Economic Transition Support
Report No: ; Type: Report/Evaluation Memorandum ; Country: Mongolia; Region: East Asia And Pacific; Sector: Macro/Non-Trade;
                                      Major Sector: Economic Policy; ProjectID: P004341


        The Mongolia Economic Transition Support Project, supported by Credit 2551-MOG for
US$20 million equivalent, was approved in FY94. The credit was closed in FY97, following a one-year
extension of the closing date. An amount of US$0.4 million was canceled. The Implementation
Completion Report (ICR) was prepared by the East Asia and Pacific Regional office. The Borrower’s
contribution is included as an appendix.

        In 1991, IDA approved a US$30 million Economic Rehabilitation Credit (ERC) to provide
quick-disbursing balance of payments support for Mongolia’s reform efforts. In 1993, the Government
requested a follow-up operation to finance additional imports and critical inputs in priority sectors. The
Mongolia Economic Transition Support Project was IDA’s response to this request. It was designed to
finance imports of spare parts and equipment needed to maintain and develop key sectors--energy,
transport, coal and copper mining. Specifically, the project financed: (i) the import of equipment,
materials, and spare parts for the two largest coal mines; (ii) equipment and spare parts for a major
copper mine, which accounts for half of total export revenues; (iii) materials, spare parts, and servicing
of locomotives for the railways; (iv) gasoline pumps and high-speed lubricants; and (v) technical
assistance to improve production and management skills in the mining sector.

        A secondary objective of the project was to catalyze assistance from other donors during the
third Mongolia Assistance Group meeting, in September 1993. The project was implemented in parallel
with an IMF Enhanced Structural Adjustment Facility (ESAF), approved in 1993. Sectoral investments
were to be financed in part by tariff increases by publicly-owned utility and transport companies. These
were linked explicitly to an IMF-supported stabilization program.

        The overall project outcome was satisfactory. The project helped sustain the recovery of the
Mongolian economy, by averting a possible collapse of the coal and transport sectors. The project
contributed to the rehabilitation of the energy sector, which helped stem the decline in coal production
and avoid a breakdown of supplies to the power stations. Copper exports increased significantly, and
the energy and transport sectors were able to support increased levels of economic activity.

        The project supported technical assistance programs to the coal and copper mines that provided
assessments of economic viability, operational capacity and environmental impact of mining operations.
This facilitated the identification and preparation of the follow-up Energy Sector Survey and the Coal
Project (Credit 2854-MOG). The project also assisted in the identification and preparation of the
Transport Rehabilitation Credit (Credit 2615-MOG) of FY94 which financed the medium-term
development of road, railways and urban transport; and the Coal Project (Loan 2854-MOG) of FY96.

         Project implementation was generally satisfactory. However, transport bottlenecks and
difficulties experienced by suppliers in the former Soviet Union delayed delivery of critical imports and
spares in the mining sectors. The Government therefore requested, and the Bank agreed, to a 12-
months’ extension of the project closing date. The Government proved reluctant to increase energy
prices, as stipulated in the Credit Agreement. As a result, coal companies experienced cash flow
problems and their payments for equipment were delayed. Energy tariff increases remain an element in
the policy dialogue.
       The ICR, which is of satisfactory quality, rates project outcome as satisfactory, institutional
development impact as modest, sustainability as likely and Bank performance as satisfactory. OED
concurs with this evaluation.

         This project demonstrates the benefits of donor coordination, the value of competitive
procurement, the importance of well-planned procurement, and the usefulness of technical assistance in
developing future projects and contributing to institutional development. The main lesson, however,
relates to policy conditionality. IDA did not secure full compliance with policy conditions relating to
energy tariffs. Unless policy conditions are emphasized up front, enforcement becomes difficult. In
this case, the Government was not required to take action until after the loan became effective. At that
point, exercising IDA’s remedies would have disrupted procurement, jeopardizing achievement of the
project’s key physical objectives.

        No audit is planned.