national and sectoral planning documents in Mongolia, these are usually quite weak in quality, and there is very little linkage between the documents and the annual capital budget.

Exacerbating this problem of weak strategic guidance is the failure to effectively enforce sector ceilings on line ministry budget proposals with the result that there is little incentive for the ministries to prioritize their investment proposals given fiscal constraints. For example, in 2008 the investment proposals submitted by all line ministries amounted to 22.6 percent of GDP, as against a ceiling of 8 percent of GDP set out in the medium term fiscal framework.<sup>7</sup> Politically, this lack of discipline implies that ministries are not forced to make tough choices and instead can ―pass the buck‖ to the Ministry of Finance by including numerous projects and thereby pleasing all constituencies.

There is no formally institutionalized process of economic appraisal of investment projects in Mongolia. The primary budget legislation (the Public Sector Finance and Management Law of 2003) is largely silent on the modalities for public investment planning and budgeting, and the Ministry of Finance regulations on preparation and prioritization of public investment projects are highly skeletal. There are no project appraisal guidelines that specify what economic and financial analysis needs to accompany project proposals, and what will be the basis of appraising these projects. Without such systematic approaches, it is very difficult to determine inter-sectoral and intra-sectoral priorities, and to determine which projects are feasible and which are not. The corollary to this regulatory weakness is the lack of capacity in the line ministries to conduct economic analysis, and the lack of capacity in the Ministry of Finance for an independent review of project proposals based on analytical criteria.<sup>8</sup> The Investment Division of the Ministry, which until the recent creation of the new planning agency, had prime responsibility for this task has a staff of strength of less than 10, and for all practical purposes the project review process is limited to ensuring that the proposals for new constructions have the necessary technical drawings to comply with the requirements of the Construction Law, and that the cost estimates follow the required norms.

These problems are particularly severe in projects that are inserted by parliament during the annual budget sessions. Parliament has regularly significantly increased and altered the capital budgets submitted by the executive — In 2008 for example, the parliament increased the capital budget approved by the cabinet from 442 billion MNT to 571 billion MNT, replacing and adding numerous projects to the portfolio (Figure 4). Some of these new projects flow from the Local Development Fund, or the allocation given to each parliamentarian for earmarked or ―porkbarrel‖ spending in their home districts. These constituency funds were introduced in 2003, and the allocation per MP has increased hundred-fold since then from 10 million MNT per MP in 2003 to 1 billion MNT per MP in 2010. Often these schemes identified under the constituency fund

**Figure 4:  Parliament has significantly expanded the capital budget**

<!-- Start of picture text --> Capital Budget (Public Investment Plans), Billions of<br>MNT 571.4<br>518.8 531.4<br>Executive<br>Parliament 427.4 442.7 456.1 452.5 447.8<br>Amended<br>364<br>303.8<br>169.8<br>137.5<br>69<br>2006 2007 2008 2009 2010<br><!-- End of picture text --> _Source_ : Ministry of Finance are without basic technical documentation and have even more inaccurate cost estimations than the projects proposed by the line ministries.

> 7 Finch & Fritz (2010).

> 8 See Rajaram et al (2008) for the framework for key aspects of a good public investment management system.

8