Mongolia prepares to sign first PPP this quarter

Mongolia is in the final stages of negotiating its first public-private partnership (PPP) contract, and the $1.2 billion deal with an international consortium is expected to be signed before the end of this quarter, Infrastructure Investor has learned.

The contract would be for the construction and operation of a 415-megawatt (MW) heating power plant in Ulaanbaatar, the country’s capital. Called CHP5, the plant will focus on generating heat for the nine coldest months of the year, and split its capacity between heat and energy for the remaining three months of the year.

Winters on Mongolia’s plains, and even in its capital city, are deadly cold. The thermometer can plunge as low as -40 degrees Celsius. In an an average winter, many are expected to die from the cold, sources working with the country told II. It is hoped that the CHP5 project will greatly alleviate the suffering of Mongolian citizens.

Mongolia first tendered the project in 2011, when it hired the Asian Development Bank as an adviser. After a bidding process involving many international investors, Mongolia shortlisted four consortia, and in May 2012 announced that a consortium led by French multinational electric utility company GDF SUEZ had emerged as the preferred bidder. Other members of the consortium include Japanese trading company Sojitz Corporation, South Korea’s first private electricity producer Posco Energy, and Mongolian conglomerate Newcom.

However, when Mongolia’s new government was elected later that year, many terms of the PPP were called into question. The new officials were not sure of the value of bringing international investors into the project, and may have even debated scrapping it.

After long consultation, however, the Mongolian government made its final offer in February 2013, and in August the original GDF consortium was confirmed as the preferred bidder, according to a GDF statement. The private investors are currently negotiating terms of the $1.2 billion project, and a deal could be signed as early as this quarter.

With coal power generation capacity of 415MW and a production capacity of 587MW of steam, the plant is planned to be equipped with three fluidised bed boilers in the hopes of reducing pollution. The entire production will be purchased by the Government of Mongolia as part of a 25-year power purchase agreement.

Mongolia has attracted private investors in infrastructure before, but all such projects so far have been entirely private rather than PPPs. For example, the $100 million, 50MW Salkhit Wind Farm was completed in 2012, a project taken on in its entirety by Newcom. And in July, Australian metals and mining company Rio Tinto began operating its $6.2 billion Oyu Tolgoi mine, which it began as a purely private project in 2009, and for which it has only recently resolved some permit disputes with the Mongolian government, according to media reports.