms that go to line minis- ment Policy. Preferably, have it approved by tries; more generally, aim to align ministries’ the City Council or, as the second-best op- funding decisions with city’s priorities; tion, by a Mayor’s resolution; ŠŠ Prioritize both on-going (“transfer”) projects ŠŠ Introduce and implement a rule that all cap- and new projects on the request lists for line ital projects that require public investment ministries – given that not all on-going proj- (from the city or line ministries’ budgets) ects get funded; and or that create liabilities for the city budget ŠŠ In the official CIP, include separate annexes and the balance sheet (through municipal with lists of projects prioritized but sent for enterprises, PPPs, or borrowing) must first further study and consideration for potential go through consideration and prioritization borrowing or PPPs. within the standard CIP process; ŠŠ Continue experimenting with the project pri- oritization criteria and the data needed to de- Strategic directions termine scores. However, before coming up with an official list of data requirements for ŠŠ Recognizing spatial planning as a source of project requests, carefully test it with techni- sustainable or unsustainable development. cal experts from the entities that will prepare Development plans are where most invest- requests. Key issues to test are whether (i) ment needs for new infrastructure originate. the criteria and data required to submit are Therefore, spatial development plans like the clear to participants; and (ii) they have or Master Plan must begin to attach price tags know how to obtain required data; to suggested development, including: (i) the ŠŠ Prepare (and annually update) a guidebook/ cost of public investment needed for imple- 53 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar mentation; and (ii) both the capital costs and ŠŠ Introducing more systematic asset manage- future O&M costs need to be taken in consid- ment. This is a complex, long-term task. For eration. Can the city afford to build needed example, the City of Portland (Oregon, United infrastructure and then sustain its O&M? States), took close to twenty years to devel- op a good asset management system based ŠŠ Strengthen the information base of the CIP on unified principles for all infrastructure process. The CIP process simply cannot be ef- sectors. For UB, there is an element of good ficient without adequate data and the capaci- asset management that is directly relevant to ty to use the data. The challenges that UB fac- CIP and, more generally, to the sustainabil- es on this front have two main components: ity of its infrastructure: the estimated cost (i) lack of a systematic database of past cap- of annual O&M and actual O&M expenses. ital investment at the city level; and (ii) in- Therefore, the PPD can start by helping all sufficient capacity and data at asset-holding municipal entities, which hold and operate entities about their assets, and in particular, city-owned facilities and infrastructure sys- about their O&M needs, costs, and expenses. tems, to learn how to monitor and plan these expenses. Knowing the history of public investment for at least the previous ten years is necessary ŠŠ Recognizing climate resilience as a new chal- to avoid inefficient use of public funding. The lenge. How to reflect this challenge in CIP is database needs to be GIS referenced. Ideally, a new frontier in public management across it should cover all public investment in the the globe and still very much at an explorato- city’s territory. However, it should start with ry stage. UB can explore two approaches: all city-funded projects and projects with city payment/repayment obligations (i.e. using -- Approach 1. To have a special capital in- loan financing or PPPs). Later the database vestment program that would address the will need to include projects funded by the most pressing climate-related issues and LDF and by line ministries. fund this program as a special priority, set- ting aside some share of the annual capital Overcoming organizational fragmentation in budget for it; or developing such a CIP monitoring database -- Approach 2. Introduce a climate-resilience and securing access to it is critical for the criterion (or criteria) to score/prioritize all overall efficiency of CIP. Regardless of which projects into the set of project scoring/pri- entity develops the database, the PPD and oritization criteria in the CIP. other stakeholders must have direct, free ac- cess to it. Moreover, the PPD, as a key user The WB recommends Approach 2 in the context of such data, needs to be consulted when the of UB. The recommended approach is further database is designed. elaborated in Appendix 1. 54 Appendix 1. Mainstreaming Climate Resilience Considerations This note explores the potential approaches to incorporating climate change and its impacts into the CIP process in UB. In other words, it explores the approaches that cities around the world are adopting to make their capital investments low carbon and resilient to climate change, as well as the feasibility of the approaches in the present context of UB. First, we briefly look at how global climate change and its impacts are driving and expected to drive changes in the climate system in Mongolia, particularly in UB. Then we discuss why cities are best positioned to initiate climate change policies and actions, after which we explore two main ap- proaches in making cities prepared for, and resilient to, climate change impacts via their CIPs. After that, we examine the rationales for incorporating a proposed “climate change criterion’ into the CIP process in UB. Finally, a short example is provided to illustrate how and in what form the proposed ‘climate change criterion’ could be used in prioritizing project requests from different sectors in CIP. The ultimate aim of this note is to facilitate the capital investments in UB to start considering and incorporating climate change resilience and mitigation efforts. Climate Change and UB city In recent decades, the unprecedented level of anthropogenic greenhouse emissions into the atmo- sphere has caused global climate change and warming. Its associated cryosphere depletion and sea level rise have led to greater levels of evaporation and changes in precipitation patterns. Mongolia has experienced rapid depletion of the cryosphere, triggering increased frequencies and intensities of weather-induced hazards like droughts, storms, Zud (a harsh winter followed by drought in sum- mer leading to losses of millions of livestock), and flash floods, all of which are forecasted to further increase in the future.27 UB experiences greater effects of global warming than the rest of the country. The mean annual sur- face temperature in the city increased by 2.6°C over the period of 1961-1991, while precipitation IPСC (2014) reports that the globally averaged combined land ocean surface temperature increased by 0.85°C over the 27 period 1880-2012, whereas MET (2017) reports that the mean annual surface temperature increased by 2.2°C over the period 1940-2016. As a consequence, MET (2017) reports that the discontinuous glacier spread over the territory of Mongolia was reduced to 29.3% in 2015 from 63% in 1970. Moreover, the volume of permafrost depleted by 29.9% in the last 70 years. Furthermore, MET (2017) reports that the frequency of weather-related hazards has doubled in the past two decades in Mongolia. 55 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar decreased by 5%.28 In the near and mid-term future, it is projected that the mean annual surface temperature and precipitation will increase.29 Thus, it is expected that the frequency and intensity of weather-related hazards will increase in UB, where the majority of Mongolia’s population and economic activities are concentrated. In addition, rapid urbanization (i.e. urban growth and associated changes in land use patterns) in UB exacerbates the negative impacts of climate change in the city.30 Power plants in UB account for 78% of the coal use in the energy sector which amounts to 70% of the national greenhouse gas emissions.31 Moreover, UB is also home to Mongolia’s main energy-intensive industries.32 Thus, it is important that UB focuses on building in climate resilience in its future development plans, as it has a great potential to reduce carbon emissions. Climate Change and Cities As has been mentioned in this guidebook, cities are best positioned to initiate and implement poli- cies and actions for climate change resilience and mitigation in different sectors. Cities are respon- sible for the delivery and, to a certain extent, the financing of various urban services and infrastruc- ture; responsibilities that can be turned into opportunities to develop climate mitigation and resil- ience efforts. However, finding adequate funds for such long-term projects may not always be easy.33 Therefore, an increasing number of cities around the world have begun to plan for climate change by developing stand-alone climate plans or incorporating climate considerations into existing plans, policies, and projects.34 Mainstreaming climate change assessments and adaptation goals into exist- ing plans and activities allow cities to address climate impacts systematically without losing sight of existing city-related issues, or placing additional pressure on scarce resources.35 Approaches to Incorporate Climate Change Considerations into CIP There are two main approaches to incorporating climate change resilience and mitigation into the CIP: 28 https://environment.ub.gov.mn/post/268 29 Under a World Bank commissioned study on assessing flood risk in UB city, experts from the Meteorology and Hydrology Institute of Mongolia calculated climate change scenarios in the past (1981-2000), near future (2011-2030), and mid-term future (2046-2065), based on results from the global climate change model HadCM3, by Hadley Centre of UK, using RegCM3 model in a 30 km resolution grid covering UB city territory. The results indicate that the mean annual temperature is likely to increase by 1°C and 2.4°C, with precipitation increase by 11.7% and 28.4% in the near future and mid-term future, respectively, in UB city. JEMR (2014). 30 The surface area of urban forests decreased by 25%, while ger areas increased by 13.6 times. The built area in the city increased by 65% only over the period 1974-2013. JEMR (2015). 31 Though Mongolia’s absolute emission is negligible (0.1% of the global greenhouse gas emissions) compared to other countries, per capita emission is considerably higher (6.08 ton CO2 eq). MET (2017). Please see more information on carbon emission of energy sector in Mongolia at https://environment.ub.gov.mn/post/270. 32 Ditto. 33 World Bank (2011). 34 Ditto. 35 Ditto. 56 ŠŠ Mechanisms for assigning a certain portion of budget for building resilience to climate change and reducing greenhouse gas emissions: These could be the mechanisms in which a special fund for climate change is set up or climate change actions are included in the municipal functions eligible for CIP. An example of a climate change fund is the climate change actions in Canadian provinces and municipalities.36 On the other hand, it is common practice among cities to legally mandate climate change actions as budgetary functions. However, these may have been incorporated in the municipal functions financed by CIP without being under the umbrella of climate change actions. In other words, in- sulation of municipally owned buildings, restoration of flood dam channels, and other disaster prevention actions are often included in the functions mandated by law for CIP without any ref- erence to climate change action, although they are instrumental in reducing exposure and build- ing resilience to climate-induced hazards. These activities are also included in the functions eligi- ble by law for CIP in the context of UB city. ŠŠ Low carbon and climate-smart CIP: Capital investments are ‘climate-smart and resilient’ when they serve the social, economic, and environmental purposes for which they were intended.37 Such purposes include reducing green- house gas emissions, helping communities adapt to climate change, and gaining resilience to any number of disturbances a city could face regardless of the existence or non-existence of CIP and/ or its plans and actions for climate resilience and mitigation.38 Climate change considerations may be incorporated into CIP by the following adjustments: fore- cast carbon emissions from proposed investment; generate and select low carbon alternatives to conventional projects; forecast the cost-effectiveness of vulnerabilities of proposed investments to all pertinent hazards; generate and select resilient alternative sites for projects; and include “climate-smart” low carbon, resilient criteria for prioritizing investments.39 Recent examples are the climate-smart CIPs under development in Kampala, Durban and Dar es Salaam where development of long-term climate-smart CIP will ensure that capital projects are designed from the outset to provide carbon reduction and resilience-building co-benefits to the municipality, allowing for the incorporation of climate change resilience and mitigation actions more effectively into long-term CIP.40 Rationales for Proposing a ‘Climate Change’ Criterion in CIP Methodology The aforementioned adjustments for incorporating climate change considerations into CIP except for the climate change criterion in the CIP methodology proposed in this Appendix will require a 36 For example, Ontario province in Canada set up a Municipal Climate Change Challenge Fund to support the greenhouse gas emission reduction projects by the municipalities as one of the mechanisms to implement its Climate Change Action Plan. Please see more information on the Fund and Action Plan at https://www.amo.on.ca/AMO- Content/Backgrounders/2017/MunicipalClimateActionLeadership. 37 Jan Whittington (2016). 38 Ditto. 39 Ditto. 40 C40 Cities (2016). 57 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar significant amount of quantitative data and assessments like carbon emission forecasts and risk and site assessments in relation to vulnerability to hazards. These adjustments are all equally im- portant on their own in improving CIP process in any city, but they will require extensive capacity building activities for the planners, managers and technical experts of numerous municipal entities involved in the CIP. As previously mentioned in the guidebook, UB’s existing CIP prioritization spread sheet needs to be further streamlined; the current project request form requires over 50 different inputs, which means it is already a complicated process to complete the forms. Incorporation of additional esti- mates and assessments risks further complicating the project request form. However, the inclusion of a climate change criterion in the CIP methodology will enable the incor- poration of climate change resilience considerations into various urban sectors, which CIP covers. A simple example on how a climate change criterion could be used in the CIP methodology for differ- ent sectors using qualitative information is provided in the next section. CIP planners and manag- ers at municipal entities and the PPD are encouraged to explore and devise the criterion to make it all-encompassing. This will also facilitate incorporation of climate change considerations into capital projects and works under CIP from the outset of project design. In other words, the criterion will be a starting point for planners, managers and technical experts at municipal entities involved in the CIP to con- sider how a proposed capital investment could contribute to building resilience to climate change and reducing carbon emissions. Climate Change Criterion in CIP Methodology A simple climate change criterion is proposed for the initial learning and piloting exercise. The pro- posed criterion will ask two questions and assign a score if answered yes. These questions are: if a project request contributes to reducing greenhouse emissions, and if a project request contrib- utes to building/enhancing resilience to climate change. Common sense qualitative explanations (e.g. project incorporates greenery or repairs existing infrastructure in such a way that the latter becomes more resilient to climate change hazards) will suffice, and if there is no such explanation forthcoming, the project will get no score accordingly. In the end, the overall climate resilience score will be added to the project’s total prioritization score. In this way project requests that incor- porate climate change considerations will have more chance in getting funded. 58 Contributes to Building Budget Law Contributes to Reducing Total Climate Provision & Enhancing Green House Emission Resilience Title of a Project Request Resilience to Yes=a score Score Climate Change No=0 a+b Yes=b score No=0 I CAPITAL CITY BUDGET CAPITAL INVESTMENT 58.1.1 Implement Capital City management Yes. Project design Engineering design of a Yes. Project design includes 1 considers resilience a+b new city sub-center green infrastructure to climate hazards 58.1.2 Urban planning, construction and establishing new infrastructure Yes. Project will contribute to Yes. Project includes Implementing a bicycle reduction of green house gas 1 drainage to reduce a+b lane program emission by reducing use of risk from flooding motorized vehicles Capital maintenance of construction and buildings owned by the Capital City, 58.1.3 establishing new property and making investments Capital repairs of buildings Yes. Project includes green 1 No a of schools roofs … … … … … … … … … … 58.1.16 Large-scale citywide landscaping and lighting Establishing model streets Yes. Project improves Yes. Project includes 1 with full furnishment in ger flood protection a+b greenery works areas drainage in the area II CAPITAL INVESTMENTS BY MUNICIPAL ROAD FUND Repair and extension of Yes. Project 1 road drainage pipes and No contributes to b sinkholes resilience to flooding 59 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Appendix 2. Draft Policy on Capital Invest- ment Planning Period covered by the Capital Improvement Program. A three-year Capital Investment Program will be prepared for the period ______ to ______ and updated annually, and the capital budget will be ad- opted annually by the City Council. Eligible types of investment. Capital investments that can be considered for inclusion in the CIP are: ŠŠ Rehabilitation and/or replacement of existing infrastructure, public-use facilities, and social-use and government-use properties under the mandate of the city government; ŠŠ Reconstruction of the above infrastructure, facilities, and properties; ŠŠ Construction of new infrastructure, facilities, and properties of the above type if financially and economically justified; ŠŠ Completion of projects funded in previous years if they do not conflict with current policies; and ŠŠ Equipment and vehicles for public functions under the mandate of the city government. The costs needed for adequate and timely maintenance, repair, restoration, and modernization of physical assets are eligible for inclusion in either operating expenses or capital costs. Funding the replacement reserve for capital assets (infrastructure, facilities, properties, and equip- ment and vehicles) should be a part of the annual capital budget. Future operations costs of all new capital investment projects should be included in project re- quests and planned for funding. Definition of capital investment project. All capital investments that belong to the above-mentioned categories, exceed ______MNT thousand, and have useful lives of longer than three years can be in- cluded in the Capital Investment Program. Project costs can include feasibility studies, engineering, architectural design, and contract services needed to complete the project. Organizational responsibility for capital investment program preparation and submission. The PPD will lead the CIP preparation process, and provide needed guidance and instructions to partici- pants, along with a workshop for key stakeholders. The PPD will select the projects for inclusion in the CIP based on the pre-agreed criteria and submit the draft CIP to the Mayor to present to the City Council for review and approval. 60 Methods of financing capital projects. The following funding options will be considered for capital projects: ŠŠ Capital City Budget ŠŠ Capital City Road Fund ŠŠ Own sources of municipal enterprises ŠŠ Funding by line ministries (for eligible projects) ŠŠ Grants/donations ŠŠ Loans taken by municipal enterprises and by state entities for city’s projects ŠŠ Private-public partnership. In particular, one-time revenues, revenues from the sale of property, land development fees, land lease fees, and operating surpluses will be used for capital projects. Long-term debt by municipal enterprises or by state entities for implementation of projects on the UB territory can be incurred only to fund capital projects that cannot be implemented from bud- get revenues and grants from central government agencies, and only if projects are approved as parts of the city’s Capital Investment Program and loan amounts and conditions approved by the City Council. The total amount earmarked for the Capital City Budget Investment cannot exceed _____% of the Capital City Budget Revenues. Limits on loan liabilities. Capital projects financed through borrowing will be financed for a period not to exceed the useful life of the asset. Long-term debt can be incurred by municipal enterpris- es and by other entities borrowing for municipal projects only if all technical specifications for the project, including permits and licenses, already have been obtained. The total amount of old and newly planned loans for which the city is liable cannot exceed _____% of the operating revenues of the Capital City Budget. Borrowing should comply with a separate Policy on Debt Management. Criteria for prioritizing projects, or who will establish them and how. Criteria for determining priori- ties in the Capital Investment Plan will be developed by the PPD, in consultations with other stake- holders. Methods and timing of public participation. The PPD, in cooperation with other stakeholders, will develop and implement public participation tools. 61 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Appendix 3. An Alternative Approach to Ranking Requests Step # 1: Define (6 to 10) evaluation criteria. The following list is illustrative only, though it includes the same criteria as the approach in the main text (Table 2): Criterion A: The project responds to long-term and mid-term national and city policy documents. Criterion B: The project has feasibility study, engineering design, land permit and technical speci- fications required for its commencement. Criterion C: Project cost will be offset by operating cost savings or increased revenues. Criterion D: A similar project was not implemented in mid-term. Criterion E: The project is a necessary repair or replacement of existing capital equipment or fa- cility. Criterion F: The project complies with Article 58 of Budget Law (applicable only to project re- quests to Capital City's CIP). Criterion G: The project will be used by or serve at least a population average of 152 khoroos of UB. Criterion H: The project has a high priority for a submitting entity. Step # 2: Choose and apply method for using the criteria to select and prioritize projects. For each project request, judge how many of the established evaluation criteria it satisfies. Then rank the projects in priority groups. For example: First Priority Group: Projects that satisfy 5 or more criteria Second Priority Group: Projects that satisfy 4 criteria Third Priority Group: Projects that satisfy 3 criteria Fourth Priority Group: Projects that satisfy less than 3 criteria. 62 Appendix 4. Municipal Asset Management: Guidelines on Estimating O&M Costs39 I. Introduction The purpose of these guidelines is to provide local governments with some background for estimat- ing annual O&M costs that can be expected for capital assets. Moreover, the document outlines how these cost estimates should be modified and clarified depending on a stage of asset development (e.g. very rough pre-design initial estimates vs. good-practice approaches when the asset is already operational).41 This material discusses nine types of capital assets typically controlled by municipal governments and included in their CIPs. ŠŠ water systems including fixed assets such as wells, river diversions, dams, transmission lines, water treatment plants, treated water storage facilities, distribution pipelines, fire hydrants, pumping stations, etc.; ŠŠ wastewater systems including fixed assets such as collection pipelines, manholes, pumping sta- tions, wastewater treatment plants, sewage lagoons, sludge disposal areas, etc.; ŠŠ storm drainage systems including canals, ditches, pipelines, manholes, stormwater inlets, flood control reservoirs, erosion protection, dikes, etc.; ŠŠ solid waste collection and disposal facilities including collection containers, collection vehicles, recycling facilities, landfills, etc.; ŠŠ community service buildings including city halls, libraries, police stations, fire stations, etc.; ŠŠ parks and open space including children’s play equipment, picnic facilities, soccer fields, basket- ball courts, etc.; ŠŠ cemeteries including service and maintenance buildings; ŠŠ power generation and distribution systems including power generation equipment, substations, metering, transmission and distribution systems, administrative buildings; and ŠŠ streets and roads including roadway surfacing, signage, rights-of way, bridges, traffic control de- vices, drainage systems, etc. II. O&M Cost Estimating Overview There are several common methods that are utilized to estimate future O&M costs for both planned Prepared by Gary Windolph, P.E (2013) for NORC at the University of Chicago. 41 63 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar and/or existing municipal assets such as those described above. If only approximate or preliminary planning estimates are desired, it is common practice to use a percentage of the estimated or origi- nal construction cost as a basis for estimating the annual O&M costs. Another method involves mak- ing such estimates based upon historical costs associated with similar municipal facilities. The most accurate method requires the preparation of a detailed O&M plan for the facility, a plan that should include a description of all anticipated O&M activities, a description of each work activity, a detailed staffing plan, power costs, materials costs, and replacement costs of equipment having a short life expectancy, etc. Estimates based upon initial construction costs. This methodology is the least accurate of all meth- ods available for estimating future O&M costs for proposed facilities. However, it is commonly used as a basis for making early, preliminary estimates of O&M costs. Every new facility has unique char- acteristics that cannot be directly compared to existing facilities from which historical O&M data is derived. Using such data without considering the unique characteristics of the proposed facilities to estimate O&M costs as a percentage of initial total project capital cost is not advised. Buildings, water systems, wastewater systems, etc., are all constructed differently, have different components, different physical characteristics, are located in a different climate, etc. Therefore, it is very import- ant to give consideration to all of the unique characteristics that may affect O&M costs when mak- ing estimates using this method. For example, a proposed complete water system will include numerous components, each having different O&M requirements. O&M costs are much different for dams, pump stations, pipelines, storage facilities, and well fields. O&M costs are generally around 1 percent of the total estimated construction costs for pipelines, distribution, facilities, tanks and wells; at 1.5 percent of the total estimated construction costs for dams and reservoirs; and at 2.5 percent for intake and pump sta- tions. O&M costs for water treatment plants are much higher in relation to initial construction costs and vary considerably depending on the type of treatment required. The above example clearly illustrates why it is not appropriate to apply a single percentage factor to the total construction cost of a complete project for the purpose of estimating the anticipated annual O&M cost. Therefore, for each of the capital improvement categories previously identified, a general breakdown of the components that may be included in the total projects should be ana- lyzed, with a range of estimates given for each category. Depending on the type of facility, the annual combined O&M costs could fall in the range of 2-50% of the initial construction cost, and even higher for some facilities. Obviously, the operation and maintenance cost/construction cost ratio (O&M/CCR) for a power generation and distribution sys- tem, or a wastewater treatment plant will be much higher than for a storm drainage collection and disposal system. Estimates based upon historical costs. For additions to, or the modification of, existing facilities, identifying historical costs and adjusting those values, based upon required or desired changes to the previous O&M program, is an effective approach for developing estimates of future O&M costs. Estimates based on O&M work plans. The most reliable method for estimating O&M costs for newly proposed facilities, is to formulate estimates based upon a detailed work plan that includes esti- 64 mated staffing levels, work activity descriptions, supplies required, etc. Typically, good engineering practice requires making these estimates during the alternative evaluation phase of project devel- opment. These estimates are normally made and refined throughout the alternative evaluation pro- cess to aid in the determination of the most cost-effective project alternative. III. Definitions Used for O&M Cost Estimates For the purpose of this document, “Operation” costs include the following: ŠŠ For non-movable items having a life duration in excess of twenty years, operational costs include those activities and associated costs that are necessary for the asset to function for the purpose intended. Estimates of the percentage of O&M costs do not include costs for staffing required to provide the service ultimately intended, such as teachers and school administrators for schools, firemen in fire stations, etc. In the case where the facility itself produces the end product, e.g. water and wastewater treatment plants, all costs are included for the operation of the facility, in- cluding staffing for both operation and maintenance. ŠŠ For movable items included in the initial project direct cost, such as equipment required to pro- vide the intended service, maintenance and replacement costs are included in the percentage range estimates. An example would be waste bins and garbage collection vehicles. O&M costs would not include personnel costs associated with the operation of the vehicles, emptying the waste bins, etc.; only the costs for the maintenance and replacement of the equipment are included. For the purpose of this document, “Maintenance” costs include the following: ŠŠ All labor, material, tools, equipment, and supply costs associated with maintaining the improve- ment in an acceptable operating condition. ŠŠ Physical depreciation/replacement costs (annual) for components that must be replaced during the expected life of the completed facility. IV. O&M Cost Estimates based on Capital Costs A number of variables unique to each project or project component can affect the relationship be- tween capital construction costs on the one hand, and O&M costs defined as a percentage of the initial cost, on the other hand. Some of the more common variables that generally apply to all con- structed facilities include: ŠŠ High construction costs, resulting from the use of higher quality materials, will normally result in lower O&M costs; ŠŠ Economies of scale can result in lower O&M costs when compared to capital costs. In other words, larger facilities may have a lower O&M costs in relation to the original construction cost; ŠŠ Specific site conditions can greatly increase initial construction costs, but actually reduce O&M costs, both in real terms and when defined as the percentage of the initial construction cost; ŠŠ In some cases, “Operations” cost cannot be reasonably estimated as a percentage of initial capital costs; and 65 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar ŠŠ The estimates given are based upon estimated annual costs and do not reflect the fact that actual annual spending would fluctuate. An important assumption, however, is that if one year the total planned amount is not spent, money is accumulated and spent later when needed. The estimates also do not take into account inflation, salvage, or disposal costs at the end of the facility life. For components requiring repeated replacement during the life of the facility, replacement costs are included in an amount equal to the straight-line depreciation over the life of the component. V. Estimates of O&M Cost as a Percentage of Construction Cost (O&M/Cc) Water systems including fixed assets such as wells, river diversions, dams, transmission lines, wa- ter treatment plants, treated water storage facilities, distribution pipelines, fire hydrants, pumping stations, etc. General Considerations: ŠŠ Ground-Water Wells. The relationship between capital construction costs and O&M costs for Ground-Water Wells is highly variable. The initial cost is defined to be the cost of construction of the borehole, including the well casing and well screen. Difficult geologic conditions can result in high initial costs, but will not result in higher O&M costs. In addition, water quality can significant- ly affect casing and well screen life, i.e. highly corrosive or high mineral content water may require more frequent well maintenance. Initial well screen quality is also an important consideration. ŠŠ Diversions Structures, Dams. Diversion structures are normally located on rivers or streams that are all unique in their character. Structures located in areas of high-velocity water flow, or ar- eas subject to occasional or frequent flooding, have higher maintenance costs than initial capital costs compared to facilities located in a less hazardous environment. ŠŠ Transmission and Distribution Pipelines. Difficult construction conditions, such as installation in hard rock, will result in high initial construction costs but lower maintenance costs. Pipelines crossing intermittent rivers or drainageways or located in geologically unstable areas may not initially cost more, but will incur higher maintenance costs. Operational costs such as flushing of lines and exercising valves will remain constant, regardless of the above considerations. ŠŠ Water Treatment. The relationship between initial construction cost and O&M costs for water treatment is highly variable, primarily based upon the quality of water to be treated and the type of treatment. For example, for high-quality water requiring only chlorination, initial costs will be relatively low, but O&M costs as a percentage of initial capital costs will be very high since the cost of chlorine is high. Low-quality water requiring more treatment will result in much higher initial capital costs, but O&M costs, as a percentage of the initial cost will be lower compared to chlorination only. For water treatment facilities, O&M cost estimates should be determined for each project, based on a thorough analysis by the designing engineer. ŠŠ Pumping Stations (including well pumps). The cost relationships for this category are primarily af- fected by the local cost for electricity, frequency of operation (total operational time), and motor and pump efficiency. Pump and motor manufacturers normally provide power consumption data in their standard sales materials. ŠŠ Water Meters. Maintenance costs for this category have an indirect relationship to the initial cost. High-quality (usually more expensive) water meters normally have a longer life and require lit- tle maintenance, thereby generating a lower share of O&M cost compared to the initial cost than cheaper meters. 66 WATER SYSTEMS O&M cost Component Variables affecting cost percentage (% of capital cost) Ground-Water Wells (not including Well depth, geology, water quality, initial 2%-10% pumping equipment) quality of components Diversions Structures, Dams Location, geology, topography 2%-5% Transmission and Distribution Climate, geology, material 1%-3% Pipelines Storage Reservoirs Capacity, type 2%-4% Water Treatment Water quality, treatment type, size 10%-50% Pumping Stations (including well Capacity, pumping head and quantity, 10%-20% pumps) power rates Water Meters Initial quality 5%-15% Wastewater systems including fixed assets such as collection pipelines, manholes, pumping sta- tions, wastewater treatment plants, sewage lagoons, sludge disposal areas, etc. General Considerations: ŠŠ Treatment Plants. The relationship between initial construction cost and O&M costs for waste- water treatment is highly variable, primarily based upon the type of treatment system and the quality of water to be discharged. Discharge water quality is normally a function of government regulation. The type of treatment system chosen usually is based upon land availability and the degree of treatment desired. For wastewater treatment facilities, O&M cost estimates should be based on a thorough analysis by the designing engineer. ŠŠ Pumping Stations. The cost relationships for this category are primarily affected by the local cost for electricity, frequency of operation (total operational time), and motor and pump efficiency. Pump and motor manufacturers normally provide this data in their standard sales materials. ŠŠ Collection and Outfall Pipelines. Difficult construction conditions, such as installation in hard rock, will result in high initial construction costs but lower maintenance costs. Pipelines crossing in- termittent rivers or drainageways or located in geologically unstable areas may not initially cost more, but will have higher maintenance costs. Operational costs such as flushing of lines will remain the same, regardless of the above considerations. Topography also affects maintenance costs. Lines constructed on flat grades may require flushing on a more frequent basis. WASTEWATER SYSTEMS O&M cost Component Variables (% of capital cost) Degree of treatment, type of treatment Treatment Plants 12%-20% system Pumping Stations Size, pumping head, capacity 10%-20% Collection Systems and Outfall Pipelines Geology, topography 1%-3% 67 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Storm drainage systems including canals, ditches, pipelines, manholes, stormwater inlets, flood control reservoirs, erosion protection, dikes, etc. General Considerations: ŠŠ Canals and Open Waterways. Canals can be either lined or unlined. O&M costs are generally lower for lined canals. Since lined canals normally cost more, the O&M/CC ratio is normally lower. ŠŠ Pipeline. O&M cost considerations are similar to those for wastewater systems. ŠŠ Manholes and Inlet. O&M costs can be significantly affected by the effectiveness of the communi- ty solid waste management system. Poor solid waste management practices will result in an in- creased need for manhole and inlet cleaning to remove surface debris accumulating in the system. ŠŠ Flood Control Retention Reservoirs. O&M costs are highly dependent on whether the storage area is also used as a community park. If this is the case, park maintenance costs should also be con- sidered when making the O&M cost estimate. STORM DRAINAGE SYSTEMS O&M cost Component Variables (% of capital cost) Canals and Open Waterways Topography, geology, alternative uses, lining type 2%-5% Pipelines Topography, geology 1%-2% Location, topography, geology, street cleaning Manholes and Inlets 2%-5% and solid waste management Flood Control Retention Size, topography, geology, alternative uses 1%-3% Reservoirs Flood Control Dikes Location, height, topography, geology 1%-5% Solid waste collection and disposal facilities including collection containers, collection vehicles, recycling facilities, landfills, etc. For movable equipment, O&M cost as a percentage of capital cost does not include utilization, but does include maintenance and replacement costs. General Considerations: ŠŠ Collection Containers. O&M costs do not include the costs associated with the actual collection process. Costs only include periodic cleaning, repair, and replacement. ŠŠ Collection Vehicle. O&M costs do not include the costs associated with the collection and trans- portation process. It does include replacement cost and routine maintenance during the life of the vehicle. ŠŠ Recycling Facility. O&M costs include repair, maintenance, and replacement of recycling equip- ment. It does not include staffing costs for operation of the equipment. Costs are highly variable, depending upon the type of facility. ŠŠ Landfill. O&M costs cannot be estimated with any degree of reliability based upon the initial cap- ital cost. O&M costs are difficult to quantify on this basis due to highly variable design consider- ations. More reliable estimates are possible if they are based upon the daily quantity of waste 68 processed, but local conditions are normally a significant factor. Estimates should be made based upon a specific design prepared by a qualified engineer. SOLID WASTE COLLECTION AND DISPOSAL FACILITIES O&M cost Component Variables (% of capital cost) Collection Containers Type, materials, location, frequency of use 12%-25% Collection Vehicles Initial quality, utilization 12%-17% Recycling Facilities System type, initial quality 8%-15% Not quantifiable as a Landfills Topography, geology percentage of initial construction cost Municipal service buildings including city halls, libraries, police stations, fire stations, etc. General Considerations: ŠŠ Structural Components. O&M costs for structural components are highly dependent on the struc- ture type. Lower initial costs may lead to higher O&M costs, although this is not always the case. Climate and end use can also significantly affect these costs in relation to the initial capital cost. ŠŠ Electrical Systems. O&M costs have a reasonably good correlation to initial construction costs. ŠŠ Heating, Ventilation, & Air Conditioning Systems. O&M costs are highly variable when compared to the initial cost, depending on the structure type, climate, and end use considerations. MUNICIPAL SERVICE BUILDINGS O&M cost Component Variables (% of capital cost) Structural Components including roof Materials, quality, climate 1%-1.5% system and facade Electrical Installed mechanical equipment 0.5%-1% Heating, Ventilation, & Air Conditioning Climate 3%-7% Landscaping, Parking Area, climate, use 0.5%-2% Parks, recreation and open space including children’s play equipment, picnic facilities, soccer fields, basketball courts, etc. Initial cost of land is not considered in initial construction cost. General Considerations: ŠŠ Baseball/Softball Fields. For lower percent estimates, assumptions include that the fields are ser- viceable playing surfaces with less sophisticated drainage systems (typically perimeter drainage only), utilization of soils existing on site, limited (if any) lighting, fencing for safety purposes only, temporary scoreboards, minimal but adequate irrigation systems, primitive (if any) concession facilities, throw down bases, and generally low capacity seating for teams and spectators. Higher 69 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar O&M cost estimate percentages include fields that generally possess elements making them ser- viceable for longer periods of time, including higher quality turf, comprehensive irrigation sys- tems, lighting suitable for nighttime play, improved infield materials (fast drying clays and soils), higher quality seating for spectators and teams, permanent electronic scoreboards, efficient drainage systems, extensive fencing for securing the field when not in use, on-site maintenance facilities, and larger concession services. Also included would be on-site utility infrastructure including water, drainage culverts, and electricity, all resulting in both higher capital and O&M costs. ŠŠ Soccer/football Fields. Soccer/football fields are less expensive to develop than baseball/softball fields, primarily because the only requirements are generally a large, level, playing surface cov- ered with adequate turf. Soccer/football fields do not need particularly specialized playing sur- faces. If extensive supporting services are provided including seating, lighting, concessions, and water and sanitation facilities, O&M costs will be higher in relation to the initial construction cost when compared to a minimum facility. ŠŠ Tennis Courts. Assumptions include construction of a regulation tennis court with 10 ft. fencing, netting, and drainage, court cushioning and full lighting for night play. Lower percentages should be used for higher cost and initial quality of construction. ŠŠ Basketball Courts. Estimates assume an outdoor college regulation sized basketball court, con- crete with painted lines, and 10-foot fencing with lighting. ŠŠ Swimming Pool (outdoor). Assumptions include only construction of the pool and perimeter, and do not include lighting, concessions, seating, dressing rooms or other ancillary facilities. ŠŠ General Park Facilities. Assumes the area is open, actively landscaped (planter boxes, decorative trees and shrubs) parkland with irrigation system, lighting, trash cans, park benches, picnic ta- bles, stationary barbecue units, bike rack, restrooms, and drinking fountains. Playground equip- ment is also included. PARKS AND OPEN SPACE O&M cost Component Variables (% of capital cost) Baseball Fields/Softball Fields 5%-15% Soccer/Football Fields 10%-15% Tennis Courts 3%-6% Basketball Courts 2%-5% Swimming Pool (outdoor) 15%-25% General Park Facilities 15%-35% Cemeteries including access and interior roadways, service and maintenance buildings. General Considerations: ŠŠ O&M services include mowing, planting, seeding, fertilizing, raking, mulching, watering, pruning, and all services related to maintaining the grounds on a cemetery and surrounding grounds, in- cluding raising, setting and aligning, and cleaning of headstones. It also includes the maintenance 70 of pathways, driveways, curbs and parking areas, and irrigation systems. They do not include costs associated with burial activities. CEMETERIES O&M cost Component Variables (% of capital cost) Maintenance and Construction quality 2%-6% Administration Buildings Cemetery Grounds Climate, topography, soil conditions, degree of care 20%-30% Roadways Quality, ease of access to gravesites 1%-3% Power generation and distribution systems including power generation equipment, substations, metering, transmission and distribution systems, administrative buildings, etc. General Considerations: ŠŠ Population Density. Population density is an important consideration. A mainly urban utility may have less than 17 meters of distribution circuit for each customer. A rural utility can have over 100 meters of primary circuit per customer. ŠŠ Distribution Networks. Underground distribution systems have a much higher capital cost com- pared to overhead systems, but much lower O&M costs. This results in a lower O&M/CC percent- age for underground systems compared to overhead systems. POWER GENERATION AND DISTRIBUTION SYSTEMS O&M cost Component Variables (% of capital cost) Gas Turbine Generation Size, location, gas price 10%-15% Solar Photovoltaic Size, location 0.5%-1% Conventional Coal Size, location, coal price 2.5%-5% Population density, topography, system type Distribution Networks 8%-15% (above or underground) Streets and roads including roadway surfacing, signage, rights-of way, bridges, traffic control devic- es, drainage systems, etc. General Considerations: ŠŠ Gravel Roadways. Gravel roads have lower construction costs than paved roads, but higher O&M costs. For very low volume roads, maintenance costs are also relatively low. Gravel roads require grading, shaping, and regular addition of gravel. Dust control is often necessary. These costs in- crease significantly with traffic volume and weights. 71 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar ŠŠ Asphalt Roadways. Asphalt streets and roads have somewhat higher initial construction costs but normally lower maintenance costs if constructed properly and regularly maintained. Mainte- nance is periodic, generally requiring resurfacing every 4-7 years. ŠŠ Traffic. All roadway maintenance is highly dependent on the amount and type of traffic. STREETS AND ROADS O&M cost Component Variables (% of capital cost) Topography, geology, climate, vehicle type, Average Gravel Roadways 5%-10% Daily Traffic (ADT) Asphalt Roadways Topography, geology, climate, vehicle type, ADT 2%-8% City Streets (hard surface) Topography, geology, climate, vehicle type, ADT 5%-10% VI. Summary O&M costs must be estimated, and sources of funding identified, early in the initial planning stage of project development. If these costs are not quantified and planned for, project implementation may result in unbearable future financial burdens on the community, resulting in ultimate project failure. The estimation of O&M costs, based upon a percentage of initial construction costs, is a fairly com- mon practice used in the early planning stages of project development. However, it must be kept in mind that these estimates should only be used in the preliminary planning phase. As project im- plementation progresses, new O&M estimates should be prepared based upon the specific design details of the project. If project alternatives are being considered that have significant differences in initial construction and O&M costs, financial analysis should determine the most cost-effective alternative. In order to make this analysis, the best possible estimates of O&M costs should be used in the analysis. The preparation of detailed O&M cost estimates should be required of the engineer/ architect responsible for the design of the project. 72 Appendix 5. Assessing Local Government Financial Capacity Knowing and planning its own capacity to fund and finance capital projects and maintaining fiscal discipline on this front, are critical for UB’s financial sustainability. Such financial planning is the foundation on which CIP should be based. Analysis and Forecast of Revenues and Expenses Financial planning starts with an objective analysis and forecast of revenues and expenses. Not all sources for capital investment listed in Chapter 3 are equally available in UB. However, even if these instruments are potentially available, the primary factors in determining the city’s financial capac- ity are: (1) the extent to which the city government can generate revenue or has a stable stream of grants and subsidies from the central government, and (2) the extent to which the city can control expenditures. Furthermore, as already mentioned, line ministries and the DBM play a very import- ant role in funding capital investment in UB. Thus, in 2016, capital investment on UB’s territory by the central government constituted about 20% of the total planned capital investment in the city, and 28% by the MDB. Revenue Receipts One of the main factors in determining UB’s financial capability is the size of its local revenue base. This is the amount of revenue (from taxes and fees) that the city is entitled to receive and collect. Within good practices, two types of revenues are distinguished: operating (recurrent) revenues, and capital revenues (such as one-time revenues from allocating land rights). Earlier research in UB42 identified that the city has a substantial potential to increase its own rev- enues, through improved administration and collection of local fees and charges. In particular, a substantial increase is realistically possible through improving land and property taxation and fees. However, this would require collaboration between the central and city governments, to reconsider related policies and regulations. The biggest single-source increases can be expected from: ŠŠ Taxing apartment ownership (if politically feasible); ŠŠ Taxing non-residential properties based on their market value; and ŠŠ Releasing municipal land for private sector activities at market value. Land Administration and Management in Ulaanbaatar, Mongolia. – World Bank, 2015. 42 73 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Other directions of revenues enhancement include: ŠŠ A gradual increase of tariffs for services, toward the level of full cost recovery, but closely tied to simultaneous improvement of the quality or quantity of the service – affordability concerns should be addressed through targeted subsidies; and ŠŠ Improved effectiveness and efficiency of tax and fees administration. Another substantial part of the city’s annual revenue are transfers from the central government; making them predictable and stable is a requisite of the city’s financial health. Operating Expenditures In evaluating its financial capacity, the city should be concerned with the number and extent of the public services that it is mandated by law to provide and the accompanying municipal expenditure. The costs of providing services are determined by the cost of labor, materials, and energy for each service plus the administrative costs of running the city government. In addition, UB has loan re- payment obligations, which are part of the city’s expenditures. A useful indication of the ability to provide services can be obtained from looking at the structure of the city’s operating expenses, es- pecially how much is spent on items other than staff salaries. Financial Balance (Net Results) and Financial Analysis Financial balance is simply the comparison of revenues to expenditures. If operating revenues ex- ceed operating expenditures, there is an operating surplus; if expenditures exceed revenues, there is a deficit. Municipal policymakers (City Council) and financial managers (Mayor and finance direc- tor) should be concerned with both the operating balance in any one year and future trends. The stability of the operating balance (and total balance) from year to year is important, and particular- ly wide swings between surpluses and deficits may need attention. Speaking pragmatically, to establish the limits for the capital budget for the current year and realis- tic multiyear targets, an analysis of a local government’s financial condition and capacity to finance future capital projects should be made early in capital programming. Ideally, the analysis needs to be prepared and discussed prior to the preparation of capital project requests. Besides, within good practices, the establishment of fiscal parameters by the policymakers enables a more rational and effective approach to the selection of projects in the CIP process. At a minimum, financial analysis should comprise: ŠŠ 3-to-5-year financial analysis of own-source revenues by major source, expenditures, operating and capital reserves and surpluses/deficits; ŠŠ Analysis of current and future debt capacity, from all forms of borrowing, including indirect bor- rowing through PPPs; ŠŠ Analysis of per capita debt, debt as a percentage of revenues, and debt service as a percentage of budget; ŠŠ Analysis of potential future changes in funding from the central government; and ŠŠ Analysis of potential capital funding sources. 74 In conducting the analysis, the following questions should be asked: ŠŠ What are the operating expenditure, revenue, and net operating result (surplus, deficit) trends? ŠŠ What are the reasons for these trends? ŠŠ What would happen to the net result if key parameters such as a tax rate or a collection rate changed? ŠŠ How dependent is the city government on one-time revenues (such as revenues from allocation of land rights) and funding from the central government? ŠŠ What is the current amount of outstanding debt? ŠŠ What is the remaining borrowing capacity? ŠŠ What is the level of debt service? ŠŠ What is the potential for new sources of capital funds? ŠŠ How much will be available for capital funding? ŠŠ How can the government’s financial condition be improved? Spreadsheets for cash flow forecasts are required to conduct this kind of analysis. Sample forms for the basic cash flow analysis are shown below, as sheets 1 and 2. Sheet 3 includes a spreadsheet for matching available financing with requests for capital funding assembled in the CIP process.43 This kind of analysis is a part of financial management, regardless the needs of CIP. The analysis should use scenario-based simulations under various assumptions about parameters that can be changed by the city government (from salaries of government employees to rates for local taxes and tariffs for local fees). The forecast also should include a sensitivity analysis. Note that sheet 2 has sections (IV and V) that simulate the impact of annual operating expenses caused by new capital projects on local governments’ net operating results. Moreover, in connec- tion with capital projects built by higher levels of government, if the future annual O&M expenses are expected to be borne by the local budget, it is recommended that these costs also be included in the simulation. Debt Financing and Debt Policy To what extent the use of borrowed finance is feasible and prudent depends on several factors: availability of such finance from the financial market, creditworthiness of the city, and its interest in borrowing. Moreover, most countries have special regulations and limitations on local government borrowing that should be factored in. Once a loan has been incurred, debt service payments must be included in operating expenditures going forward (sheet 2). A key question in evaluating debt carrying capacity is whether the sur- plus will be sufficient to cover the debt service payments associated with a given loan or loan pro- gram. The more the net operating surplus exceeds a city’s anticipated new debt service payments, the more creditworthy the city is. Indeed, the ratio of net operating surplus to anticipated new debt service payments is often considered the most important indicator of a local government's debt car- rying capacity. Matching finance to requests is discussed further in Chapter 4, step 8. 43 75 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar If the ratio is close to 1.0, any serious fluctuation in a city’s operating revenues or expenditures (or in exchange rates if the loan is denominated in a foreign currency) could produce serious problems in meeting the payment terms of the credit. If, on the other hand, the ratio of net operating surplus to debt service payments is substantially higher than 1.0 and is forecast to remain stable over sev- eral years, a city's ability to support the anticipated debt is reasonably secure. To properly assess creditworthiness, the city needs to look at this issue in more detail44. Incurring debt should be a matter of local policy. The city government should play a leading role in determining whether, to what extent, and under which conditions, to take loans which it would be responsible to repay. UB needs to adopt a formal policy to provide general direction in planning and borrowing to finance capital investment. A debt policy needs to: ŠŠ Establish parameters for the acquisition or issuance of debt and for acceptable levels of debt; ŠŠ Provide a basis for evaluating the impact of acquiring debt on the city’s overall financial condi- tion; ŠŠ Communicate to citizens the importance of financial management; and ŠŠ Communicate to investors and the financial community in general that the city government is prudent and has a policy basis for debt. Adoption of a debt policy provides parameters for the consistency and continuity required to achieve financial goals. It clearly communicates to the finance department a hierarchy of sources for the capital budget, so that staff can use this framework to carry out their responsibilities in debt management. The framework should be reasonably flexible so that officials can respond quickly to changes in the financial market or other conditions without jeopardizing essential services. Obviously, the city debt policy needs to comply with the framework of existing laws and be based on the city’s projections of its future financial condition. Moreover, it may be prudent for UB to es- tablish its own additional limits on borrowing, beyond those set by national regulations. More specifically, the city debt policy should address the following questions regarding the specific local situation: ŠŠ What is the appropriate use and acceptable level of short-term debt? ŠŠ What is an acceptable level of long-term debt? ŠŠ For what purposes (types of projects) will long-term debt be used? ŠŠ When should tax-supported (or asset-backed) general obligation debt be used versus self-sup- porting revenue debt (debt that finances projects that generate revenues sufficient to repay the debt)? ŠŠ What is the desired mix of financing from current budget revenues and from debt? ŠŠ When should variable rate debt be used, if at all, versus fixed rate debt? ŠŠ What maturity schedules should be used for short-term and long-term debt? 44 Peterson, George E. 1998. Measuring local government credit risk and improving creditworthiness (English). Washington, DC: World Bank. Peterson, George E. 2000. Building local credit systems (English). Urban and local government background series no. 3. Municipal finance. Washington, DC: World Bank. 76 Sample Forms for Budget Analysis DETAILED (ANALYTICAL) ESTIMATE OF OPERATING (RECURRING) REVENUES (Sheet #1) (MNT thousands) Actual Plan Projection Revenues Current Current Year+1 Year+2 Year+3 Year+4 Year+5 year year Inherited from previous A               year B Local taxes               1               … k               Subtotal local taxes               C Local fees               1               …               n               Subtotal fee revenue D Other local revenues               1               … m               Subtotal other local               revenues Grants (any transfers that E can be used for operating               or unrestricted purposes)   Total (A+…+E) 77 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar ESTIMATING THE NET OPERATING SURPLUS/DEFICIT (Sheet #2) (MNT thousands) Actual Plan Projection Description Current Current Year+1 Year+2 Year+3 Year+4 Year+5 year year Total operating (recurrent) I revenues, from Sheet # 1 (A+…+E) A Inherited from previous year B Local taxes C Local fees Other local operating D revenues E Unrestricted grants Total operating (recurrent) II expenses (A+…+F) A Salaries and benefits B Utility expenses Maintenance and repair C expenses D Other operating expenses Operating subsidies to E municipal institutions and utility companies F Reserve/depreciation funds Debt service (interest and G principle) for existing loans Projection of net operating surplus/deficit before III impact of new planned investment (I minus II) Estimated M&R, depreciation, and IV operations expenses or savings from planned new investments Projection of net operating surplus or deficit after M&R, depreciation, and V operations expenses of planned new investment (III minus IV) Net operating surplus or VI deficit as % of operating revenues (V/I) 78 CAPITAL BUDGET PROJECTION (Sheet #3) (MNT thousands)   Actual Plan Projection Description Current Current   Year+1 Year+2 Year+3 Year+4 Year+5 year year I Capital revenues (1+…+8)               Planned operating surplus 1 (from Sheet # 2, above,               Line V) Revenues from sale of 2               assets Voluntary contributions 3 (or special assessments) Federal/regional capital 4 grants 5 Donor capital grants 6 Loan or bond proceeds Proceeds from capital 7               reserves                   Capital expenditures II               (1+…+6) 1 Capital repair*               2 Replacement*               New equipment 3               acquisition* Construction (including 4               design)* 5 Land acquisition*               Addition to capital reserve 6 fund NET (I-II) Note: This spreadsheet should be investigated in 2 versions: (1) with (*) items from the previous CIP, to see how much would be left after previously started capital projects are further funded; and (2) with additional projects from draft CIP budget. See chapter 3. 79 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Appendix 6. References and Useful Resources World Bank’s Relevant Urban Programs and Instruments Suzuki, Hiroaki, Arish Dastur, Sebastian Moffatt, Nanae Yabuki, and Hinako Maruyama. 2010. Eco2 Cities: Ecological Cities as Economic Cities. Washington, DC: World Bank. https://siteresources. worldbank.org/INTURBANDEVELOPMENT/Resources/336387-1270074782769/Eco2_Cities_ Book.pdf World Bank. n. d. “Disaster Risk Management Program (DRM).” http://www.gfdrr.org/gfdrr/ _____. 2011. “Urbanization Review: Strategies for efficient, inclusive, and sustainable urban- ization.” Urbanization Review Framework (URF), PowerPoint presentation, World Bank, Washington, DC. https://siteresources.worldbank.org/INTURBANDEVELOPMENT/Resourc- es/336387-1265151743414/6759249-1267460071913/Lall.pdf _____. 2009. “Systems of Cities: Harnessing urbanization for growth and poverty alleviation.” World Bank Urban and Local Government Strategy. http://www.worldbank.org/en /topic/urbandevelop- ment/publication/urban-local-government-strategy Local Capital Budgeting and Finance National Advisory Council on State and Local Budgeting. 1998. “Best Practices in Public Budgeting.” National Advisory Council on State and Local Budgeting. http://www.gfoa.org/services/nacslb _____. 2018. “Best Practices/Advisories.” Committee on Economic Development and Capital Plan- ning. http://www.gfoa.org/best-practices Ministry of Finance, British Columbia, Canada. 2002. “Capital Asset Management Framework.” https://www2.gov.bc.ca/gov/content/governments/services-for-government/internal-corpo- rate-services/camf Nova Scotia Municipal Finance Corporation. 2013. “Multi-Year Capital Planning.” 2013. Nova Scotia, Canada. https://www.nsmfc.ca/sample/...multi-year-capital-planning/file.html 80 Office of the New York State Comptroller. 2009. “Local Government Management Guide. Multiyear Capital Planning”. https://www.osc.state.ny.us/localgov/pubs/listacctg.htm #capplanning Ontario Ministry of Municipal Affairs and Housing. 2008. “Municipal Capital Budgeting Handbook.” Queen’s Printer for Ontario, Canada. Peterson, George E. 2009. Unlocking Land Values to Finance Urban Infrastructure. Washington, DC: World Bank. Vogt, John. 2009. Capital Budgeting and Finance: A Guide for Local Governments. Washington, DC: ICMA (International City/County Management Association). Westerman, Nicole. 2004. “Managing the Capital Planning Cycle: Best Practice Examples of Effective Capital Program Managements.” Government Finance Review, June. https://www.gfoa.org/sites/de- fault/files/Managingthecapitalplanningcycle.pdf Asset Management/Life Cycle Costing Fuller, Sieglinde. 2016. “Life Cycle Cost Analysis” Whole Building Design Guide. NIST (National Insti- tute of Standards and Technology), September 19. http://wbdg.org/resources/lcca.php Kaganova, Olga and Mihaly Kopanyi. 2014. “Managing Local Assets.” In Municipal Finances: A Hand- book for Local Governments, edited by Catherine Farvacque-Vitkovic and Mihaly Kopanyi. Washing- ton, DC: World Bank. Lufkin, Peter. 2008. “Trends in Facility Cost Models.” Whitestone Research Briefings, Presentation, Washington, DC, October 15. Fidelis Resource Group. 2011. “Integrated Resource Recovery Study." Prepared by Fidelis Resource Group for Metro Vancouver, Canada. https://georgiastrait.org/wp-content/uploads/2015/03/ North_Shore_IRR_FINAL29Mar2011web.pdf Whitestone Research. 2010a. Facility Maintenance and Repair Cost Reference 2010–2011. 15th ann. ed. Whitestone Research: Santa Barbara, CA/Washington, DC. _____. 2010b. Facility Operations Cost Reference 2010–2011. 4th ann. ed. Whitestone Research: Santa Barbara, CA/Washington, DC. Creditworthiness Freire, Mila, and John Petersen, eds. 2004. Subnational Capital Markets in Developing Countries: From Theory to Practice. New York: World Bank and Oxford University Press. 81 Guidebook on Capital Investment Planning for the Capital City of Ulaanbaatar Peterson, George E. 1998. Measuring local government credit risk and improving creditworthi- ness (English). Washington, DC: World Bank. http://documents.worldbank.org/curated/en /559551468314072571/Measuring-local-government-credit-risk-and-improving-creditworthiness Peterson, George E. 2000. Building local credit systems (English). Urban and local government back- ground series no. 3. Municipal finance. Washington, DC: World Bank. http://documents.worldbank. org/curated/en/382721468749785929/Building-local-credit-systems Project Preparation for External Funding and Finance European Commission. 2002. “Guide to Cost-Benefit Analysis of Investment Projects.” Prepared for Evaluation Unit, DG Regional Policy. Brussels: European Commission. http://ec.europa.eu/region- al_policy/sources/docgener/guides/cost/guide02_en.pdf TRT (Trasporti e Territorio) and CSIL (Centre for Industrial Studies). 2008. “Guide to Cost-Bene- fit Analysis of Investment Projects, Structural Funds, Cohesion Fund and Instrument for Pre-Acces- sion.” Final Report Submitted by TRT and CSIL to European Commission, Brussels. http://www.eu- rosfaire.prd.fr/7pc/doc/1215583204_costs _benefits_analysis_guide_2008.pdf World Bank. 1998. Handbook on Economic Analysis of Investment Operations. Washington, DC: World Bank. http://siteresources.worldbank.org/INTCDD /Resources/HandbookEA.pdf Public-Private Partnerships CDIA (Cities Development Initiative for Asia). 2010. PPP Guide for Municipalities. Metro Manila: CDIA. http://cdia.asia/wp-content/uploads//2014/09/PPP-guide-for-municipalities.pdf PPIAF (Public-Private Infrastructure Advisory Facility). 2018. “Knowledge, Toolkits”. https://ppiaf. org/knowledge#toolkits UNDP (United Nations Development Program). “Toolkit on Pro-Poor Municipal PPP.” UNDP Re- gional Bureau for Europe and the Commonwealth of Independent States (RBEC), New York. http:// pppue.undp.2margraf.com/en/01.htm World Bank Group. 2018. PPP Knowledge Lab. https://pppknowledgelab.org/tools Climate resilience C40 Cities Climate Leadership Group. 2016. Good Practice Guide on Creditworthiness. C40 Cities Cli- mate Leadership Group, London; New York; Rio de Janeiro. https://www.c40.org/networks/credit- worthiness 82 IPCC (Intergovernmental Panel on Climate Change). 2014. Climate Change 2014: Synthesis Report. Core Writing Team, R.K. Pachauri and L.A. Meyer, eds. Geneva: IPCC. JEMR. 2014. “Report by Institutional and Information Systems Team of Ulaanbaatar City Flood Risk Management Strategy Development Project.” Ulaanbaatar: JEMR LLC. JEMR. 2015. “Final Report for Ulaanbaatar City Flood Risk Assessment and Management Strategy Development Project.” Ulaanbaatar: JEMR LLC. MEGD (Ministry of Environment and Green Development). 2014. “Mongolia Second Assessment Re- port on Climate Change (MARCC) 2014.” Ulaanbaatar: MEGD. MET (Ministry of Environment and Tourism). 2017. “The State of Environment in Mongolia: 2015- 2016.” Ulaanbaatar: MET. Whittington, Jan. 2016. “Climate Smart Capital Investment Planning.” Municipal Finance and Credit- worthiness Academy, hand-out material, April 2016. World Bank. 2018. “Climate Change Knowledge Portal (CCKP).” Mongolia Country Profile, Climate Baseline and Risk Screening Overview, World Bank, Washington, DC. http://sdwebx.worldbank. org/climateportal/countryprofile/home.cfm?page=country_profile&CCode=MNG&ThisTab=Cli- mateBaseline World Bank Group. 2011. Guide to Climate Change Adaptation in Cities. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/27396