Mongolian Government, Donors Discuss Progress, Coordinate

UNCLAS SECTION 01 OF 05 ULAANBAATAR 000790

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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

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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

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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

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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