Completion Report

Project Number: 35376 Loan Number: 2307 Grant Number: 0070 March 2014

Mongolia: Customs Modernization Project This document is being disclosed to the Public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS

Currency unit – togrog (MNT) At Appraisal At Project Completion 21 August 2006 31 August 2011

MNT1.00 = $0.00086 $0.00072

$1.00 = MNT1,165 MNT1,249

ABBREVIATIONS ADB – Asian Development Bank CAREC – Central Asian Regional Economic Cooperation CAIS – customs automated information system EIRR – economic internal rate of return GAMAS – customs automated data processing system ICB – international competitive bidding ICT – information and communication technology IT – information technology KOICA – Korea International Cooperation Agency KTNET – Korea Trade Net MCGA – Mongolian Customs General Administration MOF – Ministry of Finance MOU – memorandum of understanding O&M – operation and maintenance PMO – project management office PRC – People's Republic of China PSC – project steering committee SDR – special drawing right VSAT – very small aperture terminal WCO – World Customs Organization

NOTE

In this report, “$” refers to US dollars.

Vice-President S. Groff, Operations 2 Director General A. Konishi, East Asia Department (EARD) Director Y. Qian, Public Management, Financial Sector and Regional

Cooperation Division, EARD

Team leader Y. Zhang, Senior Regional Cooperation Specialist, EARD Team member C. Javier, Project Analyst, EARD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page BASIC DATA I. PROJECT DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 1

A. Relevance of Design and Formulation 1 B. Project Outputs 3 C. Project Costs 5 D. Disbursements 6 E. Project Schedule 6 F. Implementation Arrangements 7 G. Conditions and Covenants 7 H. Consultant Recruitment and Procurement 8 I. Performance of Consultants, Contractors, and Suppliers 10 J. Performance of the Borrower and the Executing Agency 10 K. Performance of the Asian Development Bank 11

III. EVALUATION OF PERFORMANCE 11

A. Relevance 11 B. Effectiveness in Achieving Outcome 11 C. Efficiency in Achieving Outcome and Outputs 12 D. Preliminary Assessment of Sustainability 12 E. Impact 13

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 14

A. Overall Assessment 14 B. Lessons 14 C. Recommendations 14

APPENDIXES 1. Performance Indicators and Achievements 16 2. ADB Disbursements by Year 21 3. Planned and Actual Project Implementation Schedule 22 4. List of Contract Packages and Project Costs 26 5. Economic Reevaluation 32 6. Status of Compliance with Loan Covenants 38

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BASIC DATA A. Loan Identification 1. Country 2. Loan number / grant number 3. Project title 4. Borrower 5. Executing agency 6. Amount of loan / grant 7. Project completion report number

Mongolia 2307-MON / 0070-MON Customs Modernization Project Mongolia Ministry of Finance SDR3,375,000.00 / $500,000 1434

B. Loan Data 1. Appraisal – Date started – Date completed 2. Loan negotiations – Date started – Date completed 3. Date of Board approval 4. Date of financing agreement 5. Date of loan effectiveness – In financing agreement – Actual – Number of extensions 6. Closing date – In financing agreement – Actual – Number of extensions 7. Terms of loan – Interest rate – Maturity (number of years) – Grace period (number of years)

21 August 2006 1 September 2006 22 November 2006 22 November 2006 20 December 2006 6 February 2007 6 May 2007 21 May 2007 1 31 August 2010 13 December 2011 1 1.0% 32 8

C. Grant Data 1. Appraisal – Date started – Date completed 2. Grant negotiations – Date started – Date completed 3. Date of Board approval 4. Date of financing agreement 5. Date of grant effectiveness – In financing agreement – Actual – Number of extensions 6. Closing date – In financing agreement – Actual – Number of extensions

21 August 2006 1 September 2006 22 November 2006 22 November 2006 20 December 2006 6 February 2007 6 May 2007 21 May 2007 1 31 August 2010 11 January 2012 1

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D. Disbursements a. Dates

Loan 2307-MON Initial Disbursement 19 November 2007

Final Disbursement 27 October 2011

Time Interval 47 months

Effective Date 21 May 2007

Original Closing Date 31 August 2010

Time Interval 39 months

Grant 0070-MON Initial Disbursement Final Disbursement Time Interval 3 April 2008 11 January 2012 45 months Effective Date Original Closing Date Time Interval 21 May 2007 31 August 2010 39 months b. Amount (SDR), Loan 2307-MON

Category

Original

Allocation

Last Revised

Allocation

Amount

Disbursed

Undisbursed

Balance

01A: ICT hardware 275,000 453,679 444,446 9,233 01B: ICT network infrastructure 779,000 789,625 789,625 … 01C: Workstation and computer 188,000 169,930 169,959 (29) 01D: Surveillance inspection 378,000 205,300 195,899 9,401 01E: Laboratory and analytical 293,000 527,536 525,759 1,777 01F: PMO equipment 8,000 6,525 6,515 10 02A: ICT software 495,000 446,371 446,371 … 02B: Application development 417,000 610,034 610,034 … 03: Project management office 134,000 126,000 117,976 8,024 04: Interest charges 40,000 40,000 40,000 … 05: Unallocated 368,000 0.00 Total SDR 3,375,000 3,375,000 3,346,584 28,416 Total $ equivalent 5,000,000 5,196,161

( ) = negative, … = not applicable, ICT = information and communication technology, PMO = project management office, SDR = special drawing right.

c. Amount ($), Grant 0070-MON

Category

Original

Allocation

Last Revised

Allocation

Amount

Disbursed

Undisbursed

Balance

Consulting services 174,700 206,000 205,745.11 3,929.89 Capacity building, consultation meeting, project management

Training 130,000 160,415 166,609.02 (6,194.02) Workshop, forums and consultation meetings

80,000 49,585 48,971 613.62

Surveys and studies 40,000 40,000 36,647.22 3,352.78 Materials, manual, grant 25,400 25,400 23,560.44 1,839.56

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administration and grant support Unallocated / contingencies 50,000

18,600 14,925.00

Total 500,000 500,000 481,533.17 18,466.83

E. Project Data

1. Project Cost ($ million)

Cost Appraisal Estimate Actual

Foreign exchange cost Other grant financing

5.00 0.50

5.20 0.48

Local currency cost 1.26 1.34 Total 6.76 7.02

2. Financing Plan ($ million)

Cost Appraisal Estimate Actual

Implementation costs Borrower financed 1.26 1.34 ADB financed 5.00 5.20 Other external financing (e-Asia and Knowledge Partnership Fund grant)

0.50

0.48

Total 6.76 7.02 IDC costs Borrower financed 0.00 0.00 ADB financed 0.60 0.61 Other external financing Total

0.00 0.60

0.00 0.61

ADB = Asian Development Bank, IDC = interest during construction.

3. Cost Breakdown by Project Component (SDR)

Component Appraisal Estimate Actual

Component 1 ICT hardware

275,000

444,446

ICT network 779,000 789,625 Workstation and computer 188,000 169,959 ICT software 495,000 446,371 Application development 417,000 610,034 Component 2 Supervision and inspection

378,000

195,899

Laboratory and analytical 293,000 525,759 PMO furniture 8,000 6,515 PMO salaries 134,000 117,976 Interest charges 40,000 40,000 Unallocated / contingencies 368,000 Total SDR Total $ equivalent

3,375,000 5,000,000

3,346,584 5,196,161

ICT = information and communication technology, PMO = project management office, SDR = special drawing right.

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4. Project Schedule

Item Appraisal Estimate Actual

Date of contracts

Business process and ICT specialist Interagency coordinator Project implementation and monitoring coordinator Customs equipment ICT equipment Servers Computers and accessories Surveillance equipment X-ray and detection equipment X-ray equipment Mobile radiation detector Laboratory equipment and analytical device Main equipment Tools of measurement Furniture, glasses, and reagents PMO equipment and furniture Computers and equipment Office furniture Software Application and web server software Web server software Database software Development cost Portal and customs administration system Data warehouse

March 2007 March 2007 March 2007 May 2007 September 2007 October 2007 January 2008 January 2008 April 2007 May 2007 May 2007 March 2007 March 2007 May 2007 May 2007 May 2007 June 2008

March 2008 March 2008 March 2008 June 2010 June 2010 June 2010 October 2009 October 2009 June 2010 June 2010 June 2010 July 2010 July 2010 July 2010 July2010

Network Link Data center networking Backup (hardware and software) Network (hardware and software)

June 2007 June 2007 June 2007 June 2007 June 2007

February 2011

Dates

First procurement June 2007

Last procurement February 2011

ICT = information and communication technology, PMO = project management office.

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F. Data on Asian Development Bank Missions

Name of Mission

Date

No. of

Persons

No. of Person-

Days

Specialization of Members

Fact finding Appraisal Inception Review 1 Review 2 Review 3 Review 4 Review 5 Review 6 Project completion review

29 May–9 June 2006 21 August–1 September 2006 11–15 June 2007 19–25 February 2008 2–5 December 2008 7–15 December2009 26 June–1 July 2010 5–9 December 2010 29–31 August 2011 12–16 August 2013

9 10 3 2 3 3 2 1 2 3

108 120 15 14 12 27 12 6 6

20

a, b a, b, c, d a, g, h

f, g f, g, h f, h, i f, h e

e, h b, e, h

a = senior banking specialist, b = consultants, c = senior enterprise architect, d = counsel, e = senior regional cooperation specialist, f = regional cooperation specialist, g = economic officer, h = project analyst, i = regional cooperation coordinator.

I. PROJECT DESCRIPTION 1. The Customs Modernization Project aimed to increase the volume and ease the flow of Mongolia’s external trade by improving efficiency, transparency, and sustainability in customs services and administration. The project also aimed to lower the incidence of corruption and smuggling, enhance duty and tax revenue collection, provide a platform for customs information and communication technology (ICT) to integrate into the e-government systems, reduce trade barriers, and improve the environment for investment.

2. As described in the report and recommendation of the President to the Board of the Asian Development Bank (ADB),1 the project had three components: (i) migration and upgrade of GAMAS, the automated system for customs services and administration;2 (ii) improvement of customs-related infrastructure; and (iii) institutional strengthening.

3. The project reflected the Government of Mongolia’s efforts to promote trade and improve the investment climate through customs reforms and modernization. It was a response to (i) Mongolia’s accession to the International Convention on the Simplification and Harmonization of Customs Procedures (Revised Kyoto Convention) of the World Customs Organization (WCO) and the expected enactment of Mongolia’s new Customs Law; (ii) the government’s move toward a national single electronic window and e-government; and (iii) Mongolia’s attempt to gear up the fight against corruption.

4. From a technological perspective, upgrading GAMAS was imperative—it had been introduced by the Mongolian Customs General Administration (MCGA) in 2002 to replace the ASYCUDA3 system used since 1996. Since it was written using a programming language that had been overtaken by more advanced ones such as Java, GAMAS was not able to use new technologies such as data warehousing or security features such as digital signatures. It was primarily manually operated and labor-intensive, and had a decentralized structure. The capacity of the GAMAS server and network was low and could no longer cope with the growing number of customs declarations and maintain proper trade statistics. Modern customs business processes, such as risk management and post-entry audit, could not be widely introduced because of the decentralized database and the lack of an internet-based system. Moreover, GAMAS was subject to human intervention, which often caused delays in customs clearance and even corrupt practices, undermining transparency and predictability.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation 5. The project was highly relevant at the time of appraisal and continued to be so after completion. It supported the implementation of one of two major pillars of ADB’s country strategy and program for Mongolia—stable and broad-based economic growth (the other pillar being inclusive social development)—since customs modernization would facilitate and promote trade, which is an engine for economic growth and development.4 It was also in line with the

1 ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Grant

Administration to Mongolia for Customs Modernization Project. Manila. 2 GAMAS stands for “customs automated data processing system” and was first developed for a Microsoft Windows-

based environment to capture customs data from import and export declarations submitted by the trading community. It was used by the Mongolian Customs General Administration (MCGA) up to June 2010.

3 Automated System for Customs Data developed by the United Nations Conference on Trade and Development.

4 ADB. 2005. Country Strategy and Program (2006–2008) for Mongolia. Manila; and ADB. 2006. Mongolia: Country

Strategy and Program Update (2007–2009). Manila.

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country strategy’s emphasis on strengthening governance in the public sector and improving the investment climate for the public sector. The project also directly supported one of the six priorities of Mongolia’s Comprehensive National Development Strategy—developing export-oriented, private-sector-led, and technology-driven growth, with a particular focus on ICT development, transit transportation, logistics improvement, and regional cooperation.5

6. The project had a high regional cooperation dimension, and was an integral part of the regional efforts toward customs reforms and modernization under the customs cooperation initiative of the Central Asia Regional Economic Cooperation (CAREC) program. It addressed two of the five priorities of the CAREC customs cooperation set out by CAREC's Customs Cooperation Committee, including simplification and harmonization of customs procedures in line with the Revised Kyoto Convention, and adopting advanced ICT for customs modernization. The project was implemented in collaboration with two ADB regional technical assistance projects6 that supported the piloting of joint customs control between Mongolia and the People’s Republic of China (PRC), another priority of customs cooperation set forth by the Customes Cooperation Committee, and training of MCGA customs officials on various subjects of customs modernization.

7. After project approval, the MCGA, as the implementing agency, signed a bilateral agreement with the Korea International Cooperation Agency (KOICA) under which KOICA committed a grant of $2.5 million equivalent to support Mongolia’s customs modernization. The KOICA grant was provided to the MCGA in the form of parallel financing to the ADB loan. ADB, KOICA, and the MCGA signed a tripartite memorandum of understanding (MOU) on 21 February 2008, committing to full cooperation.7 The KOICA grant enabled the MCGA to introduce some extended technical functions and enhance the technical features of GAMAS. To reflect the improvements, GAMAS was replaced by “customs automated information system” (CAIS).

8. The CAIS design was based on findings of an ADB-funded customs modernization needs assessment for Mongolia and the studies on customs business process reengineering conducted by the project consultant team under the guidance of the MCGA and in close consultation with KOICA experts. The government, and particularly the MCGA, demonstrated strong ownership of the project design and implementation. The MCGA leadership provided strategic guidance and timely operational instructions. The government’s policy requirements of improving the efficiency, transparency, and governance of customs services were duly incorporated into the CAIS design through development of the risk management system and establishment of a centralized data warehouse module in CAIS.

9. The project also emphasized partnership with the private sector. Consultations with the trading community and other intended system users were held, and their feedbacks were factored into the new business process at the core of CAIS. With funding support of the e-Asia and Knowledge Partnership Fund, various users, including those from the private sector, were trained on how to use and work with CAIS.

5 Parliament of Mongolia. 2008. Millennium Development Goals-Based Comprehensive National Development

Strategy of Mongolia. Ulaanbaatar. 6 ADB. 2006. Technical Assistance for Development of Regional Cooperation Programs for Mongolia and the

People’s Republic of China. Manila; and ADB. 2008. Technical Assistance for Capacity Development for Regional Cooperation in the People’s Republic of China and Mongolia. Manila.

7 Memorandum of Understanding between the Korea International Cooperation Agency of the Republic of Korea,

Ministry of Finance of Mongolia, Mongolian Customs General Administration, and Asian Development Bank Concerning the Project for Mongolian Customs Modernization, signed in Ulaanbaatar on 21 February 2008.

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10. In designing the project, experiences in customs modernization made by other CAREC countries—Republic of Korea, the Philippines—and the European Union were reviewed. The most important lessons reflected in the project design were: (i) the ICT upgrade should be preceded by customs legal reforms and business process reengineering; (ii) the ICT master plan should be formulated at the very outset; (iii) migration to automation should be accompanied by a change in management process; and (iv) users must be well trained.

11. A change to the project scope that deserves mentioning was the development of a disaster recovery system—this had not been included in the original design due to budget constraints, but given the importance of protecting the sensitive customs information, the MCGA proposed it and ADB approved it in January 2011. The disaster recovery system provided a backup server and data storage capacity, improving substantially data security. It was funded with loan savings and the contingencies.

B. Project Outputs

1. Migration and Upgrading of GAMAS

12. The outputs under component 1 included (i) an upgrade of GAMAS to provide an electronic processing environment supporting internet-based systems, (ii) an interface with the planned national single electronic window as part of the e-government initiative; and (iii) better communication and network infrastructure.

13. GAMAS was replaced by CAIS, which was jointly developed under the ADB loan and the KOICA grant. CAIS contained five subcomponents: (i) integrated customs information system; (ii) external portal system; (iii) ICT equipment; (iv) customs administration information system; and (v) external connection. In line with the implementation arrangements set out in the tripartite MOU, the first three so-called “must-have” subcomponents, which fell under the original component 1, continued to be financed by the ADB loan. The other two subcomponents were financed by the KOICA grant.

14. CAIS was completed and put into pilot operation in July 2009. After 1 year of pilot operation, during which feedback from various users was factored in and system improvements were made, the government officially accepted CAIS in July 2010. Since then, CAIS has been operating smoothly. The government assessed it as a substantially improved customs information platform that enabled nationally integrated processing with a centralized database, thus reducing risks of clearance errors, detecting more accurately customs offenses, and allowing higher uniformity in applying customs rules in the country. Customs data was centralized and, in particular, customs statistics were consolidated in the data warehouse. This has helped the MCGA fulfill its mission of preparing foreign trade statistics for economic policy analysis as stipulated by the 2008 Customs Law. The data warehouse has become the main information repository serving customs officers at all levels. Communication and transmission of data and information substantially improved, and data loss, which often happened with GAMAS, was minimized. The risk management module within CAIS also provided a strong tool for analyzing risks of noncompliance. Compared with GAMAS, which ceased operation by June 2010, CAIS took much less time to process information while improving interaction and communication with traders and the public.8 Overall, outputs achieved under component 1 by

8 Trade surveys in 2011 and 2012, carried out by the MCGA under instruction of the Mongolian government,

documented a significant reduction of complaints by traders about the difficulty of working with the MCGA’s system.

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the time of project completion were more extended than anticipated in the original design. As a result of the project, the MCGA was the first agency in the Mongolian government to be equipped with a highly automated information system, and set a model for the country in developing e-government and a national single electronic window.

15. The project also helped improve communication between the MCGA headquarters and the customs posts along Mongolia’s borders by providing VSAT services.9 In total, 13 sets of VSAT systems were set up at 13 border-crossing points that did not have direct data communication with the MCGA headquarters before implementation of the project. The ADB loan financed 5 of the 13 sets.

2. Improvement of Customs Infrastructure

16. Outputs under component 2 included (i) provision of advanced cargo surveillance tools such as X-ray equipment at selected customs houses and border posts, (ii) establishment of customs-specific regional laboratories through provision of various analytical equipment, (iii) construction of a data center in the MCGA headquarters, and (iv) expansion of the road cargo terminal at the border control complex in Zamyn-Uud. Outputs (iii) and (iv) were mainly civil works and financed by government counterpart funding.

17. All planned activities under component 2 were completed by July 2011. X-ray cargo inspection machines and infrared detection instruments were deployed at six customs houses around the country, including Ulaanbaatar Customs House, and operation of the equipment has been normal. Surveillance equipment, mainly closed-circuit television, was provided to eight customs posts, including at Ulaanbaatar International Airport. The project also provided analytical and testing equipment to the MCGA Central Laboratory and four regional laboratories in the country. With the new instruments and proper training of laboratory staff, accuracy of testing improved, and the time of a typical test was reduced to a few hours, from several days in the past. Moreover, the Central Laboratory gained technical capability to conduct certain types of complex tests (such as those for mineral samples) that in the past had to be contracted out to foreign laboratories, costing much more and taking much longer. 18. The MCGA completed the expansion of the cargo terminal at Zamyn-Uud, which helped reduce congestion in the peak seasons, and established an airconditioned space for the data center to house the main servers of the CAIS. All civil works related to these two items were financed by the government's counterpart funds.

3. Institutional strengthening 19. The project supported the MCGA in revising and upgrading the Customs Law, which was approved by the Parliament in May 2008 and became effective in July 2008. Subsequently, 36 new customs regulations were issued and 70 old ones revoked. The new Customs Law incorporated many trade-facilitating measures in line with international standards (particularly those in the Revised Kyoto Convention), such as use of customs declaration documents in electronic format and pre-arrival declaration.

9 VSAT refers to “very small aperture terminal”, an earthbound station used in satellite communications of data, voice,

and video signals, excluding broadcast television. A VSAT consists of two parts, a transceiver that is placed outdoors in direct line of sight to the satellite and a device that is placed indoors to interface the transceiver with the end user's communications device, such as a computer.

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20. The e-Asia and Knowledge Partnership Fund supported various training and capacity building activities, which can be divided into three broad categories: (i) training for information technology (IT) staff at the MCGA and its major customs houses; (ii) CAIS user training for customs officers; and (iii) CAIS training for business users such as customs brokers, customs-authorized carriers and freight forwarders, banks, and other private sector users. A user’s manual on CAIS was prepared and distributed to all customs officers and other users in the trade community. The MCGA also organized a series of international training units on a wide range of subjects—IT, customs statistics, authorized economic operators, risk management and enforcement strategy, laboratory techniques, customs valuation, the Harmonized System of Description and Codification of Goods and Commodities (developed and administered by the WCO) and protection of intellectual property rights. During implementation, the project trained 2,653 participants. The targeted and well-organized training helped achieve a smooth transition from GAMAS to CAIS.

21. The project also supported activities to improve interagency coordination. The MCGA, supported by the Ministry of Finance (MOF) as the executing agency, took a strong lead in the work of the project steering committee (PSC). Coordination between agencies brought about a more synchronized regulatory framework and reduced inconsistencies in the application of rules and procedures. As a result of the project, the MCGA forged a stronger partnership with other government agencies and the trading community.

22. Implementation of the project and the regional technical assistance projects contributed to CAREC regional customs cooperation, particularly with PRC customs authorities. The pilot test of joint customs control by Mongolia and the PRC, by harmonizing cargo manifests for road transport as a first step, was launched on 15 December 2009 at the border crossing points of Mongolia’s Zamyn-Uud and the PRC’s Erlianhaote. It yielded positive results by reducing clearance times at the border, improving data accuracy, and stepping up compliance.

C. Project Costs

23. The total cost of the project at the time of appraisal was $6.76 million. It was to be funded by an ADB loan of SDR3,375,000 ($5 million equivalent) from ADB's Special Funds resources, accounting for 74% of the total project budget, an e-Asia and Knowledge Partnership Fund grant of $500,000 (7.4% of the budget), and the government's counterpart financing of $1.26 million equivalent (18.6% of the budget).

24. The project was completed within budget, and there were no cost overruns. Some minor adjustments between subcomponents were made. The cost of ICT hardware, and ICT network infrastructure and software application increased as a result of broadening the technological functions of CAIS and developing the disaster recovery system. The budget for surveillance and inspection equipment decreased in line with the actual needs of the project, but the allocation for laboratory and analytical equipment was increased in response to the MCGA’s emphasis on improving the testing and analyzing capacity of the customs laboratories. The budget for consulting services was higher than the appraisal estimate because two extra contracts were offered to the international business process and ICT specialist to conduct price benchmarking and develop a training plan for the MCGA’s IT Center. The government provided counterpart financing in a timely manner, and in the full amount as planned, to cover costs related to civil works, equipment, and taxes and duties. Civil works were fully funded. The cost of equipment increased because the MCGA deployed more X-ray machines at the key customs posts. Taxes and duties actually paid were lower than the appraisal estimates.

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25. There were three reallocations during implementation. The first one took place in June 2008 due to a parallel financing by KOICA. A minor adjustment was necessary to reflect the funding responsibilities between ADB and KOICA in line with the tripartite MOU. The second reallocation was approved in August 2010 in response to the actual contract prices negotiated with contractors and suppliers. These two reallocations took place within the subcomponents of components 1 and 2, but involved no cross-component reallocation. The third reallocation was made in January 2011 to allow the project to use the loan savings from components 1 and 2, and the unallocated contingencies, to establish the disaster recovery system, which was completed in May 2011 at a cost of $489,000.

D. Disbursements

26. The loan and grant proceeds were disbursed in accordance with ADB’s Loan Disbursement Handbook (as amended from time to time). No schedule of disbursements was prepared at appraisal. Against the loan amount of SDR3,375,000, total disbursements by the actual closing date of 13 December 2011 were SDR3,346,584, at a loan utilization rate of 99.2%. The first loan disbursement of $54,000 was made on 19 November 2007 for the initial advance to the imprest account, 6 months after loan effectiveness. The final disbursement was made on 13 December 2011. Loan cancellations amounted to SDR28,416.06, and were made upon requests by MOF on 27 October 2011 and 13 December 2011. As for the $500,000 grant, total disbursements were $481,533.17, at a grant utilization rate of 96.3%. The first grant disbursement took place on 28 November 2007, and the final one on 11 January 2012. Grant cancellations amounted to $18,466.83.

27. The imprest fund was used for the operating expenses of the project management office (PMO), audit expenses, and salaries of PMO staff. The imprest account was effective and ensured timely release of payments to contractors and suppliers. The statement of expenditure procedure was used in liquidating advances and functioned in accordance with respective guidelines. Direct payment and reimbursement procedures also applied. Loan disbursements progressed smoothly, and no major delays were encountered. The auditor’s opinion on the use of the procedures indicated compliance with the financing agreement.10

E. Project Schedule 28. At appraisal, the project was to be implemented from March 2007 to February 2010. An implementation schedule showing the planned and actual timing of activities is in Appendix 3. The loan and grant were approved on 20 December 2006. The date of the financing agreement was 6 February 2007. The actual date of loan and grant effectiveness was 21 May 2007 versus 6 May 2007 in the financing agreement. The loan and grant closing date was 31 August 2010 in the financing agreement, and was extended by 1 year to 31 August 2011.11 The extension was to (i) make up for the startup delays in the first year of implementation due to the need to reach agreement with KOICA on the parallel financing; (ii) give the MCGA more time to finish the procurement process, which turned out to be more complex and lengthy than anticipated, particularly for component 2; and (iii) enable the MCGA to use loan savings to set up the disaster recovery system. By June 2011, all project activities were completed. It took a bit longer

10

Financing Agreement (Republic of Korea e-Asia and Knowledge Partnership Fund and Special Operations) between Mongolia and the Asian Development Bank, dated 6 February 2007. 11

The project completion review mission was originally planned for the last quarter of 2012. But due to government reorganization and the MCGA staff changes in late 2012 and the first half of 2013, the earliest possible time for fielding the mission was August 2013.

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than planned however to finish all liquidation steps, and the loan and grant were finally closed on 13 December 2011.

F. Implementation Arrangements

29. From the outset, the project benefited from the committed support of MOF and the MCGA, which put into place adequate institutional arrangements for project implementation. MOF provided strategic guidance to project implementation, particularly by taking the lead in interagency coordination through the PSC, and exercised close supervision, particularly over financial matters of the project. The implementation arrangements designed at appraisal proved to be adequate in mitigating risks, keeping the project on schedule and securing compliance with covenants and conditions of the loan, and conformance with ADB guidelines.

30. The MCGA provided sufficient resources for project implementation. It set up a PMO that was adequately staffed and had clearly defined responsibilities. The PMO staff, including international and national consultants, were experienced, competent, and dedicated. The PMO was able to secure necessary support and cooperation from various divisions of the MCGA at the headquarters and at customs posts across the country. When necessary, task forces comprising experienced customs experts and other key stakeholders were formed to perform specific tasks such as review of the Customs Law, business process reengineering, and testing and acceptance of CAIS.

31. The PSC was set up in September 2007 and reorganized in March 2008 by the Minister of Finance Order No. 155. It was chaired by MOF, and included senior representatives of key government agencies involved in Mongolia’s external trade and national single electronic window development. The PSC provided guidance to project implementation, and played a key role in interagency coordination on issues such as business process reengineering, Customs Law reform, and in establishing procedures for testing and final acceptance of CAIS.

32. The MCGA and PMO developed a project performance monitoring system based on the project design and monitoring framework to document detailed progress. Quarterly progress reports were prepared, and key information on progress was fed into the system. Gaps and shortcomings in project implementation were identified and brought to the attention of senior MCGA management, and corrective measures were adopted in a timely manner.

33. Effective collaboration was achieved between ADB, KOICA, and the MCGA under the guidance of the tripartite MOU, which clearly defined the responsibilities of each party. Regular (i.e., at least semiannual) consultations were held between the three parties to exchange information on implementation progress and, in case of difficulties encountered, to discuss joint interventions and to find solutions.

G. Conditions and Covenants

34. Loan effectiveness was achieved with a slight delay of 2 weeks. The general and specific covenants developed at appraisal were relevant and adequate. Out of 24 covenants, 22 had been fully complied with by the time of project completion. The status of compliance with the loan covenants is shown in Appendix 6. The only two covenants not fully complied with were (i) Covenant 2 on the PSC, which stipulated that the PSC should be established within 1 month of loan effectiveness, while in reality the PSC was set up 3.5 months after loan effectiveness; and (ii) Covenant 15 on operation and maintenance (O&M), when the MCGA was not able to provide sufficient budgetary resources for CAIS O&M.

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35. Annual audited financial statements for the project were submitted to ADB on time throughout implementation, and all reports were unqualified. The audit reports did not reveal any material weakness in managing the project's financial matters and in complying with relevant accounting standards. Issues raised (in the 2007 and 2009 audit reports) were generally minor and technical in nature: (i) separate imprest accounts should be used for loan and grant; (ii) value-added tax on the PMO's communication expenses should not be charged against the loan proceeds; (iii) the project should not be subject to tax on PMO staff's individual incomes; (iv) the practice of lump-sum withdrawal of PMO staff salaries should be discontinued; (v) supporting documents need to be kept properly; and (vi) bid securities need to be accounted for as income. MOF and the MCGA solved the issues adequately and implemented all recommendations by the auditor.

36. The covenant on anticorruption measures was effectively complied with. The loan and grant proceeds were used exclusively to implement the project. The government’s and ADB’s anticorruption policies were included in all bidding documents for the project. Throughout implementation, no corruption allegations or practices occurred.

H. Consultant Recruitment and Procurement

37. All procurement activities under the loan and grant were in full compliance with ADB guidelines (including guidelines on procurement and consultants)12 and applicable national rules and regulations. No international competitive bidding (ICB) had been stipulated at appraisal. During implementation, however, MOF and the MCGA voluntarily proposed to change national competitive bidding to ICB for components 1 and 2 so as to increase competition in response to the enhanced technical and functional features of CAIS. ADB approved the change of procurement method in June 2008, and ICB was used for most of the contracts save a few, as explained in paras. 38-41below. A summary of contracts awarded under the loan and grant is in Appendix 4. The procurement process was generally smooth for components 1 and 3, but some delays were encountered under component 2.

38. A total of 23 contracts were awarded under the loan: (i) six contracts for component 1—one for establishing CAIS, three for workplace computers and other equipment, one for the VSAT systems at customs border posts, and one for the disaster recovery system; (ii) nine contracts under component 2—four for customs X-ray and other inspection and surveillance equipment, and five for regional customs laboratories; and (iii) eight contracts for project administration under component 3 (PMO staff, office equipment, and operating expenses).

39. Use of ICB for component 1 was effective in attracting more competitive bidders from the international market for a highly sophisticated CAIS. This would not have been possible under national competitive bidding because the domestic ICT market was quite narrow and could not guarantee enough competition by bidders with necessary ICT expertise on customs modernization.13 However, the contract for the disaster recovery system was awarded by direct contracting to KTNET, the original CAIS supplier, to ensure maximum consistency in systems specifications and functional compatibility. The contract for VSAT was awarded through shopping to Incomet Administration of Mongolia because the company was one of the two

12

Procurement Guidelines (as amended from time to time), and Guidelines on the Use of Consultants by the Asian Development Bank and Its Borrowers (as amended from time to time).

13 The observation made in 2008 remained applicable at the time of project completion review. ICT engineers (particularly those with combined knowledge about ICT and business process analysis and re-engineering) are still scarce in Mongolia domestic market. ICB would still be recommendable for future ICT-related projects in Mongolia

9

earlier suppliers of similar equipment under the KOICA grant, and the products sourced from Incomet had higher transmission speed and data stability.

40. Provision of X-ray and inspection equipment under component 2 went through two rounds of bidding, and the first round was not successful since none of the bidders could meet all qualification criteria and technological requirements for a variety of specialized equipment. After the second round, the contract was awarded to Yavuu Impex in June 2010, which however requested contract termination, claiming that that it would not be able to supply the goods without a deficit due to the price increase by its foreign partner. Given the time pressure and because the MCGA had made repeated but unsuccessful efforts through ICB, it requested to change the procurement method to shopping, which ADB approved in November 2010. The original contract was then repackaged into four subcontracts. The MCGA solicited price quotations from four suppliers and awarded the contracts to Bit TNN in December 2010, after Bit TNN submitted the lowest responsive bids.14

41. ICB for regional customs laboratories under component 2 required three rounds. In the first, none of the bidders could meet all technological and qualification criteria. After consultation with and approval by ADB, the MCGA modified some of the qualification criteria (particularly regarding contractual and technical experience) and repackaged the goods into three lots. The second round awarded Lot 2 and Lot 3 contracts to Tsetsuuh Trade. But no successful bidder was found for Lot 1 (which contained a variety of specialized equipment) because no single bidder could provide all in one contract. This lot was then divided into four packages for the third round of bidding. Packages 1 and 4 were awarded to Tsetsuuh Trade, and packages 2 and 3 to Medimpex International.

42. The longer-than-expected process of bidding for some packages under component 2 is attributed mainly to (i) lack of interest from international firms due to the small size of contracts; (ii) limited number of qualified local bidders due to the small size of the Mongolian market; (iii) some of the unrealistically high bidder qualification criteria and technical requirements; and (iv) lack of experience on the part of local vendors with regard to bidding for contracts financed by multilateral development banks like ADB. ADB helped the MCGA and PMO remove these constraints during implementation, and key measures taken included revising some qualification criteria and technical requirements, and providing necessary procurement training. In general, the flexibility in applying ADB’s procurement guidelines, as approved by ADB, played an important role in completing the project as scheduled.

43. In total, 26 contracts were awarded under the grant from the e-Asia and Knowledge Partnership Fund, which was used exclusively for component 3—six contracts for individual consultants and 20 for training and workshops. At appraisal, the project included 4.5 person-months of an international consultant (business process and ICT specialist), and 44.5 person-months of national consultants (business process and ICT coordinator, interagency coordinator, and project implementation and monitoring coordinator). The international consultant was recruited as an individual through a firm, and was fielded in October 2007, 4 months later than planned. The three national consultants were hired as individuals and fielded in July 2007, September 2007, and May 2009. The originally budgeted international and national consulting services were fully utilized. Two additional lump-sum contracts were signed with the international business process and ICT specialist to (i) conduct a price benchmarking study on

14

MOF and the MCGA did not impose a penalty on the contractor for two reasons: (i) the company's abandoning of the contractual obligation did not cause actual financial or technological loss to the project, and (ii) MOF and the MCGA thought that it would not be worthwhile to get involved in any possible legal process that could distract much of their energy and attention.

10

procurement related to CAIS (component 1) and (ii) prepare a reorganization plan for the MCGA’s IT Center. The original terms of reference for the interagency coordinator were modified and expanded to include expertise on Harmonized System codes to support the MCGA’s efforts to revise its Harmonized System handbook as required by the new Customs Law. No other deviations from the arrangements agreed at appraisal for grant implementation occurred, and no major difficulties were encountered during consultant recruitment. 44. MOF and the MCGA maintained a high level of transparency in procurement in close consultation with ADB. An adequate structure of managing procurement of services and goods was activated with clear working protocols. The MCGA, under the guidance of MOF, led the work of the bidding evaluation committee. The committee diligently conducted review and detailed analysis of each proposal in accordance with task descriptions, and formulated respective recommendations. It played a pivotal role in selecting high-quality goods and service providers while factoring in the condition of the Mongolian market, which is still constrained by limited competition and inexperienced suppliers. All ICB and consulting service contracts were submitted to ADB for prior review before contract awarding.

I. Performance of Consultants, Contractors, and Suppliers 45. Overall, the international and national consultants recruited under the loan and the grant achieved satisfactory performance in completing tasks defined by contracts. They delivered outputs with the required quality in a timely manner. The international business process and ICT specialist played a highly constructive role in advising the MCGA on business process analysis and reengineering, and assisting in preparing bidding documents. The PMO director and key staff members were experienced in their areas, and demonstrated high levels of professionalism and dedication. The national ICT and procurement specialist resigned before completing his contract. However, his resignation was not due to performance issues, but to a much higher offer from a private company. The position was subsequently filled by a qualified local consultant, and no serious negative impact on project implementation ensued.

46. The performance of KTNET, the contractor for CAIS, was satisfactory. It delivered the system according to schedule. It also provided the MCGA with necessary documentation, including technical documentation of system and equipment, user’s manuals, training materials, and related manuals for O&M. Supported by KOICA, KTNET organized necessary technical training on operating and maintaining CAIS. At the request of the MCGA, KTNET agreed to provide continued technical support after the government officially accepted CAIS in July 2010, by hiring two IT engineers at the MCGA’s service up to 30 June 2011. KTNET provided one additional IT engineer, funded by KOICA, who was stationed in Ulaanbaatar from January 2011 to December 2012 to provide technical services to CAIS. In addition, KTNET was invited, through direct contracting, to develop a disaster recovery system for CAIS, which was delivered promptly and in good quality. The performance of other suppliers for various surveillance, inspection, and customs laboratory equipment was also satisfactory.

J. Performance of the Borrower and the Executing Agency

47. The performance of the borrower and MOF is rated satisfactory. MOF provided strategic guidance to project implementation, and played a key role in interagency coordination through the PSC. MOF also ensured timely provision of government counterpart funds, and exercised close supervision over project financial matters.

11

48. The MCGA performed its role as the implementing agency effectively, from project administration, planning, and supervision to reporting. It enacted adequate implementation structures, putting the PSC, PMO, and task forces in charge of specific functional and technical works, all with clear governance mechanisms and distribution of work. The senior management exerted close supervision and provided guidance and solutions to problems in a systematic manner. The annual work programs, action plans, procurement plans, and the final testing and acceptance procedures were implemented on time, in coordination with ADB and KOICA. Financial management was fully compliant with ADB policies and domestic procedures. Audit reports of the project were submitted to ADB on time each year, and reflected its conformance to rules of financial management.

K. Performance of the Asian Development Bank 49. The performance of ADB is rated highly satisfactory. ADB supported the borrower and the PMO in all aspects of project implementation. The frequency of ADB loan review missions was adequate, and discussions with MOF and the MCGA were productive. Regular ADB review missions facilitated necessary adjustments to the project and helped solve implementation difficulties. While ensuring full compliance with ADB policies and guidelines, ADB demonstrated necessary flexibility in dealing with implementation hurdles, especially those related to procurement under component 2. ADB also worked closely with the MCGA in project financial planning to achieve the highest possible loan and grant utilization and disbursement.

50. ADB organized in-country training on project implementation and administration, which boosted the capacity of the MCGA and PMO in preparing and reviewing bidding documents and conducting evaluation and selection procedures. ADB also supported overseas training for key MCGA staff conducted by the WCO and some bilateral donors on various subjects of customs reform and modernization.

III. EVALUATION OF PERFORMANCE A. Relevance

51. The project design is rated highly relevant to the stated goal of increasing the volume and facilitating Mongolia’s external trade. It aimed to remove constraints in the area of trade facilitation through development and installation of an automated customs clearance and information system, improvement of customs infrastructure, and institutional strengthening. The project outputs were fully achieved and greatly improved delivery of customs services to the trading community. Positive feedback from the private sector in the form of fewer complaints about customs services was recorded. The project facilitated the MCGA’s move toward a more efficient and collaborative structure, and created a modern work culture and operational environment across Customs. The project also laid a solid foundation for the MCGA and the government to develop a national single electronic window with a view to further facilitating Mongolia’s international trade.

B. Effectiveness in Achieving Outcome

52. The project is rated highly effective in achieving its intended outcome of greater efficiency, transparency, and sustainability of customs services and administration. CAIS outperforms the former system (GAMAS) by a great margin. It increased the speed of customs clearance—the average time of clearing a shipment through CAIS takes less than 5 minutes, against over 10 minutes under GAMAS. The number of supporting documents for customs declaration was reduced from 10 for imports and 11 for exports in 2007 to 8 for both imports and exports in 2012, and was further reduced to 6 for imports and 4 for exports in 2013. CAIS

12

enabled nationally integrated and web-based processing with a centralized database and risk management system, thus reducing error risks and allowing more uniformity in applying customs rules in the country.15 It also helped improve transparency and minimize human interventions in the process, reducing the chances of corrupt activities. According to the latest survey of the perception of corruption index, organized by the government and the Mongolian National Chamber of Commerce and Industry in May 2013, the MCGA’s rank improved and was above the average of peer agencies—81% of traders saw improvement in law enforcement by the MCGA; 85% viewed customs services as adequate; and 95% of traders acknowledged the MCGA’s progress in facilitating international trade (Appendix 1).

53. The project contributed substantially to modernization of customs business processes, especially through adoption of audit-based control and risk management techniques. It helped improve the regulatory and legislative framework of the MCGA through revision of the Customs Law in 2008. It also helped optimize the organizational structure and functions of the MCGA. The project succeeded in cultivating a new work culture among customs officers in an electronic processing environment, and motivated the MCGA to further modernize practices and improve service quality. The project also helped improve coordination with other government agencies and partnership with the trading community. In collaboration with other ADB regional technical assistance projects, the project promoted dialogue and cooperation between the MCGA and PRC Customs by piloting joint customs control with a view to simplifying and harmonizing clearance procedures for cross-border trade. All these achievements will help strengthen the sustainability of customs services and administration.

C. Efficiency in Achieving Outcome and Outputs

54. The project is rated highly efficient in achieving outcome and outputs. It delivered not only all the outputs designed at appraisal, it achieved more by (i) developing CAIS instead of merely migrating and upgrading GAMAS and (ii) establishing a disaster recovery system that helped bolster the data security of CAIS. All outputs were completed within the original budget.

55. As indicated in the report and recommendation of the President, the economic internal rate of return (EIRR) of the project was estimated at 19.63% at appraisal, and sensitivity analysis indicated that the EIRR would stay within the band of 16.1%–22.9%. The project at completion realized an EIRR of 37.2%, as a result of the rapid increase in Mongolia’s foreign trade during 2008–2011 and the substantial gains obtained by the project. The economic reevaluation is in Appendix 5. D. Preliminary Assessment of Sustainability

56. The project is rated most likely sustainable based on the following factors: (i) There is a high likelihood of achieving the technical sustainability of CAIS. The

MCGA’s IT Center has assembled a team of qualified engineers who have been trained for the system’s O&M. The MCGA has been able to retain most of the team members, although some chose to leave for higher salaries in the private sector. The MCGA devised special incentives, in terms of financial compensation and career development, to retain and attract more IT engineers. The MCGA and MOF are also considering other measures to support and sustain IT development in government in general and further upgrades of CAIS in particular.

(ii) Achieving the financial sustainability of CAIS is likely. The government has been able to increase budgetary allocations to cover most of the O&M costs of CAIS—it

15

Feedback from senior, middle-management, and junior customs officers interviewed in August 2013.

13

allocated MNT100 million in 2011 and MNT250 million in 2012, against operating costs of MNT240 million in 2011 and MNT300 million in 2012. For 2013 and 2014, the government planned O&M allocations of MNT440 million and MNT760 million. The MCGA and MOF were also considering setting up an escrow account using part of the CAIS service fees to cover O&M costs.

(iii) The government has been committed to moving to e-government, in particular by developing a national single electronic window. CAIS, developed under the project, has become a model for other government agencies and they have expressed strong interest in replicating the MCGA experience.

(iv) The MCGA has keenly participated in CAREC customs cooperation, including use of ICT for customs modernization and single-window development.

E. Impact

57. Economic impact. The project had a highly positive impact on Mongolia’s economic development. During implementation, Mongolia witnessed a substantial increase in its international trade. Exports grew by 35% over 2007 and reached $2.54 billion in 2008; contracted by 25% and dropped to $1.90 billion in 2009 due to the global financial crisis; regained strength and grew by 52% to $2.90 billion in 2010; and grew by 65% to $4.78 billion in 2011. In a similar pattern, imports increased by 41% over 2007 to $3.62 billion in 2008; contracted by 34.1% and decreased to $2.13 billion in 2009; and recovered strongly in 2010 to grow by 54% to $3.28 billion, followed by even stronger growth of 99% in 2011, to a volume of $6.53 billion. On average, customs tariffs contributed 36.5% of the government’s fiscal revenue over 2007–2011, and the ratio was expected to reach 50% in 2013.16 The MCGA’s efforts in customs modernization and trade facilitation played an important role in supporting the rapid increase of trade, and CAIS enabled the MCGA to cope effectively with the sharp increase in the customs processing workload. In 2012, CAIS processed 275,466 customs declaration documents with accuracy—an increase of 74.2% over the 158,172 documents processed in 200717—with a trader satisfaction rate of 85%, against less than 80% before the project.18

58. Institutional impact. The project had a highly positive impact on the institutional strength of the MCGA. It greatly enhanced IT awareness and capacity by introducing an electronic working environment to the customs system across the country. After adoption of the new Customs Law in 2008, the MCGA reorganized its functional structure in line with the reengineered business process. Interagency coordination was also strengthened as a result of the project. These institutional impacts are most likely sustainable. The new MCGA management, which was put in place in early 2013 after the 2012 parliamentary election, expressed strong commitment to continuing customs reform in line with the Customs Law and international good practices.

59. Environmental, social, and other Impacts. The project did not have any negative environmental and social impacts. The X-ray inspection equipment was properly used, and operators were trained. Guidelines on exposure limits were complied with, and health hazards were avoided. No hazardous materials were purchased and disposed of under the project. No environmental nor resettlement issues were involved in the limited scope of civil works financed by the Government counterpart funds. The project generated direct social benefits by improving the business environment for the trade community—reducing time and cost of customs

16

Multi-year United Nations Statistics. 17

Statistics by the MCGA. 18

Results of the survey of 3,960 traders in the country conducted by the MCGA's Monitoring and Performance Analysis Division in May 2013.

14

clearance, particularly for the carriers and small traders (many of them women) engaged in cross-border trade.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment 60. The project design was adequate at appraisal, and was further strengthened during implementation by replacing GAMAS with the more advanced CAIS. Despite a 1-year extension of the closing date, the project achieved more than the output targets and fully achieved the outcome within the original budget. The government made genuine efforts to reform its customs system by adopting a new Customs Law and reengineering the business process. Based on these achievements, the project is rated highly successful.

B. Lessons

61. The following major lessons can be drawn from of the project: (i) Implementing a customs modernization program entails efforts by not only the

customs authority, but also various other government agencies involved in regulating international trade. Strengthening interagency coordination for policy consistency and harmonization is a key to success.

(ii) Business process reengineering, which is at the core of customs reform, must be conducted in line with international standards, particularly the WCO’s Revised Kyoto Convention. This will maximize harmonization of customs procedures across borders in the interest of facilitating international trade.

(iii) Ownership by the borrower, particularly the implementing agency, is critical to successful implementation. An efficient PMO with dedicated staff and supported by experienced international and national consultants plays an indispensable role in project implementation.

(iv) Setting up task forces with experienced and motivated staff from the executing and implementing agencies, as well as staff from other government agencies depending on the nature of tasks, proved effective in executing tasks related to business process reengineering, which is both policy oriented and technical in nature, or to testing and accepting CAIS, which relied heavily on ICT.

(v) For customs modernization projects with high ICT content, a pilot operation period of at least 1 year needs to be included at appraisal. This will give system developers and project designers a chance to factor in user feedback before final acceptance.

(vi) Proactive engagement with the private sector helps ensure effectiveness of business process reengineering, improve system user-friendliness, and facilitate acceptance by the trade community.

(vii) Close donor coordination will ensure that project activities are implemented in a synchronized manner.

(viii) For ICT-related projects, attracting and retaining high-caliber engineers is a challenge and requires special solutions, e.g., designing special incentive packages.

C. Recommendations

1. Project Related 62. Future monitoring. Since it was officially accepted in July 2010, CAIS has been operating smoothly and stably, with several software adjustments by the MCGA’s IT Center to

15

accommodate newly introduced customs control requirements. Proper O&M support will be a critical factor for achieving the technical sustainability of CAIS. ADB will need to maintain the dialogue with the government, at least twice a year, to (i) monitor the status of budget resource provision for O&M and (ii) monitor the turnover of IT staff and make sure that the MCGA retains sufficient technical capacity. It is recommended that the MCGA formulate a 3-year O&M plan, including training plans with clear budget allocation. The MCGA should also be encouraged to continue monitoring the performance indicators so that proper baselines and targets can be established for future projects in areas of customs (and other services like quarantine and inspection) modernization and national single window development.

63. Covenants. The project covenants were relevant and adequate. They should be maintained for future projects in the sector.

64. Further action or follow-up. To ensure full realization of project impact, it is recommended that:

(i) MOF and the MCGA establish an escrow account to cover O&M costs of CAIS, including training and periodic software and hardware upgrades.

(ii) The MCGA organize technical verification of CAIS to assess any needs for system upgrades that will ensure optimal performance of CAIS.

(iii) The MCGA coordinate with other government agencies and work out an action plan for developing Mongolia’s national single electronic window.

65. Additional assistance. ADB should continue the dialogue with the government to design and implement a project to develop Mongolia’s national single window, as a logical follow-up to CAIS, to further promote trade facilitation.

66. Timing of the project performance evaluation report. It is recommended that the project performance evaluation be conducted in 2016. By that time, CAIS and other project facilities will have been operating for more than 5 years, and their use, maintenance, physical condition, and the project’s impact can be assessed.

2. General

67. Design and monitoring framework. Performance targets and indicators should be realistic and more directly relevant to impact, outcome, and outputs, and should be included only when baseline data is available. Baseline data needs to be established at appraisal.

68. Executing agency and implementing agency. The capacity of the borrower, particularly of the implementing agency, is key to project success. The PMO should be adequately staffed with experienced and dedicated members. Wherever possible, implementing and executing agencies should retain PMO staff beyond project completion to keep the knowledge and experience gained during implementation.

69. Procurement. While ensuring full compliance with ADB policies and guidelines, a certain flexibility in application by ADB would be needed in response to the actual market situation of the borrower. Wherever possible, executing and/or implementing agencies should retain PMO procurement staff to support future projects financed by multilateral development banks.

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Appendix 1

PERFORMANCE INDICATORS AND ACHIEVEMENTS

Design Summary

Target Specified at Appraisal

Actual Achievements

Impact Increased volume and smooth flow of trade

10-15% annual increase in external trade (starting from the first year after project completion as compared with previous year)

1. Foreign trade increased in value by

187.34% in 2011,a compared with

2010 (and by 285.6% compared with base year 2007). The number of customs declaration documents processed in 2011 increased by 176.31% compared with 2007.

2. Foreign trade increased in value by 277.1% in 2012, compared with base year 2007. The number of customs declaration documents processed in 2012 increased by 174.14% compared with 2007.

Outcome Improved efficiency, transparency, and sustainability of customs services and administration

Number of cases of customs infringement to be reduced by 10% annually during the first 5 years after project completion Ranking of the MCGA in assessment or survey of perception index of corruption to improve above the average amongst peer agencies or ministries in Mongolia (starting from the second year after project completion).

1. 69.4% of 3,960 traders and customs

brokers (10% of the number of economic operators having transactions with Customs) surveyed in May 2013

a stated that

dissemination of regulatory information by the MCGA is adequate.

2. 85% of traders held that customs services provided by the MCGA are adequate.

3. 94% of traders have problems solved by the MCGA within the time period stipulated by laws and regulations.

4. 95% of traders acknowledged progress made by the MCGA in trade facilitation.

5. 80.9% of traders acknowledged progress made by the MCGA in law enforcement.

6. 17.5% of traders admitted having committed customs offenses.

b

Outputs 1. Migration and upgrading

of GAMAS to an internet-enabled environment and central database

Number of online customs declarations increased by 50% before project completion to 90% by project completion Establishment of central data warehouse by project completion

1. The new customs automated

information system (CAIS) was established and is operational.

2. More than 90% of customs declaration documents were processed by CAIS.

c

3. The data center was established in July 2009 (trial operations started on 2 July 2009). Civil works (physical buildings) were funded by counterpart financing.

17

Design Summary

Target Specified at Appraisal

Actual Achievements

2. Improvement of infrastructure at selected major customs houses and customs border posts, including provision of inspection equipment and laboratory apparatus

50% reduction in the time needed for customs inspection and clearance (compared with before the infrastructure improvements) by project completion 60% reduction in the amount of time needed for customs laboratory analysis in results (including cross-city transport) by project completion (compared with before the project)

1. More than 75% of shipments were cleared by Customs within a working day.

d

2. Waiting times are substantially shorter. CAIS processes trade and customs information for shipment clearance in 3–5 minutes, whereas GAMAS took more than 10 minutes.

3. The number of supporting documents for customs declaration was reduced from 10 for import and 11 for export in 2007 to 8 for both import and export in 2012, and further reduced to 6 for imports and 4 for exports since 1 January 2013.

4. Shipments channeled to Red Lane (documentary and physical inspection) were reduced from 100% under GAMAS to 65% under CAIS thanks to improvement in risk management.

5. The time required for regular testing of commodity samples was cut from 7–10 days in 2007 to 3–4 days in 2011. Certain tests can be done within 1 day.

3. Institutional strengthening, comprising business process reengineering, capacity building, interagency coordination, regional cooperation, and public private partnership

100 customs officers trained with modernized customs environment Client satisfaction to exceed 80% by project completion Manual of reengineered business processes printed and circulated to customs officers by December 2007. Coordination with SSIA and MASM improved Procedures harmonized and data exchanged in customs cooperation with neighboring

1. The project provided training to 2,653 customs officer/times on various subjects, e.g., customs legislation, classification, intellectual property rights, authorized economic operators, customs valuation, risk management, and use of CAIS.

2. 85% of traders found that customs services provided by the MCGA are adequate.

3. Manuals on business process reengineering, tariff classification, and valuation were printed and circulated to customs officers.

4. Coordination with SSIA and MASM improved substantially under more synchronized policies and regulations. Inputs from SSIA and MASM related to customs clearance were duly incorporated into new customs processes under the Customs Laws.

5. Joint customs control pilots at two

pairs of border-crossing points with the PRC using the harmonized cargo

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Design Summary

Target Specified at Appraisal

Actual Achievements

countries Participation by the private sector in project implementation and expansion of the customs-business partnership

manifest were launched in 2009 and 2010. Electronic exchange of cargo manifests and other customs data is under discussion.

6. The private sector participated in the project by providing data and inputs for new customs business processes. A memorandum of understanding on cooperation between the MCGA and MNCCI was signed and implemented.

Activities 1.1 Finalize architecture

and high level business process by June 2007

1. Functional and technical

specifications for online applications by December 2007.

1.2 Complete functional and technical specifications for online applications by September 2007

2. Completed by December 2008, with specific designs and technical details for ICT-related work in 2009.

1.3 User testing and online application roll-out by September 2008

3. CAIS was put into pilot use in July 2009, and user feedback was assessed and incorporated into system design. CAIS was officially accepted in July 2010.

1.4 Complete functional and technical specifications for the data house application by September 2009.

4. Functional and technical specifications for the data house were completed as scheduled.

1.5 User testing and roll-out for the data warehouse application by February 2010.

5. User testing of the data warehouse was conducted from the end of 2009, and its rollout took place in July 2010 with full acceptance.

2.1 Review current requirements and produce final technical specifications for customs and laboratory equipment by June 2007.

1. Requirements and technical specifications for customs control and customs laboratory equipment were initiated in Q2 2008 and completed in Q4 2008.

2.2 Finalize contract for regional laboratory equipment by December 2007

2. Contracts for procurement of equipment for customs laboratory services were finalized in Q1 2009.

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Design Summary

Target Specified at Appraisal

Actual Achievements

2.3 Install laboratory equipment and analytical devices by June 2008

3. Installation started in Q2 2009, and related actions such as training and testing were carried out from Q2 2009 to Q2 2010.

2.4 Complete civil works for cargo terminal expansion in Zamyn-Uud by March 2008

4. Civil works in Zamyn-Uud were completed in March 2008, without any environmental and resettlement issues involved.

2.5 Complete civil works for data center construction in 2008

5. Civil works to build a data center at the headquarters of the MCGA started in February 2008 and ended in May 2009.

2.6 Finalize contract for surveillance equipment by June 2008

6. Contracts for procurement of surveillance equipment were finalized by December 2008.

2.7 Install surveillance equipment by September 2008

7. The last batch of surveillance equipment was installed in Q1 2011.

3.1 Implement changes in business processes and further refine it

1. New customs business processes were incorporated into CAIS in June 2010. Refinement took place from July 2010 to July 2011.

3.2 Prepare and disseminate manual of reengineered business process by December 2007

2. Manuals covering the reengineered business process were prepared by international consultants and the project management office, and were completed by December 2007.

3.3 Conduct capacity building training in synchronization with the implementation of outputs 1 and 2

3. Annual training plans were prepared and implemented, and training of 2,653 customs officer/times was delivered.

3.4 Carry out interagency coordination, regional cooperation, and public-private partnership throughout project implementation

4. MOF and the MCGA, through the project steering committee, conducted interagency coordination effectively throughout project implementation.

5. Regional customs cooperation achieved notable progress, and pilots of joint customs control with PRC were launched.

6. The private sector, through MNCCI, was involved in business process reengineering, and their views were factored into the CAIS design.

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Design Summary

Target Specified at Appraisal

Actual Achievements

3.5 Conduct surveys to gauge level of satisfaction with Customs Administration

7. Surveys were conducted by the MCGA in 2010, 2011, 2012, and 2013. There are two types of surveys: i) survey of the top 100 taxpayers and companies and ii) survey of 10% of all economic operators having transactions with Customs. Findings of the most recent survey (May 2013) were provided.

ADB = Asian Development Bank, CAIS = customs automated information system, ICT = information and communication technology, MASM = Mongolia Agency for Standardization and Metrology, MCGA = Mongolian Customs General Administration, MNCCI = Mongolian National Chamber of Commerce and Industry, MOF = Ministry of Finance, PRC = People’s Republic of China, Q = quarter, SSIA = State Specialized Inspection Agency. Note: a

Data and statistics provided by the MCGA to ADB in August 2013. b

Data of surveys in 2010, 2011, and 2012. c According to information by the MCGA during interviews conducted in August 2013 by ADB.

d Business Progress Initiative by United States Agency for International Development – Time Release Study of the

MCGA at three customs offices, March 2013. Customs offices are closed for 12 hours a day (from 20:00 to 08:00). Source: Asian Development Bank.

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Appendix 2

ADB DISBURSEMENTS BY YEAR

Loan 2307-MON ($) Category 2008 2009 2010 2011 Total

1. Equipment and furniture ICT hardware

157,860 52,620 489,900 700,380

ICT network infrastructure

896,475 324,454

1,220,929

Workstations & computers

257,032 875 257,907

Surveillance and Inspection

310,000 310,000

Laboratory & analytical equipment

484,866 330,667 815,534

PMO and operating costs 10,371

330

10,701

2. Software development ICT software

517,890 172,630

690,520

Application development

707,775 235,925

943,700

3. Consultant services

43,091 36,925 40,365 64,867 185,248

4. Interest charges

1,844 23,405 35,992 61,242

5. Unallocated

– – – – –

Total funds disbursed

53,462 2,318,769 1,591,628 1,232,301 5,196,161

Cumulative disbursements 1.1% 47.4% 79.3% 103.9%

– = not applicable, ICT = information and communication technology, PMO = project management office.

Note: Categories as specified in the loan agreement. Source: Asian Development Bank Loan Financial Information System. Grant 0070-MON ($)

Category 2008 2009 2010 2011 Total

1. Consulting

94,529 78,836 30,166 2,214 205,745

2. Surveys and studies

350 6,461 2,140 27,696 36,647

3. Grant administration

3,062 20,498 23,560

4. Training

9,303 53,428 89,383 14,495 166,609

5. Workshop

1,860 11,092 3,398 32,622 48,971

6. Imprest account Total funds disbursed

106,042 149,817 128,149 97,525 481,533

Cumulative disbursements 21.2% 43.1% 76.8% 96.3% Note: Categories as specified in the grant agreement. Source: Asian Development Bank Grant Financial Information System.

22

Appendix 3

23

24

25

Schedule at Appraisal Actual

26

Appendix 4 LIST OF CONTRACT PACKAGES

Loan 2307-MON

PCSS No. Contractor Mode of

Procurement Contract Date Country Final Contract

Amount ($)

0001 Amarsaikhan Damdinjavyn ICS 21-Jun-07 MON

75,000.00

PMO director (Component 3)

0002 Orgil Sukhdorj ICS 01-Sep-07 MON

21,224.31

ICT and procurement specialist (Component 3)

0003 Norov Unurtsetseg ICS 01-Nov-07 MON

45,465.35

Finance/administrative officer (Component 3)

0004 Various Others 18-Mar-08 MON

3,229.50

PMO operating expenses (Component 3)

0005 Various Others 18-Mar-08 MON

9,440.76

PMO equipment and furniture (Component 3)

0006 Various Others 01-Feb-08 MON

32,465.53

PMO operating expenses (Component 3)

0007 Various Others 31-Mar-08 MON

883.68

PMO equipment and furniture (Component 3)

Purchase of paper shredder, digicam & flash disk

0008 Korea Trade Network Co. Ltd. (KTNET) ICB 01-Apr-09 KOR

3,040,000.00

Customs Automated Information System Goods and Services (Component 1)

0009 Gantushig Galtsbog ICS 01-Aug-09 MON

7,863.32

ICT and procurement specialist (replacement of Orgil) (Component 3)

0010 Tsetsuuh Trade Co. Ltd. ICB 28-Oct-09 MON

116,136.21

Establishment of regional customs laboratories

Lots 2 and 3 (Component 2)

0011 Topica Company Ltd. ICB 18-Jun-10 MON

215,667.00

27

Computer equipment (Component 1)

0012 MCS Electronics LLC ICB 18-Jun-10 MON

8,740.00

Training room equipment (Component 1)

0013 Tsetsuuh Trade Co. Ltd. ICB 18-Jun-10 MON

238,170.00

Establishment of regional customs laboratories

Lot 1, Package 1: X-ray fluorescent spectrometer (XRF) and Lot 1, Package 4: Analyzing equipment for crude oil

(Component 2)

0014 Medimpex International Co. Ltd. ICB 18-Jun-10 MON

91,092.00

Establishment of regional customs laboratories

Lot 1, Package 2: Desktops explosives and narcotics (Component 2)

0015 Tsetsuuh Trade Co. Ltd. ICB 18-Jun-10 MON

26,819.41

Establishment of regional customs laboratories

Supply of customs laboratory equipment (Component 2)

0016 Bit TNN Co. Ltd. Shopping 06-Dec-10 MON

100,000.00

X-ray cargo inspection system (960[W]X750[HMM]) 2 units Rapiscam system 626XR

Lot 1, Contract 1 (Component 2)

0017 Incomet Administration of Mongolia Shopping 09-Jul-10 MON

25,628.90

Installation of 5 complex sets of VSAT at designated place

(Component 1)

0018 Bodi Electronics Co. Ltd. ICB 09-Jul-10 MON

33,500.00

Supply of PC and workstation equipment

LCD TV (Component 1)

0019 Medimpex International Co. Ltd. ICB 19-Jun-10 MON

343,316.00

Establishment of regional customs laboratories

Lot 1, Package 3: Fourier Transform

28

Infrared Spectrometer (Component 2)

0020 Bit TNN Co. Ltd. Shopping 06-Dec-10 MON

53,000.00

X-ray Cargo Inspection System Rapiscam System 626R X-ray Machine

Lot 1, Contract 2: X-ray cargo inspection equipment (Component 2)

0021 Bit TNN Co. Ltd. Shopping 06-Dec-10 MON

97,000.00

X-ray cargo inspection system Rapiscam systems 622XR X-RAY

Lot 1, Contract 3 (Component 2)

0022 Bit TNN Co. Ltd. Shopping 06-Dec-10 MON

60,000.00

X-ray Cargo Inspection System Rapiscam System 618XR

Lot 1, Contract 4: 530WX330 (H) MM – 2 units (Component 2)

0023 Korea Trade Network Co. Ltd. (KTNET) Direct contracting 23-Feb-11 KOR

489,900.00

Backup server and related equipment to compose mini-sized disaster recovery system for the new system (Component 1)

Total

5,134,541.97

ICB = international competitive bidding, ICS = individual consulting services, ICT = information and communication technology, KOR = Republic of Korea, LCD TV = liquid crystal display television, MON = Mongolia, PC = personal computer, PMO = project management office. Source: Asian Development Bank.

29

Grant 0070-MON

Contract No. Contractor Mode of

Procurement Contract Date Country Final Contract

Amount ($)

G01450 Gerel Batdelger ICS 03-09-07 MON

7,500.00

Business process & ICT coordinator

G01457 Dambiinyam Ochirbat ICS 20-06-07 MON

61,065.68

Project implementation and monitoring coordinator

G01458 Lauro Vibes ICS 23-09-07 CAN

98,304.64

Business process & ICT specialist

G01465 Training Others 16-02-08 MON

3,199.75

Advance payment for participation fees

G01617 Training Others 18-02-08 MON

2,176.00

Payment for training of S. Orgil

G02610 Lauro Vibes ICS 08-12-08 CAN

34,475.00

Consultant engaged for price benchmarking under component 2 of the project

G02377 Field trip expenses Direct purchase 09-12-08 MON

350.01

Field trip expenses

G02382 Workshops and forums Others 09-12-08 MON

1,860.00

Workshop on exchange of information and data

G02379

Training

Others

10-12-08

MON

14,875.00

Study tour in Republic of Korea, 9–14 Nov 2008

G02968 Training Others 22-01-09 MON

2,268.97

Field trip expenses

G02966 Regional training and symposium Others 20-03-09 MON

6,461.04

Expenses for regional training and symposium in Thailand

30

G02967 Workshops and forums Others 20-03-09 MON

11,092.13

Expenses for WCO ICT Conference

G03200 Gongor Doyod ICS 04-05-09 MON

4,399.79

Interagency coordinator and national consultant

G03952 Regional Training Others 04-08-09 MON

129,733.94

Regional training/field trips/surveys/studies/material

Manuals/grant administration and support costs

Ref: Training plan for 2010 – domestic and international

G04214 Materials and manuals Others 04-08-09 MON

19,455.77

Revision of Harmonized System of Commodity Codes

G03953 Workshops and forums Others 16-10-09 MON

2,820.43

WCO Asia Pacific Regional Seminar on Customs

Modernization, Republic of Korea, 17–20 Nov 2009

G04215 Workshops and forums Others 21-12-09 MON

577.14

Establishment of working group to test the new

systems

G06595 Field visit to regional customs posts Others 25-09-10 MON

3,254.82

Field visit to regional customs posts on CAIS

G05403 Lauro Vibes Others 01-10-10 CAN

2,000.00

Professional services on capacity and training

(Lauro Vibes, XMG Global IT Research)

G06594 Training Others 25-10-10 MON

13,666.36

Regional training on CAIS, RM at 18 customs houses

and offices

G06592 Workshops and forums Others 20-11-10 MON

11,632.05

31

Training on PPP in Zamyn-Uud

28–30 Nov, 5–8 and 13–14 Dec 2009

G05693 Training of customs officials in the Netherlands Others 25-11-10 MON 43974.29

G05692 Workshops and forums Others 25-11-10 MON

2,285.69

Domestic workshop on PPP and prevention of IPR frauds

G05983 Materials and manuals Others 18-03-11 MON

4,104.67

Participation of MON officials at 2011 WCO IT

Conference in USA, 13 May 2011

Total

481,533.17

CAIS = customs automated information system, CAN = Canada, ICT = information and communication technology, IPR = intellectual property right, MON = Mongolia, PPP = public-private partnership, RM = resident mission, USA = United States of America, WCO = World Customs Organization. Source: Asian Development Bank.

32

Appendix 5

ECONOMIC REEVALUATION

1. The Customs Modernization Project of Mongolia (L2307 SF, Grant No. 0070-MON) was successfully completed by August 2011. As part of the project completion report, a review of economic analysis was undertaken in August 2013. It records an economic internal rate of return (EIRR) of 37.2% with a net present value (NPV) of $20.24 million in 2006 base prices, outperforming the expected EIRR of 19.6% with an NPV of $4.48 million as estimated at appraisal. This appendix summarizes findings of the EIRR review, estimated from realized costs, expenses, and potential benefits of the project.

A. Overall approach

2. The reevaluation used the following parameters in calculating the economic costs and benefits of the project based on Asian Development Bank (ADB) guidelines on economic and financial analysis of projects:

(i) Main indicators and coefficients are expressed in US dollars. (ii) The analysis covers a 25-year period (2007–2031), carried out in constant

2006 dollar prices, with domestic prices used as the numeraire. (iii) Financial costs are converted into economic costs by excluding price

contingencies. (iv) Economic costs are calculated based on the annual project cost

disbursements, with annual recurrent costs estimated at around 12.5% of capital costs;1 and capital costs and operation and maintenance costs were adjusted based on a shadow exchange rate factor of 1.10 (based on ADB guidelines). Tradable goods are about 55% of project costs.

(v) The direct taxes, duties and subsidies have been excluded while converting costs from their financial to economic equivalents and that the labor and land costs have been shadow priced accordingly.

3. For consistency and as a standard practice, the reevaluation used the methods that were applied in the 2006 economic evaluation of the project for the report and recommendation of the President. 2 The economic reevaluation used the domestic price of Mongolia. The original economic evaluation used the baseline domestic price of 2006, and did not factor in any impact of inflation or the consumer price index (CPI) of subsequent years (2007, 2008, 2009, 2010, and 2011) when estimating costs and benefits. This approach was adopted for the reevaluation with the understanding that characteristics of the Mongolian economy, trade, and foreign exchange control policies have not caused any substantial distortion to the social rate of foreign exchange. 4. Benefits resulted from efficiency gains and an increase in trade. Over the project implementation period (2008–2011), Mongolia's foreign trade increased in value by 284%. Revenue collection by Customs in 2011 increased by 336.9% from the revenue collected in

1 Recurrent costs will be covered by the government with a regular annual budget. The memorandum of

understanding of the loan appraisal mission for this project (signed on 1 September 2006) provides that “The Government will ensure that necessary budget allocations will be provided to meet the recurrent costs under the Project for the operation and maintenance of the Project both during and after Project completion”. This assurance was also incorporated in the loan agreement after project approval.

2 ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Grant

Administration to Mongolia for the Customs Modernization Project. Manila.

33

base year 2007.3 Customs modernization played a key role in facilitating Mongolia’s international trade.

5. Efficiency gains of the project were realized through a decrease in transaction costs (mostly transportation costs) and customs clearance costs (savings). These sources of benefits from the project were brought about by foreign trade expansion (accounting for 17% of realized benefits) and efficiency gains (83%). Cost reduction accrued to both traders and the Customs. Efficiency gains were achieved through reduction of clearance time and better use of transport means. In calculating these gains—involving salaries of Customs personnel and hourly trucking costs—adjustments were made by taking into account gross domestic product (GDP) deflators and the CPI as documented by literature of international organizations, so results could be interpreted in NPV terms.

6. The reevaluation found that various economic assumptions needed updating, e.g., the cost of transportation by trucks. This is because the 2006 EIRR was estimated using the actual cost of 2005 while the project was implemented during 2008–2011; therefore adjustments have been made as elaborated below. To that end, the analysis used GDP deflator and CPI as applicable.

7. The 2006 economic evaluation for the report and recommendation of the President included foreign exchange escalation in estimating project costs (investment and maintenance) but did not use the foreign exchange factor (the basis of foreign exchange shadow prices) in assessing benefits. Instead, it focused on the NPV as explained above; logically, this approach was also used in the 2013 economic reevaluation. 8. The reevaluation aimed to assess costs and benefits with a primary focus on the economic rate of return instead of the absolute amount of benefits. The two streams of benefits expected from the project were expansion of trade and efficiency gains. By standard, these indicators are widely used in assessing impacts of projects of trade facilitation and customs modernization. In estimating efficiency gains, due consideration was given to establishing key indicators in real terms, such as the salary of customs officers in Mongolia, number of vehicles crossing borders (using the CPI of Mongolia during 2006–2012 as averaged by the International Monetary Fund). 9. GDP deflators of 2008–2012 were used to adjust the salary of Customs personnel instead of using the hourly salary of $3.13 effective in 2013. This adjustment assumes that the government might have raised salaries of public servants in view of Mongolia's economic conditions. Furthermore, due to the absence of available and documented costs of transportation, the 2006 costs of transportation were retained but adjusted (using the CPI of Mongolia during 2006–2012 as averaged by the International Monetary Fund). Thus it is fair to say that costs and benefits reflected in the reevaluation of the economic analysis were adjusted to a reasonable level against the 2006 base-year price, instead of using 2013 prices. 10. The original economic evaluation did not consider the impact of foreign exchange on trade expansion and consequently no world price (for goods and services of foreign trade) was involved. The reevaluation however included the impacts of foreign exchange escalation in assessing costs of capital, operation, and maintenance of the project in line with ADB guidelines. Furthermore, the reevaluation factored in the realized costs of the project, as documented by the project completion report of the Mongolian Customs General Administration

3 Data provided to ADB by the Mongolian Customs General Administration (MCGA) in August 2013.

34

(MCGA) of November 2011. In assessing benefits of the project, a certain margin of subjectivity is required due to the dynamics of trade and because of some benefits that have not been clearly measured, such as those resulting from regulatory reform and greater technical capability of Customs personnel.

B. Main results 11. The economic reevaluation revealed a realized EIRR of 37.2% with an NPV of $20.24 million in 2006 prices. 12. Efficiency gains accounted for $125.72 million and gains realized thanks to an increase in trade accounted for $25.15 million in nominal terms. Within the efficiency gains, the trading community received 71% of benefits through savings resulting from shorter customs clearance period. As a result, trucks would be more efficiently and effectively used for transport of goods and passengers. 13. The net benefits of the project stood at $125.76 million.

Table 1: Economic Cost Benefit $ (‘000)

Year

Economic Costs Economic Benefits Total

Benefits

Net

Benefits Project

Cost Maintenance

Costs

Total Efficiency

Gains Increased

Trade

2008 2,386 0 2,386 – – – (2,386)

2009 2,727 0 2,727 – – – (2,727)

2010 1,704 0 1,704 – – – (1,704)

2011 0 818 818 3,265 653 3,918 3,100

2012 0 818 818 3,428 686 4,114 3,296

2013 0 818 818 3,600 720 4,320 3,502

2014 0 818 818 3,780 756 4,536 3,718

2015 0 818 818 3,969 794 4,762 3,945

2016 0 818 818 4,167 833 5,000 4,183

2017 0 818 818 4,375 875 5,250 4,433

2018 0 818 818 4,594 919 5,513 4,695

2019 0 818 818 4,824 965 5,789 4,971

2020 0 818 818 5,065 1,013 6,078 5,260

2021 0 818 818 5,318 1,064 6,382 5,564

2022 0 818 818 5,584 1,117 6,701 5,883

2023 0 818 818 5,863 1,173 7,036 6,218

2024 0 818 818 6,157 1,231 7,388 6,570

2025 0 818 818 6,464 1,293 7,757 6,640

2026 0 818 818 6,788 1,358 8,145 7,328

2027 0 818 818 7,127 1,425 8,552 7,735

2028 0 818 818 7,483 1,497 8,980 8,162

2029 0 818 818 7,858 1,572 9,429 8,611

2030 0 818 818 8,250 1,650 9,900 9,083

2031 0 818 818 8,663 1,733 10,396 9,578

2032 0 818 818 9,096 1,819 10,915 10,098

Total 6,817 17,996 24,813 125,718 25,146 150,861 125,756

EIRR (%) 37.20

NPV at 12% Discount Rate 20,241.76 ( ) = negative, – = not applicable, EIRR = economic internal rate of return, NPV = net present value. Source: Mongolian Customs General Administration; Asian Development Bank project completion review mission.

35

C. Sensitivity Analysis

14. The economic reevaluation followed the methodology adopted in the original evaluation of 2006. Three scenarios were analyzed, and the results are reported in the matrix below in a manner comparative to the results of the 2006 evaluation. This shows that the EIRRs and NPVs of these scenarios clearly outperformed those of the original evaluation. The economic reevaluation showed that Scenario 2 was realized at project completion:

(i) Scenario 1—benefits from trade expansion attain only half the projection in the base scenario;

(ii) Scenario 2—efficiency gains outperform the base-case scenario by 20%; and (iii) Scenario 3—project costs exceed the estimates in the base-case scenario by 20%.

Scenario

EIRR (%)

NPV at 12% Discount Rate

($ million)

Remarks

2006 expected Scenario 1 17.90 3.40

2013 project completion report calculation Scenario 1

34.66 17.72 Outperformed

2006 expected Scenario 2 22.90 6.70

2013 project completion report calculation Scenario 2

42.01 25.27 Outperformed

2006 expected Scenario 3 16.10 2.70

2013 project completion report calculation Scenario 3

32.01 18.23 Outperformed

EIRR = economic internal rate of return, NPV = net present value. Source: Mongolian Customs General Administration; Asian Development Bank project completion review mission.

D. Fiscal Analysis

15. The project has a positive fiscal impact on Mongolia as a whole. Most benefits accrued to economic operators in the form of transport-related efficiency gains, savings in time and resources, and certainty of getting customs clearance for their shipments. 16. Tariff revenues collected in 2011 increased by 336.7% over 2007, and foreign trade increased by 284% over the same time. As a result, the tax base was expanded for budgetary collection. The MCGA also collects processing fees on customs declaration documents submitted to Customs in electronic format, and it is very likely that this revenue stream will continue to rise along with further trade expansion. 17. In particular, it is also worthwhile to point out that the project has brought about more uniform application of rules, better enforcement of rules, and better collection of duty, taxes, and fees across the country. In addition, the project has created a new working environment with positive attitudes, which results in better productivity of Customs personnel and better use of physical facilities. The customs automated information system (CAIS) delivered by the project also provides the MCGA with a new tool for managing and supervising work undertaken in various customs offices in the country, so senior management is able to make prompt decisions in response to threats of noncompliance.

36

E. Sustainability 18. It is likely that CAIS will achieve financial sustainability. The government has been able to increase budgetary allocations to cover most of the operation and maintenance (O&M) costs of CAIS—allocations amounted to MNT100 million in 2011 and MNT250 million in 2012, against operating costs of MNT240 million and MNT300 million. For 2013 and 2014, the government budgets for O&M are planned at MNT440 million and MNT760. While the budgets provided by the MCGA for CAIS O&M still fall short of a standard assumption that 12.5% of the investment shall be shouldered by the government as recurrent costs in accordance with ADB guidelines, a proposal of setting up an escrow account is being considered by the MCGA to ensure continued budgetary support for upgrades. Given the increase of both trade volume and tarrif revenues witnessed in the project implementation period, which is highly likely to be sustained beyond the completion, the Project is not expected to have any negative impact on the MCGA’s budget. 19. There is a high likelihood that CAIS will achieve technical sustainability. The MCGA’s information technology (IT) center has assembled a team of qualified engineers who are trained to operate and maintain CAIS. The MCGA has been able to retain most of the team members, although some have chosen to leave for higher salaries in the private sector. The MCGA is devising special incentives in the form of financial compensation and career development to retain and attract more IT engineers. The MCGA and the Ministry of Finance (MOF) are also considering measures to support and sustain IT development in the government in general and CAIS upgrades in particular. The government has been committed to moving toward e-government, in particular by developing a national single electronic window. CAIS, as developed under the project, has been a model for other government agencies and they have expressed strong interest in replicating the MCGA experience. F. Adjustments, Updates Made, and Justifications 20. Adjustments were made to the following components of the original economic analysis:

(i) Salary of customs officers. According to the original economic evaluation, the average hourly salary of a customs officer in 2005 was $0.56. For the present analysis, it has been adjusted to $2.31 since the average salary of a Mongolian customs officer in 2013 was $550 per month. Mongolian GDP deflators during 2008–20134 were used for this calculation.

(ii) Hourly cost of use of a truck. The original cost in 2005 was $6. Due to an increase in transportation costs because of a rise in global prices for petroleum products, it has been adjusted to $9.83. The CPI of Mongolia during 2008–2013 (footnote 4) was used for this calculation.

(iii) Number of trucks being used. Mongolia's foreign trade in 2011 had increased in value by 284% over the base year of 2007. In value, mineral products account for most of the country's overall exports. So it is realistic to assume that the number of trucks used should have been increased. For this economic reevaluation it is assumed that of the total number of vehicles crossing the borders (1,865 in 2005) at least 40% were trucks.

(iv) Number of customs officers involved in clearance of shipments. Responding to an increase in cross-border trade and cross-border movement of vehicles and people, it is

4 IMF, Country Report 12/320, November 2012, Table 6 – Selected Economic and Financial Indicators 2008–2017.

37

assumed that the number of customs officers taking part in customs inspection and control of shipment release increases to 413 (the original number of 2006 was 300).5

(v) Project costs. Data provided by the MCGA relating to costs and expenses of the loan and grants were incorporated. It is also important to note that the project benefitted from savings of $ 202,000 due to variations in the foreign exchange rate.

(vi) Data on Mongolian foreign trade of 2007–2012 and the number of customs declaration documents during the period were also updated for this economic analysis.

(vii) Data on customs offenses provided by the MCGA were also updated for the analysis. G. Conclusions

21. Upon its completion in 2011, the project had achieved an EIRR of 37.2%, compared with the EIRR of 19.6% at appraisal. Efficiency gains resulting from the reduction of customs clearance times accounted for the majority of realized benefits. The project has a positive fiscal impact and, more importantly, it generates a positive impact on governance by nurturing the confidence of public servants and the private sector in Mongolia's customs services.

5 The original ratio of three-eighths of Customs personnel in charge of customs clearance was maintained for

consistency of the analysis. The total number of customs officers in 2013 was estimated at 1,112 as per the MCGA.

38

Appendix 6

COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference in Loan

Agreement

Status of Compliance

Project Executing Agency and Implementation Agencies 1. MOF shall be the Project Executing Agency (EA) and MCGA shall be the Project Implementing Agency (IA).

Schedule 5, Para 1

Complied with.

Project Steering Committee (PSC) 2. Within one month after the effectiveness of the Financing Agreement, a PSC shall be established to oversee the Project and coordinate issues related to Project Implementation. The PSC, chaired by the Vice Minister, MOF shall comprise representatives from MOF, GDNT, MCGA, Ministry of Industry and Trade (MIT), Information Communications Technology Authority (ICTA), SSIA, MASM, and MNCCI. The PSC shall meet whenever necessary but not less than once every six months, to provide guidance on the future direction of the Project. ADB shall attend the PSC meetings as observer.

Schedule 5, Para 2

Partly complied with. The PSC was established on 12 September 2007, and reorganized in March 2008 by decision of the Minister of Finance. The first PSC meeting was held in 2009. The second and third meetings were held on 12 March and 16 July 2010. The fifth meeting was held on 26 August 2011.

Project Director 3. The Director General of MCGA shall be designated as the Project Director. The Project Director shall have overall responsibility for project implementation.

Schedule 5, Para 3

Complied with. Mr. D. Tseveenjav, director general of the MCGA, has been serving as project director.

Project Management Office 4. Within one month after the effectiveness of the Financing Agreement, a project management office (PMO) will be established to undertake day-to-day project implementation of the Project. The PMO will be headed by a qualified PMO Director acceptable to ADB. The PMO Director will report to the Project Director.

Schedule 5, Para 4.

Complied with. The PMO was fully staffed and operational by November 2007.

Use of Proceeds of the Loan and Grant 5. Mongolia shall cause the proceeds of the Loan and the Grant to be applied to the financing of expenditures on the Project in

Article III, Section 3.01

Complied with. Proceeds of the loan and the grant were disbursed

39

Covenant

Reference in Loan

Agreement

Status of Compliance

accordance with the provisions of the Financing Agreement.

and used by the PMO in accordance with ADB guidelines.

Particular Covenants 6. (a) Mongolia shall (i) maintain, or cause to be maintained , separate accounts for the Project; (ii) have such accounts and related financial statements audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; (iii) furnish to ADB, as soon as available but in any event not later than 6 months after the end of each related fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors’ relating thereto (including the auditors’ opinion on the use of the Loan and Grant proceeds and compliance with the financial covenants of the Financing Agreement as well as on the use of the procedures for imprest accounts and statement of expenditures), all in English language; and (iv) furnish to ADB such other information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

Art. IV, Sec 4.02 (a)

Complied with. The PMO maintains separate imprest accounts for the loan and grant at Golomt Bank. An authenticated signature of the state secretary of MOF was updated accordingly. The director general of MOF’s Department of Development Financing was also authorized to sign for transactions of less than MNT100 million to streamline the approval process. Dalaivan Audit LLC was assigned to audit the financial statements of the project for 2007. Confident Audit LLC was the auditor for 2008 and 2009. Dalaivan Audit LLC was reappointed as the auditor for 2010 and 2011. Audited financial statements for 2007–2010 were all submitted to ADB before the due date. The audited financial statements for 2011 were received on 30 September 2011.

(b) Mongolia shall enable ADB, upon ADB’s request, to discuss Mongolia’s financial statements for the Project and its financial affairs related to the Project from time to time with the auditors, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the presence of an authorized officer of Mongolia shall otherwise agree.

Art IV, Sec 4.02 (b)

Complied with.

40

Covenant

Reference in Loan

Agreement

Status of Compliance

7. Mongolia shall enable ADB’s representatives to inspect the Project, the Goods and Works financed out of the proceeds of the Loan and the Gran, and any relevant records of documents.

Art IV, Sec 4.03

Complied with.

ADB’s Review of Procurement Decisions 8. All contracts procured under international competitive bidding procedures and contracts for consulting services shall be subject to prior review by ADB, unless otherwise agreed between Mongolia and ADB and set forth in the Procurement Plan.

Schedule 4, Para 10

Complied with.

National Competitive Bidding 9. No National Competitive Bidding procurement may be undertaken unless ADB and Mongolia have agreed in writing to any necessary modifications or clarifications to Mongolia’s National Competitive Bidding procedures for purposed of this Project to ensure consistency with ADB’s Procurement Guidelines. Any such modifications or clarifications shall be subsequently reflected in the Procurement Plan and are hereby incorporated by reference to this Financing Agreement.

Schedule 4, Para 5

Complied with.

Industrial or Intellectual Property Rights 10. (a) Mongolia shall ensure that all Goods and Works procured (including without limitation all computer hardware, software and systems, whether separately procured or incorporated within other goods and services procured) do not violate or infringe any industrial property or intellectual property right or claim of any third party. (b) Mongolia shall ensure that all contracts for the procurement of Goods and Works contain appropriate representations, warranties and, if appropriate, indemnities from the contractor or supplier with respect to the matters referred to in subparagraph (a) of this paragraph. (c) Mongolia shall ensure that all ADB-

Schedule 4, Paras 8-9

Complied with.

41

Covenant

Reference in Loan

Agreement

Status of Compliance

financed contracts with consultants contain appropriate representations, warranties and, if appropriate, indemnities from the consultants to ensure that the consulting services provided do not violate or infringe any industrial property or intellectual property right or claim of any third party.

Staffing 11. Mongolia shall ensure that the information technology division under MCGA shall be supported by adequate technical staff dealing with customs automation systems throughout the Project implementation

Schedule 5, Para 5

Complied with. MCGA was able to recruit and retain the key ICT personnel to operate and maintain the new CAIS.

Training Plan 12. Mongolia shall ensure that the IA implements the training plan under Component 3 of this Project on a timely basis.

Schedule 5, Para 6

Complied with.

Office Space 13. Mongolia shall provide adequate office space, including for consultants, throughout the implementation of the Project.

Schedule 5, Para 7

Complied with.

Counterpart Funding 14. Mongolia shall ensure that adequate funds are made available to the Project when and in the amounts required to enable Project agencies to discharge their responsibilities under the Project and to cover any shortfall of fund for the completion of the Project.

Schedule 5, Para 8

Complied with.

Operation and Maintenance 15. Mongolia shall ensure that (i) necessary budget allocations shall be provided to meet the recurrent costs under the Project for the operation and maintenance of the Project facilities both during Project implementation and after Project completion; and (ii) that a time-bound maintenance plan with adequate budget allocation is prepared on a regular basis.

Schedule 5, Para 9

Complied with (i) and party complied with (ii). Budget allocation for O&M increased annually and was adequate. However, the MCGA was not able to complete the O&M plan by Project completion. The plan was still being formulated at the time of project completion review.

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Agreement

Status of Compliance

Labor Law 16. Mongolia shall ensure compliance with all applicable labor laws, including the prohibition of child labor, and equal pay for men and women for work of equal value for activities under this Project. Compliance with these provisions shall be strictly monitored during implementation.

Schedule 5, Para 10

Complied with.

Resettlement 17. Mongolia shall ensure that any land which might be selected for the upgrading of customs physical infrastructure under this Project shall not cause any involuntary land acquisition, resettlement or limit on access to land as defined in ADB’s Policy on Involuntary Resettlement (1995).

Schedule 5, Para 11

Complied with.

Environment Law 18. Mongolia shall ensure that all activities at the customs houses, particularly handling, use, storage, and disposal of toxic and hazardous substances, and disposal of other substances and wastes be conducted in compliance with Mongolia applicable laws and regulations and ADB’s Environment Policy (2002).

Schedule 5, Para 12

Complied with.

Customs Law 19. Mongolia shall keep ADB updated on the adoption of the new Customs Law.

Schedule 5, Para 13

Complied with. The Customs Law and the Law on Customs Tariffs became effective on 1 July 2008. The design of CAIS has taken into consideration the requirements of the new laws.

Anti-corruption 20. Consistent with ADB’s and with Mongolia’s commitment to good governance, accountability and transparency, Mongolia shall ensure and shall cause the IA to ensure that the Project funds are utilized effectively and efficiently to implement the Project and to achieve the Project objectives. Mongolia shall cause the IA to (a) undertake necessary measures to create and sustain a

Schedule 5, Para 14

Complied with.

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Agreement

Status of Compliance

corruption-free environment; (b) ensure that Mongolia’s Anticorruption Law and ADB’s Anticorruption Policy are strictly enforced and are being complied with during Project implementation, and that the relevant provisions of ADB;s Anticorruption Policy are included in all bidding documents for the Project; (c) facilitate in ADB’s exercise of its right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive or coercive practices relating the Project; (d) conduct periodic inspections on the Project contractor’s activities related to fund withdrawals and settlements; and (e) ensure that all contracts financed by ADB in connection with the Project include provisions specifying the right of ADB to audit and examine the records and accounts of the IA and all contractors, suppliers, consultants and other service providers as they relate to the Project. Mongolia shall cooperate with any audit and investigation and extend necessary assistance, including access to all relevant books and records, as well as engagement of independent auditors and experts that may be needed for satisfactory completion of such audits and investigations. All external costs related to the audit and investigations shall be funded from the Loan.

Project Review 21. Mongolia and ADB will jointly review the Project at least twice during the first year of Project implementation to assess progress, identify constraints and agree on strategies for resolving constraints. A comprehensive mid-term review (MTR) will be undertaken one a half year after the commencement of Project implementation which shall include a detailed evaluation of the scope of the Project, operation and maintenance costs, implementation arrangements and achievements under the Project to identify any problems and constraints encountered and assess the need for mid-term modification of the project scope and implementation arrangements.

Schedule 5, Para 15

Complied with. Six loan review missions had been fielded as of 31 August 2011. The mission for preparing project completion was planned in April 2013 and completed on 13–16 August 2013.

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Status of Compliance

Project impacts will be evaluated upon the completion of the Project according to a schedule and terms of reference to be agreed upon by the EA and ADB.

Project Performance, Monitoring and Evaluation (PPMS) 22. Within one year after the effectiveness of the Financing Agreement, Mongolia shall have established PPMS acceptable to ADB. Key performance indicators and assumptions in the Design and Monitoring Framework of the Project as agreed between Mongolia and ADB shall form the basis for the PPMS. The PPMS shall carry out the performance monitoring and reviews during Project implementation, to evaluate the scope, implementation arrangements, benefit monitoring, progress and achievements of the objective of the Project.

Schedule 5, Para 18

Complied with. The PMO prepared the PPMS in December 2008 based on the design and monitoring framework, and has further improved it.

Reporting 23. The PMO shall submit the Project monitoring and evaluation reports to ADB and MOF on a quarterly basis. The PMO shall also furnish annual report to ADB and MOF within one month after the end of the year, to indicate progress made, and problems encountered during the review period, steps taken or proposed or proposed to be taken to remedy the problems, proposed program of activities, and expected progress during the following period.

Schedule 5, Paras 16 and 18

Complied with. Quarterly progress reports and annual reports have been submitted to ADB in a timely manner.

Financial Statement 24. The PMO shall maintain separate accounts and prepare financial statements for the Project according to international standards.

Schedule 5, Para 17

Complied with. The PMO maintains two separate imprest accounts at Golomt Bank and prepares financial statements (quarterly) in accordance with internationally acceptable standards. Audited financial statements were submitted before the due date.