Mongolia's MCA Compact Nears Critical Juncture

UNCLAS SECTION 01 OF 04 ULAANBAATAR 000809

SIPDIS

SENSITIVE
SIPDIS

STATE FOR E, EB, EAP/CM, AND EAP/RSP
STATE PASS NSC FOR WILDER
MCC FOR F. REID AND J. HALLMARK
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: PREL EAID KMCC ECON MG
SUBJECT: Mongolia's MCA Compact Nears Critical Juncture

REF: Ulaanbaatar 0790

Sensitive But Unclassified -- Not for Internet distribution.


1. (SBU) SUMMARY: Mongolia has submitted a rough draft of a program
memo which -- with substantial hard work by both Mongolian and U.S.
counterparts over coming months -- may enable a Millennium Challenge
Account (MCA) Compact to be signed in early Spring 2007. A Compact
will likely involve a significant expansion of bilateral aid
(perhaps as much as 30 times our annual non-military assistance
levels spread over five years),provide a boost to Mongolia's
economic growth in coming years, and be a tangible, significant
symbol of U.S. support for this friendly nation transforming from a
single party, state-led economy to a multi-party democracy with a
market-driven economy. However, it's been a long, bumpy ride since
Mongolia was in the first group of MCA eligible countries announced
in May 2004. Mongolians are feeling a little road weary, and any
further delay in achieving a Compact will become a serious political
problem for bilateral relations. Assuming Mongolia makes a good
faith effort to bring the Compact to closure -- which they give
every indication of doing -- it will be in our own interest, in
post's view, to make a maximum effort to ensure a Compact can be
signed next Spring. END SUMMARY.

Where We Are
--------------


2. (U) On October 20 (Washington time),Mongolia's MCA National
Council submitted the elements of a draft program memo, drawing from
its submission, and retained many of the requisite professional
experts outlined in the most recent MCC Aide Memoire. (Note: While
MCC asked for a consolidated program memo, the GOM submitted four
separate documents on each of the major projects. MCC then combined
these into the draft program memo, albeit one without an overall
Executive Summary.) MCC set the October 20 date as part of a
timeline which could realistically enable signing a Compact in early
spring 2007.


3. (U) Mongolia's proposal, after much winnowing and due diligence,
now consists of four major projects:
-- A Health Project to build a national diagnostic and treatment
center (DTC) linked to a network of global, national and upgraded
rural health centers.
-- An Education Project to build a demand-driven, national
vocational education system focused initially on up to seven growth
industries or sectors. Vocational training programs would help
prepare Mongolian workers for jobs in such industries as mining,
which is attracting more interest from U.S. investors.
-- An Information & Communication technology (ICT) Project, to
improve the capacity, reliability and accessibility of Mongolia's
ICT network, as well as lower access costs; and -- A Railway Project
to improve the capacity and efficiency of Mongolia's main railway
artery to secure critical shipments.
-- The ICT, Health and Vocational Education proposals are
interlocked and reinforce each other: the development of Mongolia's
communication technology will help schools and hospitals upgrade
their facilities and will permit distance learning and remote
diagnosis for those who live in the country's vast rural areas.


4. (U) While the GOM did not submit updated materials by October 20,
it has indicated that it wants to include two smaller projects in
its proposed Compact. Both are an outgrowth of Mongolia's original
proposal for the Compact, which included a major housing project, an
idea which fell aside during MCC due diligence over the last year.
A Housing Finance Project would focus on affordable housing finance
for low income ger area residents and strengthen competition in the
financial sector with the objective of reducing interest rates. A
Property Rights Project would strengthen property rights and improve
land management to enable development in ger settlements and
surrounding areas.


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A Tangible Demonstration of U.S. Support
--------------


5. (SBU) While there are many unknowns pending completion of due
diligence and the finalization of the Compact, the projects now on
the table could involve MCC investments of US$250-300 million over a
five year period. This is about six times what the United States
otherwise has spent annually on non-military aid to Mongolia --
through USAID, the proceeds of agricultural commodities donated
under PL-480, and regionally and centrally administered aid
programs. The five-year total is roughly equal to one year's total
of all forms of aid, loans, assistance provided by all donors. The
Compact number is also substantial by comparison to Mongolia's $2
billion a year economy, and the projects could provide a significant
boost to Mongolian economic growth in future years. In short, a
Compact will be a very large and tangible demonstration of U.S.
support for a country which has made many right choices since its
peaceful democratic revolution in 1990 and its transformation toward
a market economy.

A Long, Bumpy Ride
--------------


6. (SBU) Mongolia was among the first batch of 16 countries
announced as eligible in May 2004. Since then, it has watched as
ten of its "MCC cohort class" signed compacts, while Mongolia
remained mired in the preliminary stage. Even if the current
timeline is met, MCC disbursements will not be immediate -- and, in
Mongolia's harsh climate, any projects requiring external
construction may well not get started until Spring 2008 (the
construction season runs from May to October). In Mongolian
political terms, that will mean the MCC process will have taken one
full, four-year parliamentary election cycle -- with the
announcement of Mongolia's eligibility coming just before the June
2004 election, and the start of implementation occurring just prior
to the June 2008 elections. For politicians eager to show
accomplishments to voters, that seems like an eternity. GOM
officials had hoped to sign an agreement in 2006 as part of
Mongolia's 800th anniversary celebrations.


7. (SBU) Mongolian frustration with this lengthy process is not far
beneath the surface. The last grueling year of waves of due
deliberation teams has been particularly dyspeptic, with the
penciled in date for a Compact signing receding from Fall 2006 to
Spring 2007. In August, while discussing Mongolia's deliberations
on the size of its 7th six-month troop rotation to Iraq, Foreign
Minister Enkhbold asserted that the public perceived a link between
the Iraq deployments and MCC, and was increasingly dismayed that the
MCC Compact remained only on the distant horizon. In October,
explaining why Mongolia was exploring issuing $300-500 million of
high yield sovereign debt (Mongolia's first-ever such bond
issuance),a central bank official attributed it in part to the
delay in receiving MCC funds.

Mistakes Were Made
--------------


8. (SBU) The frustration and disillusionment is partially a
reflection of unrealistic expectations and euphoria after Mongolia
was announced as MCC eligible in May 2004. With no precedents to
inform them on the new MCA process, Mongolian officials assumed they
could whip together a proposal and a large check from the MCC would
soon be sent their way to be deposited into the GOM's coffers. They
opined that the forthcoming quick MCC cash would allow them to
ignore IMF recommendations.


9. (SBU) Once disabused of these notions, Mongolia then began its
long struggle to prepare a sound MCA proposal, but labored under
several major handicaps. First, after the June 2004 elections
resulted in a hung parliament, the weak and distracted government
made decision making problematic. This was true under both the

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'grand coalition' government -- which had 16 troubled months of
existence between September 2004 and January 2006 -- and by the
'government of national unity' which succeeded it. Not a day has
passed in the last two years without plausible rumors of the
government's imminent demise. Cabinets have suffered from poor
discipline, and the governments (and the MCC process) have had been
forced to rely on multi-party coalitions, something new for
Mongolia's young democracy. In short, while "grand coalition" PM
Elbegdorj provided personal support during his term, there has been
no strong, well-backed leader or political force which could ensure
a taut, disciplined MCA Compact preparation process.


10. (SBU) Second, as a government, Mongolia has a notably poor
planning capacity. Since 1990, Mongolia has enjoyed one of the
highest per capita aid totals in the world -- a cumulative US$1,000
per capita through 2004. However, the prioritization and project
planning has been done by donors. Fortunately, the donors talk and
coordinate amongst themselves, reducing overlap. Only this month,
after sustained cajoling by donors, has democratic Mongolia unveiled
its first attempt at a national development strategy (see reftel).
MCC's requirements thus were novel ones for Mongolia's government:
conduct a broad-based consultative process about possible projects;
prioritize and narrow these down; and submit a detailed,
economically and financially defensible investment justification.


11. (SBU) Mongolia's initial proposal in November 2004 was
considered too large and ill-defined; it was returned and Mongolia
was advised to rethink and narrow its proposal. Mongolia submitted
its revised official MCA proposal in October 2005. At that
juncture, six of the original 15 country members of the MCC class of
May 2004 had actually signed Compacts, and only Bolivia had yet to
submit a proposal. Mongolian officials had spent the previous year
running informal proposals by MCC-USA for reaction; unfortunately,
these proposals often appeared to be laundry lists of the pet
projects of a few influential members on Mongolia's MCA National
Council. Behind the scenes, the Council had vicious internal
battles and personality splits. The official proposal put forward
in October 2005 was improved but still flawed. This meant that
MCC-Mongolia started the due diligence phase with a complex proposal
which needed substantial work to shape into a viable Compact.


12. (SBU) While acknowledging that the process has been a learning
experience for them, Mongolian officials have been increasingly
assertive in rebutting what they believe are mistaken impressions.
First, they reject the notion that Mongolia has devoted few
resources to the preparation process. Council members state
Mongolia has spent over US$200,000 on its proposal since 2004, which
excludes the time spent by government officials on the working
groups in each sector. This has represented a substantial
investment of manpower and money for a country with tiny ministries
with official salaries ranging between US$100-$300 a month. Second,
officials complain that the MCC-USA due diligence experts sent by
MCC over the last year were "parachuted" into Mongolia for brief
periods, that it can be difficult to later obtain feedback on their
findings, and the guidance they provide is often conflicting and
confusing. The due diligence visits have stretched Mongolia
National Council's resources, the officials comment, without
necessarily moving the Compact much forward. More than one member
of the Council has stated some version of the sentiment that, "if
MCC were serious about completing the compact, they would send all
the experts out to Mongolia in unison to collaborate with the
working groups for an extended period of, say, two or three months.
Only that way could we hope to hash out a final plan acceptable to
all."


13. (SBU) Third, officials have visibly begun to tire of homilies
on Mongolia's need to take action to ensure the country stays
eligible for MCA assistance. One official recently noted, for
example, that Mongolian indeed had taken action to combat corruption
through major legislation passed by Parliament in July. He then
commented acerbically that he had recently looked through

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Transparency International corruption perception tables, and noted
that Georgia, which signed an MCA Compact a year ago, had sharply
lower scores than Mongolia. Why, he asked rhetorically, was
Mongolia being held to a higher standard?

Comment: Too Important to Fail
--------------


14. (SBU) In post's view, signing a Compact next year will be a
major advance forward for bilateral ties, a fitting achievement for
the 20th anniversary year for U.S.-Mongolia diplomatic relations.
If a Compact is concluded on time and money soon thereafter
disbursed, Mongolia's angst and tribulations of the last two years
will be forgotten as the benefits of projects begin to be felt.
Rep. Kolbe's visit in early September underlined to the Mongolians
that Congress will not tolerate any shortcuts, and will insist that
Compacts be well justified. Nevertheless, if Mongolia makes a good
faith effort to bring the Compact to closure -- and we believe that
the GOM is for the most part doing just that -- it will be
imperative that the U.S. also make maximum effort to assist the
Mongolians to prepare a satisfactory Compact. Mongolia is a low
income country barely a decade and a half away from effective
colonial rule by the Soviet Union. If the proposed projects are
fundamentally sound, we will be far better served by helping the
Mongolians get the project justifications right. Arguing that the
Mongolians have not made enough efforts on their own would fall on
deaf Mongolian ears and sound self-justifying. It will also be a
fundamentally unfair characterization of the high degree of
political commitment here to a long-term partnership with the U.S.,
and of the real effort being made by a large number of harried
Mongolian officials to meet our requirements.


15. (SBU) As a success or as a lingering failure, the Compact will
be a major landmark in bilateral diplomatic relations. Exaggerating
a bit, one council member told us, "If the Compact does not come
through, America will be finished here." That is hyperbole, but the
stakes for the relationship are now very high. Both sides will have
to display a firm commitment, and provide the time and personnel for
the closest collaboration, to complete this joint endeavor on
schedule.

Minton