While all Performance Standards are applicable to this investment, IFC’s environmental and social due diligence indicates that the investment will have impacts which must be managed in a manner consistent with the following Performance Standards: PS 1: Social and Environmental Assessment and Management Systems; PS 2: Labor and Working Conditions; PS 3: Pollution Prevention and Abatement; PS 4: Community Health, Safety and Security; and PS 5: Land Acquisition and Involuntary Resettlement. Issues associated with the following PS were also assessed but were found not to be relevant to the project: PS6: No adverse impacts to biodiversity or sustainable natural resource management were found; PS7: No Indigenous People are known to be in the area or affected by the project; PS8: No evidence of the presence or impact on issues associated with Cultural Heritage was identified.

This is a Category B project according to IFC’s Procedure for Environmental and Social Review of Projects because a limited number of specific and reversible environmental and social impacts may result, which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. Key environmental, health and safety, human resources and social issues that were reviewed included the following: environmental and social management system; labor and working conditions; emissions to the environment – air, water and subsurface; hazardous waste and materials management; life and fire safety and emergency preparedness and response; community and occupational health and safety; water and energy use and efficiency; land acquisition and involuntary resettlement; and community engagement.

PS1: Social and Environmental Assessment and Management Systems

Shangri-la Ulaanbaatar Hotel LLC (“the Company” or “SLUB”) has a project management team of 15 staff headed by a Project Manager to oversee the hotel construction process, reporting to the corporate project team based in Hong Kong. The SLUB team has an Environmental Health and Safety Officer responsible for E&S management. It regularly inspects the hotel site and the work of its main contractor and sub-contractors. It is in the process of developing key performance indicators as a construction oversight tool.

MCS Properties (“MCSP” - subsidiary of MCS), commissioned by the Sponsor as the main contractor for this Project, has an on-site office staffed with a team of engineers and other project staff to manage all aspects of the construction process. Responsibilities of team members, described in documents provided to IFC, are clearly defined. MCSP has developed a Contract Quality Plan (CQP), and a Project Execution Plan and Construction Method approved by SLUB which governs all aspects of the construction process including sub-contractor management. Included in these documents are E&S provisions and requirements such as those on safety management. MCSP monitors site conditions including E&S performance through daily inspections, weekly meetings and compilation of weekly reports to SLUB. Communication and reporting arrangements between SLUB, MCSP and its subcontractors are detailed in a section within the Project Execution Plan.

Reporting to the Project Director, the MCSP safety and security engineer is responsible for ensuring implementation of safety and environmental protection measures based on SLUB, CQP and Mongolian national requirements. A document control system is in place. Sub-contractors follow MCSP’s CQP procedures.

As required by national regulatory requirements, an Environmental Impact Assessment (EIA) of the Project has been conducted and is in the process of being submitted to the Mongolian Ministry of Environment and Tourism for approval. The Sponsor will ensure fulfillment of all required actions detailed in the EIA, including those pertaining to both construction and operational phases of the SLUB hotel. It will do so by commissioning an independent consultant to perform environmental verification audits.

Before the SLUB hotel (“the Hotel”) commences operation (expected to be in 2013), the Sponsor will appoint an operational team. The Sponsor will ensure that the appointed team develops and implements the SLUB hotel’s operational policies and procedures (SLUB’s E&S Management System or “ESMS”) in accordance with the Sponsor’s global corporate social responsibility policies which contain corporate commitments on aspects such as sustainability, environment, employees, and stakeholder relations. The Sponsor will attain HACCP (Hazard Analysis and Critical Control Point system) food-hygiene management certification and ISO14001 environmental management certification for the SLUB hotel one year after hotel opening. The Sponsor will also ensure that the hotel’s operations fulfill national requirements and IFC’s performance standard requirements, and that the ESMS clearly defines E&S roles and responsibilities among operational team members. There will be a two-year period during which MCSP will be working with the operational team to ensure a smooth transition from construction to hotel operation.


PS2: Labor and Working Conditions

SLUB has a construction project management team of 15 persons while MCSP employs 22 persons working directly on this Project. The main sub-contractor employs about 315 persons on site. All workers at SLUB and MCSP are direct hires with a majority being local hires. While the sub-contractor recruits about 60% of its workforce through Government employment agencies, employment relationships are directly established with all workers and not through labor intermediaries. MCSP currently does not verify whether sub-contractor workers have a formal employment contract in place.

SLUB has in place a set of Personnel Policies and Procedures for the construction phase. Human resource policies and practices of the Sponsor and MCS follow requirements stipulated in the Labor Law and Social Security Law of Mongolia. Terms of employment as well as rights and responsibilities of employees are formalized into employment contracts.

Site visits confirmed working conditions to be reasonable and clean. Remuneration is competitively determined by referencing market rates and is higher than the minimum wage stipulated by Mongolia law. Some sub-contractor construction workers have worked for more than the legally-permitted 40 hours per week, for which they have received overtime payments. SLUB will ensure that contractor and sub-contractors abide by working hour and other provisions stipulated under the National Labor Law.

Workers receive employment benefits such as training opportunities, annual leave, a local transport subsidy and mobile phone allowances, and are covered by social insurance as per local legal requirements. Meals or food allowances are provided free to all construction workers. The mechanical and electrical sub-contractor is planning to build off-site dormitories which will accommodate up to 300 workers starting in March 2011 – SLUB has sanitary and safety requirements on dormitory design and construction which will be adhered to by the sub-contractor. All staffs are regularly trained on topics such as fire safety to ensure they are operationally competent and follow safety requirements. During the winter months when construction needs to adjourn due to cold weather, construction workers are paid a winter allowance equivalent to two months of their salary.

Hiring and employment practices recognize the principles of non-discrimination and equal opportunity which are written into personnel policies. IFC found no evidence of child or forced labor in the workforce. A young-worker-union comprising 40 members at MCSP has in the past organized social activities for staff and reflected employee viewpoints to management. There are no collective bargaining agreements in place at SLUB and MCSP and there is no union in place at SLUB. There is an independent construction worker union in Ulaanbaatar to which some of the sub-contractor workers subscribe as members. In 2008 this union helped its members to secure a substantial wage increase and has contributed to the process of minimum-wage establishment in Ulaanbaatar. IFC’s review found no restriction placed by SLUB or MCSP on its workers to unionize or bargain collectively should they wish to. IFC found evidence of functional grievance mechanisms in place including regular staff meetings and one-on-one meetings, and staff can directly approach the HR manager or express opinions by email.

There have been no fatalities, major accidents or labor incidents (e.g. strikes or demonstrations) associated with the Project since groundbreaking in 2009. All staff are required to strictly observe company safety policies (e.g. use of safety harnesses where required) and the MCSP safety engineer and safety engineers of the main sub-contractor monitor safety practices and provisions closely, with personnel stationed at all times at potentially high-risk areas within the construction site. On-site equipment and facilities (e.g. electrical connections) are regularly checked and maintained to ensure functionality, and sub-contractors are required to immediately report any OHS incidents to MCSP. The construction site is de-dusted every day and cleaned every two hours during spring when it is windy and dusty, and appeared well organized with proper lighting provided to ensure safety.

The size and composition of the operational phase workforce will be determined by the Sponsor nearer the start of hotel operations. Before operation commences, SLUB will develop a detailed operational human resource policy and employee manual consistent with national and IFC performance standard requirements and with the Sponsor’s corporate social responsibility policies.


PS3: Pollution Prevention and Abatement

Up to four boilers will be installed at the hotel for use during operational phase – consisting of two 3.5 ton steam boilers (2.2MW capacity each) and two 5MW hot water boilers with emission specifications complying with IFC limits for small combustion facilities. Blow down tanks will be installed at the boiler room and laundry rooms to reduce the waste water discharge temperature to below 40 degree Celsius.

The hotel is expected to generate up to 327 m3 of waste water per day during operations, with expected parameters (BOD: 400mg/liter; Suspended Solids: 400mg/l) at the point of discharge (i.e. from the hotel) over IFC limits. The Company has obtained the required permit from the Water Supply Authority to discharge to the municipal sewerage system for subsequent treatment at the municipal waste water treatment plant (WWTP). SLUB has provided information confirming that discharge to surface water from the municipal WWTP will meet IFC standards.

Grease interceptors and petrol interceptors will be installed on site to process kitchen waste water and waste water at car parks for oil removal. Grease and sludge will be collected and disposed of by a licensed local sanitary waste management company. Storm and waste water will be discharged separately.

The total greenhouse gas (GHG) emission of this Project is estimated at about 15,000 metric tons CO2 equivalent during the operation phase, attributable to the consumption of grid electricity, fuels and the use of air conditioners and chillers.

At the construction site, solid construction wastes (about 5 tons generated per week) are sorted before collection by a licensed waste collection agency. Sub-contractors re-use on-site materials such as wood panels and wood chips, and use plywood and recycled steel as far as practicable to realize cost as well as resource savings. All subsurface soil dug up during construction from below ground is being re-used as construction materials.

It is expected that during the operational phase the hotel will consume on a daily basis an average 32,000kWh of grid electricity, 7,200 liters of diesel oil, 14,000MJ of liquefied petroleum gas, and 380m3 of water supplied by the municipal water company. These estimates have already taken into account savings (8 percent for energy and 5 percent for water) that will be realized from resource conservation measures to be taken by the hotel - see below for details. There will be no use of coal. Laundry and kitchen areas will have water meters installed.

Based on the above and other data provided by the Sponsor, the hotel is expected to have an industry water consumption benchmark value (m3/guest per night) which will fall within the “excessive” category of >0.9 (corresponding to the “luxury serviced hotels” segment in a temperate climate zone) according to IFC’s Environmental Health and Safety Guidelines for Tourism and Hospitality Development. On energy consumption (kWh/m2 serviced space), the expected index value for the SLUB hotel will fall within the “excessive” benchmark range of >410.

During operations the Sponsor plans to undertake resource saving measures such as the following: a) Using CO2 sensors to govern ventilation of large, variable-occupancy public rooms; b) Heat/cooling recovery from guestroom exhaust system by using heat pipes; c) Free-cooling system for swimming pool; d) Thermostatic control of fan coil units and air handling units; e) Using high efficiency chillers, pumps and fans; f) Chilled/hot water pipes, condensation drain pipes, and air-conditioning ductworks will be thermally insulated; g) recovering heat from kitchen refrigeration equipment for hot water heating; and h) turning off the lights in certain areas of the hotel (e.g. offices) at certain times of the day. As mentioned above, these measures are expected to result in energy and water savings of 8 percent and 6 percent respectively.

The Sponsor will commission water and energy efficiency audits at the SLUB hotel by qualified resource efficiency professionals. These will consist of: i) initial design assessments recommending construction-phase modifications; and ii) final audits one year after hotel opening to recommend further opportunities for resource savings. These audits will recommend actions to realize resource savings to the extent feasible, and will indicate expected resource savings from implementing recommended actions. These may include SLUB encouraging resource conservation practice by guests in an appropriate manner. The Sponsor will implement audit-recommended actions.


PS4: Community Health, Safety and Security

The SLUB hotel is located in the city center of Ulaanbaatar next to the National Children’s Park. It is close to the commercial district with some residential buildings around but which are not in close proximity to the hotel site. SLUB has not received any complaints about noise and dust nuisances or project-related traffic incidents. Security guards are unarmed and there have been a few cases of theft on site but no security confrontations. IFC reviewed the contract between SLUB and MCSP which includes clauses requiring MCSP to take necessary steps to protect the public and public properties from negative impacts arising during construction. SLUB has specifications in writing on architectural and M&E design requirements pertaining to hotel operation under harsh/cold weather conditions. The hotel is designed to withstand up to Richter scale 8 earthquakes.

Construction-site fire prevention measures are described in MCSP’s Project Execution Plan document. Fire specifications described in documents provided to IFC (e.g. the M&E design brief) confirm that the hotel design will be compliant with requirements of the U.S. NFPA life and fire safety code and the local code in Mongolia. Smoke detectors, alarms, fire extinguishers, fire panels, automatic sprinklers and fire hoses will be installed at the SLUB hotel as will be emergency lighting and signage in public areas. The Sponsor will ensure accessible and unobstructed exits separated by reasonable distances, will put in place escape instructions in rooms, and will exercise caution in minimizing and properly storing potentially combustible materials.

The Sponsor will develop detailed life and fire safety (L&FS) operational policies and procedures for the hotel including but not limited to emergency preparedness and response procedures, provisions for regular fire drills and fire training for all staff, and a schedule to regularly check and maintain fire fighting and prevention equipment and facility. The Sponsor will commission a post-construction audit by a qualified fire safety engineer to confirm that the SLUB hotel construction works were completed in compliance with U.S. NFPA and local code requirements.

During construction and up to the end of 2010, about 2 million cubic meters of ground water have been drained from the site in order to ensure necessary conditions for laying solid building foundations and constructing basement areas. The extracted groundwater is discharged into the nearby Selbe River. Approval by the Mongolia Water Authority is in place to perform this operation. The Sponsor worked to ensure that groundwater extraction would be completed by end of 2010. This was to ensure that no groundwater would be discharged into the frozen river over winter, which could potentially flood nearby areas.

There have been concerns expressed by local stakeholders that this process might draw water from and deplete the underground aquifer which supplies drinking water to local residents. SLUB confirmed that this is not the case – dewatering has been occurring at a level down to 11.4 meters below ground, while the underground aquifer is at a much deeper level of 40 meters or further below ground. The Sponsor confirms that on-site groundwater levels will be monitored for an additional six months after the completion of dewatering works or when the water level has stabilized, whichever is later.

There was another concern in the public domain that the drained groundwater would be discharged together with construction wastes thereby polluting the Selbe River. IFC verified during site inspection that groundwater is transported in water pipes to minimize potential contamination by construction waste, and SLUB confirms that initial silt deposits have been removed from the groundwater before discharge into the Selbe. IFC therefore concludes that discharged groundwater does not carry with it construction wastes and silt deposits have been removed.

The risk of legionella contamination in the Hotel’s water systems is minimized by adopting air-based rather than water-based cooling. Hot water systems will be maintained at 60°C or above for the purposes of legionella control. In addition, the SLUB hotel will conduct regular monitoring for legionella in its hot water systems during operation.


PS5: Land Acquisition and Involuntary Resettlement

In 1998, a business entity (“Montana LLC”) acquired the use rights of a 0.49-hectare land plot from the Ulaanbaatar City Administration of Land Affairs, Property Registration Authority (“the Land Authority” which represents the Mongolian Government as the land owner), according to Decree No. A/115 approved on May 20, 1998 by the Governor of the Capital City of Mongolia. Land usage was stated as “hotel and office” according to the land use agreement. This 0.49ha site was part of a broader 35.4ha National culture and recreational park (“National Children’s Park”) used by local residents.

In 2006, the Ulaanbaatar Municipal Government established a master plan to develop the National Children’s Park area which included a hotel development component. MCS and the Sponsor entered into joint venture to develop the SLUB Hotel Project, and accordingly acquired the use rights of the 0.49ha site from Montana LLC in 2006. Since the 0.49ha site did not provide enough physical space for this Project, SLUB subsequently reached agreement in 2007 with the Land Authority (representing the Mongolian Government as the land owner) to acquire from it the use rights of a larger 3ha site according to Decree No. 473 of the Governor of the Capital City of Mongolia.

Cadastral maps confirm that the original 0.4ha site is part and parcel of the larger 3ha site, which also used to be part of the broader National Children’s Park. The land use agreement for the 3ha site allows SLUB to use the site for the purpose of “service and hotel” over a 60 year period. IFC’s review confirms that the 3ha site was previously used as a park for public recreation purposes and did not involve physical relocation or economic displacement of local communities.

The Land Authority is working with another business entity in a public-private partnership to develop about 30 hectares of the National Children Park’s area into an amusement park with green areas, which is expected to start operating in several years. At the time of IFC’s visit, part of the amusement park was already accessible to the public, while other parts were under development and fenced. The Land Authority is also in the process of developing a 960ha national park in the southwestern Bayanzurkh district of Ulaanbaatar, and a 54ha park in the Bayaugol area. MCS is exploring opportunities to contribute to development of the above-mentioned park areas - for instance – by working to create green space in the National Children’s Park in an area adjacent to the SLUB hotel site, and to plant trees in the Bayanzurkh and Bayaugol parks.

Over the past few years there have been public and media concerns in Ulaanbaatar that this Project would take away public park areas from local residents, and that the process of land transactions should be more transparent. IFC’s review concluded that while this Project has affected local community access to an area previously designated as a park, there are initiatives underway by the local Government both to create new park areas and to upgrade the existing National Children’s Park, and that MCS which is a shareholder of SLUB is making efforts to contribute to these initiatives. The Sponsor will ensure that SLUB regularly document these efforts and publicly disclose them in an appropriate manner, as part of its ongoing local stakeholder engagement work – see the next section for further details.

The Sponsor is a leading global hotel group committed to leadership in corporate citizenship and sustainable development, with a view to operating in such a way as to balance the interests of diverse stakeholder groups. Its corporate social responsibility statements (http://www.shangri-la.com/en/corporate/aboutus/socialresponsibility) describe its position on issues related to the environment, sustainability, health and safety, employees, supply chain, stakeholder relations, philanthropy, and biodiversity. During construction and operational phases this Project is expected to generate a substantive number of local employment opportunities. During operations, further job and local business opportunities will be created through its supply chains. MCS has been working with the Mongolian Government Land Authority to explore ways to contribute to park development in Ulaanbaatar. Expanding upon this work and consistent with the Sponsor’s corporate social responsibility standards, the Sponsor, as part of the hotel-level ESMS (refer to PS1 section), will develop a systematic approach to stakeholder engagement for its operations in Ulaanbaatar. To this end, the Sponsor will develop a hotel-level policy and procedures on stakeholder engagement including an annual stakeholder engagement plan which will detail SLUB’s actions in this regard. These documents will also describe means by which SLUB will appropriately disclose project-related E&S information on a regular basis (e.g. monitoring results of groundwater level; participation in the greening of the National Children’s Park; waste discharge information; life and fire safety audit results; energy and water efficiency initiatives and results). The above will foster proactive communications between the Sponsor and local stakeholders.

For more details on the project, contact: Mr. Tony Ng Senior Project Manager Shangri-la International Hotel Management Limited Tel: +852-2599-3000 Fax: +852-2599-3613 Mr. Allan Er Project Manager Shangri-la Ulaanbaatar Hotel LLC Tel: +976(11)326602 Fax: +976(11)326643 http://www.shangri-la.com SLUB will place a local language advertisement in a major local newspaper in Ulaanbaatar to alert the public that IFC’s ESRS/ESAP is available for access. SLUB and MCSP will post the local-language ESRS and ESAP outside their respective offices and at the main entrance of the hotel site; and the same documents in English and local language on the corporate websites of the Sponsor and MCS, or provide a web- link to IFC’s disclosed ESRS and ESAP.