Identifier
Created
Classification
Origin
06ULAANBAATAR673
2006-09-08 08:48:00
UNCLASSIFIED
Embassy Ulaanbaatar
Cable title:  

World Bank Offers Prescriptions for Investment Climate

Tags:  ECON EAID EFIN EAIR PGOV PREL MG 
pdf how-to read a cable
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UNCLAS SECTION 01 OF 03 ULAANBAATAR 000673 

SIPDIS

SIPDIS

STATE FOR EAP/CM AND EB/IFD/ODF
TREASURY PLEASE PASS USEDS TO IMF, WORLD BANK
MANILA AND LONDON FOR USEDS TO ADB, EBRD
MCC FOR MONGOLIA DIRECTOR HALLMARK

E.O. 12958: N/A
TAGS: ECON EAID EFIN EAIR PGOV PREL MG
SUBJECT: World Bank Offers Prescriptions for Investment Climate
Problems

Ref: ULAANBAATAR 576

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000673

SIPDIS

SIPDIS

STATE FOR EAP/CM AND EB/IFD/ODF
TREASURY PLEASE PASS USEDS TO IMF, WORLD BANK
MANILA AND LONDON FOR USEDS TO ADB, EBRD
MCC FOR MONGOLIA DIRECTOR HALLMARK

E.O. 12958: N/A
TAGS: ECON EAID EFIN EAIR PGOV PREL MG
SUBJECT: World Bank Offers Prescriptions for Investment Climate
Problems

Ref: ULAANBAATAR 576


1. SUMMARY: A recent World Bank report provides a concise,
well-documented account of the problems -- particularly corruption
-- affecting Mongolia's investment climate. It also offers
recommendations on how to tackle these problems. While the Spring
session of Parliament passed tax reform and anti-corruption
legislation, the Bank noted that, while welcome, these steps would
not be enough. Mongolia also needs to make administrative changes
and increase transparency to reduce opportunities for corruption,
take steps to make bank lending on collateral less risky, and
address Mongolia's high transport costs (with one recommendation
being a partial Open Skies agreement). The report serves as a
useful benchmark for the USG and other donors to consider future
efforts to support the improvement of Mongolia's business climate.
END SUMMARY.

The World Bank's Report
--------------


2. In late June, the World Bank held a roll-out workshop to
introduce its new study of Mongolia's investment climate-its
problems and remedies: "Mongolia: Promoting Investment and Job
Creation-An investment climate assessment and trade integration
study". The report's executive summary can be found at
www.worldbank.org/mn.


3. The World Bank acknowledged that many previous studies had
identified the problems which hindered Mongolia's growth. It sought
to distinguish its study by relying more on hard data and actual
practices in its description of the problems, and also to benchmark
Mongolia against other countries. It also sought to focus as much
or more on the solutions to these problems.

The Problems: Corruption and Lack of Transparency
-------------- --------------


4. Six areas were regarded by over half of Mongolian firms as a
severe obstacle to investment: corruption; the cost of financing;

tax rates; access to land; tax administration; and macro-instability
policy. The level of concern in Mongolia for these and another 13
problems was usually much higher than for other countries in East
Asia, or in Europe and Central Asia. The Bank added that Mongolia,
which faces inherent development disadvantages due to its remote,
landlocked location and severe climate, could ill afford such
additional investment impediments.


5. Key problems identified:

-- Corruption and lack of transparency. " The evidence indicates
that corruption and a lack of transparency and accountability
pervade almost every sphere of business activity. Mongolian
businesses recognize this, and corruption is the most frequently
cited impediment to doing business in Mongolia. The analysis
further suggests that the consequence of this has been the growth of
a culture of operating in the 'shadow,' which has gotten in the way
of firms accessing finance, building market relationships, enhancing
productivity, growing and creating jobs."

-- High finance cost: "Interest rates have declined in recent
years, but they continue to be 10-15% higher in real terms than in
other countries. The degree of bank-based financial intermediation
in business activity is low. Less than a third of the firms have a
bank loan. Unlike firms in China and Malaysia, Mongolian firms rely
largely on internal funds and finance from informal sources for
their investment and working capital needs. Long-term credit
remains scarce in Mongolia. ... The evidence, however, suggests that
the interest rates are high not only, or even primarily, because of
a scarcity of capital. Rather, the high interest rates are due as
much to systemic and structural factors that make bank lending a
risky activity and limit the range of financial products that are
available."

-- Customs: " Import tariffs levels are among the lowest in Asia.
... (However,) customs processes cause delays and are unpredictable.
...Corruption in the customs valuation and exemptions process is an

ULAANBAATA 00000673 002 OF 003


even larger problem. ...A quarter of firms that export and just
over a fifth of the firms that import report having to pay a bribe
in order to expedite customs clearance or avoid excessive duties."

-- Logistical: " The transport options Mongolian firms have for
getting goods to and from external markets are limited, costly and
unreliable. ...Mongolia's external trade is almost entirely
dependent on a single rail link... Border crossing charges (because
of the difference in gauge) make up nearly 25% of overall costs of
transport to the port (of Tianjin). ...Transit times to port are
uncertain because of the unpredictability of delays at the border.
...Inadequate harmonization of customs procedures with Russia and
China is a major cause of the delays, unpredictability and high
costs Mongolian firms face. ... Cross-border road linkages with
China are hampered by restrictions on the movement of trucks."

Prescriptions for Improvement: Partially Accomplished
-------------- --------------


6. Several among the World Bank's prescriptions for change in June
were quickly fulfilled. The Bank had urged major tax reforms and an
anti-corruption law -- matching longstanding calls by the U.S. and
other donors -- and these measures were adopted by parliament before
it adjourned in July (reftel). However, the World Bank noted that
these steps would not be enough by themselves.

-- Administrative changes: " Reform efforts need to go beyond
changes to the tax code or passage of anti-corruption legislation to
restructuring the operations of the key agencies-the tax department,
the customs administration, and the inspections agency-that directly
interact with private firms and individuals. ... Without reforms in
tax administration to ...lower the exposure of firms to arbitrary
and predatory behavior on the part of tax inspectors, reforms in the
tax code are unlikely to achieve their aim. "

-- More openness: "Comprehensive reform of administrative processes
takes time. By adopting immediate measures to promote transparency
in government-business interactions, Mongolia can facilitate and
strengthen these reform initiatives by enabling private businesses,
industry associations and civil society groups to monitor the
progress of reforms and the degree to which actual practices conform
to prescribed law."

-- Measures to facilitate lending: "Existing gaps in the
institutional and legal framework for contract enforcement in
Mongolia, primarily in the area of bankruptcy, debt collection, and
the liquidation of collateralized assets make bank lending risky for
all banks and limit the range of financial products that are
offered. Measures to address some of these gaps would, by lowering
the risks associated with lending, lower the risk premiums that are
in part responsible for the high cost of finance, and lower the high
collateral requirements that reduce access to finance."

-- Addressing transport difficulties: "Completion of the road
connecting Ulaan Baatar with the Chinese border, construction of
which is underway, will help. What can be done in the meantime?
Initiatives in three areas hold the most promise. The first is
reform of customs processes with a view to reducing delays and
rent-seeking. The second is completion of the tripartite Agreement
on Transit Transport with China and Russia. A nd third, the
government may wish to consider adopting a (partial) open skies
policy towards charter flights for tourists and air freight
services. ... A tripartite Agreement on Transit Transportation
between Mongolia, Russia and China is essential for Mongolia's trade
integration. Negotiations on such an agreement have been ongoing for
over a decade. "

Foreign and Mongolian businesses respond
--------------


7. Overall, the businesses received the World Bank report well,
agreeing publicly and privately that the data accurately conveyed
the problems faced. Everyone agreed that the report's strength was
in giving firm, clear definitions and real-world examples of
problems faced, rather than the hazy, opaque anecdotes that have
filled previous studies. However, post-rollout commentators among
the business community were quick to identify the key weakness of

ULAANBAATA 00000673 003 OF 003


this and other reports: How to implement its proscriptions? To
paraphrase the sentiments of one longtime leader of the banking and
foreign investment community, "The report is the best critique of
the ills yet, but how can we use its prescriptions, specific as they
are, to get anything done?"


8. One possibility may be for the USG and other donors to use the
report as a benchmark consider future efforts -- through pressure on
the government as well as targeted assistance -- to support the
improvement of Mongolia's business climate.

GOLDBECK