Үндэсний Стратегийн Хүрээлэн

Institute for National Strategy

Submission to Standing Committee of State Structure Long term Sustainable development Vision of Mongolia/2016-2030/

Mongolia has aspirations to:

  • rapidly and sustainably grow its economy
  • improve its status and competitive position amongst the family of the world’s nations, and
  • improve the quality of life and social indicators for its citizenry

 These aspirations are laudable; however a well proven adage states “you cannot be great at everything”. In formulating a strategic development plan for Mongolia, its architects and planners need to recognise this truth and focus their strategic efforts on areas where Mongolia can develop competitive advantage and overcome geographic disadvantage. This strategy should not preclude broad based approaches designed to promote small and medium sized business, but it should recognize, that large projects are what will stimulate the fastest and most sustainable growth.

In 2014 INS re-endorsed a 2012 report – “A Six-Point Action Plan for Mongolia: Enabling Business to Create Employment and Growth” (Regaining credibility …..#nationalstrategy.mn)which was presented to the incoming Altankhuyag Government.  The six pillars of this action plan were:

 

Stabilize the economy;

 

 

Develop a prioritized and fundable infrastructure plan;

 

Create policy and regulatory stability;

 

Stabilize and strengthen the mining sector;
Reduce government’s role in business, streamline bureaucracy;

 

Deliver critical major infrastructure projects.

 This report highlighted three key points:

  • Strong economic growth would come from building essential capital assets that would generate new national income
  • This growth needed to be enabled through significant investment in Mongolia basic infrastructure
  • The economy was unbalanced and highly vulnerable to the commodity cycle and extreme weather events.

 The report warned that the government’s cash reserves and Mongolia’s banking sector were most inadequate to fund large projects. “The investment to fill this significant gap must come from competent national and international investors: yet we are putting at risk the basic conditions to remain attractive as an investment destination. Investors need strong legal protection, a stable regulatory and policy environment, prudent economic management, and leadership that resist reactionary and populist pressures. We do not yet provide this: investors increasingly view Mongolia as unsafe”.

Since late 2012 Mongolia’s economic fortunes have waned, partly due to three external economic factors – the global financial crisis, the slowdown in China and the collapse of critical commodity prices.

However the vagaries of Mongolian politics and the government’s interference in key business matters have also driven falling confidence in Mongolia as a desirable investment destination.  The INS article 2 in 2014 laid out the requirements for the GoM to regain credibility in the eyes of international investors. Mixed progress has been achieved, but there has been progress.

The Saikhanbileg government has successfully resolved the biggest issue, resolving the dispute with Rio Tinto, allowing signing of the $6 billion project finance package and a restart of the underground project at Oyu Tolgoi LLC. This puts Mongolia back on the map as being a place where banks are again prepared to lend large amounts of risk capital.

Addressing and resolving the following critical factors will enhance Mongolia’s ability to deliver on major strategic reform and sustainably grow the economy

  • Despite the now nearly negative GDP growth, it is imperative to maintain fiscal discipline.
    • Stimulatory programs need to be driven and funded by the private sector and bilateral support programs to take pressure off the GoM balance sheet.
  • The GoM must be more realistic about PPP programs – especially what it expects to get in terms of free carry from the organizations funding the large infrastructure projects.
    • What is critical is getting infrastructure built cost effectively. It is not critical or essential that government needs to be the owner of the asset
  • Organize government agencies that interface with complex infrastructure and mining projects along “delivery unit” lines.
    • Investors want to see a very clear and practical demonstration of how the GoM will make it easy to start, implement and commission a project or business initiative – across all levels of government
  • A resolution of protracted legal disputes between GoM and business entities is overdue
    • Place the remaining disputes under a single point of “competent accountability”
  • Genuinely reform the SOE structures
    • Ensure they have professional management and eventually privatize them.
    • In the short term professional boards need to be put in place, and political connectedness removed.
  • Be clear on policy about not further investing in – or interfering with – mining assets that are designated strategic.
  • Genuinely reform the exploration sector, so that Mongolia has some chance of enjoying some benefits from the next upswing in the commodity cycle
    • The current policy and execution of it has been most disappointing and needs to be quickly reformed.
    • Many who genuinely participate in this sector (who spend real money and do meaningful exploration) are highly critical of the policy and the managing agency.

Regardless of the final strategy, or the strategic goals and development targets or the “principles for development” that are espoused in this 2016-2030 Vision document several key principles need to be addressed to underpin high chances of success. Amcham has espoused these as:

  • Promote free markets and free enterprise to unleash the potential of the private sector
  • Ensure rule and stability of law
  • Foster regional integration, and
  • Promote economic diversification-while pursuing major mining and infrastructure projects, removing price controls and de-regulating the economy and sensible privatizing state property

 Importantly, China is source of finance and investment into Mongolia and it is an important market for all of the Mongolia’s products. It is important that Mongolia “sensibly” value-adds to its minerals and agricultural products within Mongolia and that it becomes much better at receiving international level prices for exports.

But it is also critical for Mongolia and its democratic future that it opens up broad trading and partnership arrangements with many countries and other strong regional powers. Mongolia cannot afford to become overly-dependent on China as this will impact its ability to improve in many areas.

Mongolia needs to overcome its “two neighbor landlocked” status for non-commodity based enterprises. It needs to differentiate itself in several sectors where the ability to trade does not rely heavily on passage permission through China or Russia. This factor remains a major concern for industrial development.

To achieve this Mongolia needs to attract interest from foreign investors who can fund and facilitate market entry into certain countries. For investors to take Mongolia seriously they need to

  • Be satisfied that Mongolia’s Laws are competitive
  • Be confident that disputes are solved according to international mores
  • Be comfortable that Mongolian business leaders understand what it takes to be competitive internationally and can partner in an internationally acceptable manner

Developing a highly efficient agricultural sector which leads Mongolia to becoming a net food exporter is a laudable target. Critical success factors include

  • Leveraging leading edge technologies for cold weather production and food processing
  • Providing world class agricultural extension support to farmers
  • Removing price controls and subsidies is essential if exporting is the target
  • Providing sensible investment incentives

 Several sectors lend themselves to non-Chinese and Russian domination. These include material and clothing production, tourism and cultural exports, entertainment, information technology and any industry that is global in nature. However the key here is that you must attract and allow the expertise to enter and leave the country and allowing the investors, to repatriate interest, loans and profits freely.

 Mongolia is a large country with a very small population. Population growth is one stimulant for GDP growth and building larger internal markets. Mongolia should carefully consider an immigration policy that grows its pools of capital, and expertise to be world-class. The knock on effect into the economy can be very significant. INS recognizes this as a sensitive subject and considerable thinking has also been done at the national level but is also mindful of the adage “populate or perish”.

 The focus of this article is not on sustainable social and environmental development or green development but rather where the Mongolian government should focus its efforts on managing the economy and business environment. Mongolia is a remote location for investors to consider, therefore government needs to promote and prove it has a world class investment climate and that businesses can succeed in Mongolia.

 Institute for National Strategy

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