Mongolian Government, Donors Discuss Progress, Coordinate

UNCLAS SECTION 01 OF 05 ULAANBAATAR 000790 SIPDIS SIPDIS STATE FOR EAP/CM, EB/IFD AND EB/TPP AID FOR ANE/ESA FORD/WINSTON USDOC FOR ZHEN-GONG CROSS TREASURY FOR T.T. YANG;PASS USEDS TO IMF, WORLD BANK MANILA FOR USED TO ADB LONDON FOR USED TO EBRD E.O. 12958: N/A TAGS: EAID EFIN PREL PGOV MG SUBJECT: Mongolian Government, Donors Discuss Progress, Coordinate Development Efforts At Second Bi-annual Technical Meeting Ref: Ulaanbaatar 0187 SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. ¶1. (U) SUMMARY AND INTRODUCTION: Government of Mongolia (GOM)officials and external partners (donors) convened the second bi-annual technical meeting October 9-10 to discuss progress in key areas since their first meeting in February 2006 (reftel),as well as to discuss plans for key sectors such as transport, infrastructure, education and the environment. World Bank's Mongolia Country Director David Dollar and Mongolian Minister of Finance Bayartsaikhan presided over the meeting, which consisted of presentations on the sectors listed above by the relevant GOM ministries, followed by discussions led by a lead discussant from the donor side. ¶2. Among those represented at the meeting were a) IFIs and Multilaterals including the World Bank, UNDP, UNFPA and IMF; b) key Embassies from the U.S., Germany, Japan, Korea, Turkey and Netherlands; and c) bilateral assistance agencies including USAID, JICA, Swiss Development Organization (SDC),GTZ, and others. Representatives from the Mongolian side included Prime Minister Enkhbold, the Ministers of Health, Roads, Transport and Tourism, Education, Construction, Agriculture, numerous MPS, and dozens of officials from relevant ministries. Private sector representatives and journalists also observed the meeting. ¶3. Cross-cutting themes of the discussion included the need to consider regional cooperation and engagement (in transport, environment, and energy),the importance of creating a sound environment for private sector investment (particularly in transport and energy),and the need for greater prioritization by the GOM of its development goals across all sectors discussed. One other theme that emerged from the discussion, which is a cause for concern among many external partners, is the Government's reluctance to adjust tariffs for infrastructure (energy and transport especially) in order to attract the massive private investment required to meet their development goals. The GOM also previewed its much-awaited but not yet finalized national development strategy. END SUMMARY AND INTRODUCTION. National Development Strategy (NDS) -------------- ¶4. External partners welcomed the government's initiative to draft and preview its NDS, while stressing the need for broad-based consultation, realism in setting goals, a set of measurable targets and indicators to gauge progress in implementing the NDS, and the need for the NDS to link to other government planning documents, including sectoral strategies, the Millennium Development Goals, and the state budget. External partners also noted that the government's role in the development of the NDS should be carefully considered and crafted since the private sector will be the primary driver of economic growth and job creation. Education -------------- ¶5. Since the February technical meeting, the main accomplishment in the education sector was the finalization of a Master Plan through 2015. Lead discussant Japan praised this achievement, as well as Mongolia's newly established eligibility for the World Bank's Fast Track Initiative, which gives it access to up to US$29.5 million in grant funding. Several speakers pointed to challenges remaining in the sector, including high drop-out rates, rural-urban ULAANBAATA 00000790 002 OF 005 disparities, low pre-school enrollment, a mismatch between labor market requirements (particularly vocational skills) and the current curriculum, and the incomplete transition to a 12-year primary and secondary school system. Institutional reforms, including improved management of resources and budget transparency, a review of quality standards - especially at private institutions - and improved monitoring and evaluation systems were also said to be essential to achieving sectoral goals. Private Sector Development -------------- ¶6. Both the government and other participants noted several significant improvements to the private sector investment environment since the last meeting. Not least among these is the passage of anti-corruption and anti-money laundering laws in the spring session of Parliament. The GOM also announced that two of the main recommendations of the February technical meetings have already been implemented: a one-stop shop for business approvals has been initiated and copies of materials about all licensing and permit procedures are now available on a Ministry of Industry and Trade website. The private sector working group - led by lead discussant GTZ - praised this progress, while noting that work remains to be done in tax administration, bankruptcy, collateral registration, and increasing the courts' capacity to resolve commercial matters. Some speakers also noted the mixed messages from the government on tax and mining policy and emphasized the need for a clear statement of the GOM's plans in these areas. The DCM (then Charge') weighed in to seek the GOM's recommitment to market economics and reform and the centrality of private sector development. Minister of Finance Bayartsaikhan reassured participants that the GOM was indeed committed to becoming a market economy and did "not want to go back." On October 10, the Prime Minister made similar points (see para below). Environmental Worries and Challenges -------------- ¶7. The Ministry of Nature and Environment led with a presentation highlighting the many environmental challenges facing Mongolia, including land degradation, desertification, deforestation, a decline in water resources, loss of biodiversity, increasing urban air pollution, solid waste management, and frequent natural disasters. The Ministry's main objectives in the near and medium term includes land restoration at mining sites, reforestation and desertification prevention, reducing environmental pollution, better water resource management, and improved biodiversity conservation. ¶8. In response, the representative from SDC stressed the need for a new vision for the management of Mongolia's environment. According to this vision, environmental protection would be considered in the context of promoting the country's economic development. He said Mongolia could become a leader in eco-tourism or even "eco-mining". He noted that many of Mongolia's environmental problems are examples of "tragedies of the commons". Land degradation and overgrazing, for example, could be addressed by granting land use rights so that land users have an interest in protecting the resources they use. Likewise, he suggested that moving from a conservation to a managed profit-making mentality in forestry could improve forest conservation, while increasing revenues, some of which could be used in the environmental sector. Other speakers agreed with the importance of taking a cross-sectoral view of environmental problems and how they might be resolved. ¶9. The representative from the Dutch Embassy in Beijing emphasized ULAANBAATA 00000790 003 OF 005 the importance of fostering an NGO community and public-private partnerships that can contribute to the Ministry's efforts. Such partnerships would prove especially vital, given the very limited resources of the Ministry and the inherent interest of some NGOs and many private companies in protecting the environment. GOM officials pointed to poverty as being a main cause of environmental degradation, saying that poor people have more urgent concerns than protecting the environment. They also pointed to the decline in state monitoring and enforcement of regulations and acknowledged that the ministry lacks the resources to adequately manage protected areas. Infrastructure -------------- ¶10. The infrastructure discussion focused primarily on energy and transport, with USAID and the World Bank being the lead discussants. Speakers repeatedly returned to the central theme of Mongolia's massive needs for infrastructure investments and the corresponding need to prioritize given resource restraints. The World Bank's energy advisor underlined the complex of factors that makes Mongolia's infrastructure problems so challenging: 1) the high cost incurred by high population dispersion and climate; 2) the high poverty rate and its impact on cost recovery; and, 3). the importance of heat, both for basic survival and as a political issue. Energy: Pivotal to Mongolia's Development and Survival -------------- ¶11. The presentation by the Ministry of Fuel and Energy highlighted the various challenges facing the sector, including insufficient capacity (demand for power will outstrip existing supply beginning in 2008),the inefficiency of existing infrastructure, and balancing cost recovery with accessibility. ¶12. USAID, as the lead discussant, joined other donors in emphasizing the importance of a financially self-sustaining and environmentally sound energy sector. USAID urged the Ministry to build a consensus with relevant stakeholders - including GOM, IFIs, other donors and private investors - on the importance of the sector for Mongolia's development and investment needs and likely sources of funding. USAID further urged the Government to prioritize, sequence, and synchronize the tasks that need to be accomplished to create a financially self-sustaining energy sector. Several GOM officials - including the Finance Minister and Deputy Energy Minister - made clear that two priority tasks in the near to medium term are: 1) the construction of a 220 kilovolt power line from Ulaanbaatar to the Oyu Tolgoi copper mine site (despite the expressed desire of the current mining license holder to build a mine-mouth power plant),and, 2) a hydropower plant on the Egiin River, which is to be funded by a $300 million concessional loan from China (despite environmental concerns voiced by donors). ¶13. The question of energy tariffs was raised several times during the discussion. According to the Finance Minister, energy tariffs in Mongolia have not been raised in five years and will not be raised until after the winter of 2007. This policy increasingly undermines the already poor financial health of the energy sector and sends a strong message to potential private investors that the Mongolian energy sector is not worth investing in. USAID highlighted the need to correct these pricing distortions in order to be able to attract the private sector investment that will be necessary to meet Mongolia' future energy needs. USAID also pointed to the importance of clearly defining the respective roles of the ULAANBAATA 00000790 004 OF 005 Ministry as an energy policy maker in contrast to the Energy Regulatory Authority, which has the legal right to review and approve increases in tariff rates, while balancing the need for cost recovery with the need for not overburdening customers. ¶14. The ADB and the World Bank Country Directors also stressed the need for Mongolia to address energy tariffs sooner rather than later, if the Government's stated goal of increasing access to energy supplies is to be achieved and if much needed private sector investment is to be attracted. The ADB emphasized the importance of regional cooperation - both in terms of energy imports from Russia and coal or energy exports to China - and expressed its interest in providing support on international best practice in this area. The Deputy Minister of Fuel and Energy expressed support for encouraging private sector investment in energy, but he cautioned that energy tariffs are a political consideration. Transport -------------- ¶15. A presentation by the Ministry of Roads, Transport and Tourism underscored the massive investment needs of Mongolia's roads, railways and airports. The ADB Country Director, however, criticized the presentation for failing to cover the key issues, including questions about financing, creating an enabling environment for private investment, maintenance requirements for transport infrastructure, and cost recovery strategies. Several speakers expressed agreement that the Government must set priorities for investment, given the large needs and the very limited resources, and must maintain existing transport assets. As with energy, the government expressed reluctance to adjust tariffs, despite their stated interest in private sector investment. CLOSING COMMENTS OF PRIME MINSTER -------------- ¶16. Prime Minister Enkhbold unexpectedly attended the closing session of the technical meeting on October 10. The Prime Minister's speech acknowledged the central importance of a strong private sector to the country's future economic growth and said the government would continue to pay close attention to creating a favorable environment for investment. He stressed that Mongolia needs more donor grants to improve governance and to support the education, science, health, and environmental sectors. He said the government would rely on soft loans to expand energy, transport, information technology and tourism infrastructure, while working to attract foreign investment in mining and other export-oriented industries. Finally, PM Enkhbold said that only through good economic policy and the efficient use of mining revenues would Mongolians benefit from the country's vast mineral wealth. To this end, he said the Government will support initiatives to increase transparency in the mining sector. SHAPING NEXT STEPS AND THE NEXT MEETING -------------- ¶17. In the closing session of the meeting, all participants agreed to meet again in six months. In the intervening time, working groups on private sector development, the environment, and education will continue to function with participation from relevant ministries. (USAID is part of the Private Sector Working Group, together with GTZ, ADB, the World Bank, and the Ministry of Industry and Trade.) During final comments, the head of the new European Union office in Mongolia suggested that the agricultural sector should be discussed at the next meeting. However, no final ULAANBAATA 00000790 005 OF 005 decisions were made about the subjects to be addressed six months hence. Some participants expressed support for having break-out sessions at the next meeting, but this idea was rejected due to the limited time available. USAID suggested that at least half of one day be devoted to the energy sector at the next meeting. An official from the Ministry of Industry and Trade said that the progress of future meetings should be measured against a list of criteria. Moreover, he said that the meetings should involve some kind of pledging exercise and should not be simply an opportunity "for donors to express their opinions" but also to support this process with needed resources. MINTON