Mongolia/Partners Discuss National Development Strategy,

UNCLAS SECTION 01 OF 05 ULAANBAATAR 000229

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STATE PASS USTR, PEACE CORPS, OPIC, EXIMBANK, AND FEDERAL RESERVE
STATE FOR EAP/CM, EAP/EP, AND EB/IFD
USAID FOR DEIDRA WINSTON
LONDON AND MANILA FOR USEDS TO EBRD, ADB
TREASURY PASS WORLD BANK, IMF USEDS

E.O. 12958: N/A
TAGS: EAID PREL EMIN SOCI MG
SUBJECT: Mongolia/Partners Discuss National Development Strategy,
Prioritization and Financing Needs at April 3-4 Technical Meeting

REF: A) 06 Ulaanbaatar 0165, b) 06 Ulaanbaatar 0790

SENSTIVIE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.


1. (SBU) SUMMARY: The Government of Mongolia (GOM) and external
partners, including bilateral and multilateral donors, international
financial institutions and international NGOs, met at the third
semiannual GOM/World Bank co-sponsored Technical Meeting in
Ulaanbaatar April 3-4. (Reftels summarize the previous two
meetings.) The main topic of this session was the GOM's
long-promised, newly-published National Development Strategy (NDS).
The meeting also included five breakout sessions for the working
groups formed at the last meeting to discuss development in specific
sectors, including energy, transport, rural development and
environment, urban planning and private sector development. Most
external partners agreed on the need for greater prioritization of
development objectives in the NDS and to address how to achieve
these, taking into account financial realities.


2. (SBU) External partners' views diverged after that, with some
stressing the need for more pro-poor development, some emphasizing
the centrality of infrastructure development, and others focused on
individual areas of interest such as the environment and education.
A number of GOM and other Mongolian representatives agreed with the
need for prioritization and expressed skepticism about the value of
such voluminous strategy documents, while at times expressing their
frustration at external partners' mixed messages. Charge and Acting
USAID Mission Director plus USAID cooperators attended the meetings.
END SUMMARY.

"We Mongolians Will Develop Mongolia Ourselves"
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3. (U) Prime Minister Enkhbold opened the technical meeting April 3
with a speech declaring that "Mongolians will develop Mongolia." At
the same time, he acknowledged that the NDS may not be perfect and
welcomed external partner comments. He also noted that, given the
tremendous resources required to implement the strategy, donor
assistance and private investment would still be needed. He then
said that mining sector development would be the GOM's main
priority, and he urged external partners "to pay attention to
promoting the direct investment that will be made through both
governments and private entities."

NDS: Everything But Prioritization Included
--------------


4. (SBU) The first half of April 3 was spent discussing the recently
published draft National Development Strategy, which is based on the
Millennium Development Goals. The 80-page (without annexes) NDS
document contains 120 priorities and 600 actions that are to be
carried out through 2021. (Electronic copies were forwarded to
EAP/CM and USAID ANE's Mongolia desks. Tech meeting documents are
available at www.worldbank.org/mn.) According to the GOM, the cost
to implement the NDS to achieve only Millennium Development Goals
(MDG) targets is estimated at US$14 billion, while a further US$22
billion will be needed to fully implement the strategy. (Note:
Mongolia typically receives US$150-250 million yearly in assistance
from all sources.) Given that Mongolia's nominal GDP in 2006 is
estimated at US$2.7 billion, it seems clear that implementing the
NDS will require significant donor and, more importantly, private
sector resources. Add to this the fact that some estimates for
resource requirements, for example in the energy sector, seriously
understate the tremendous investment needs of some sectors.


5. (SBU) The GOM offered two presentations on the NDS, one giving an
overview and one outlining near-term (2008-2012) actions. Partner
attendees observed that both presentations revealed the disjointed
nature of the NDS as well as the need for further consideration of

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how, rather than simply what, priority goals will be achieved. For
example, the GOM's presentations called for real GDP growth to
average 16.8% between 2008-12, largely on the basis of mineral
sector development. GDP growth from 2002-2006 averaged 7%.
However, in prioritizing sectors for investment in the near term,
infrastructure is dead last in ninth place, despite that fact that
mineral sector development will require massive infrastructure
improvements, especially in the energy sector.


6. (SBU) Both external partners and GOM officials expressed concern
at the lack of prioritization and the absence of concrete plans for
how to achieve priority objectives, and some expressed skepticism at
the likelihood of implementing yet another grand strategy document.
MP and former Prime Minister Amarjargal, while acknowledging that
the NDS is a decent starting point, noted that Mongolia had
developed many planning documents in the past, but said that they
were never implemented because no one has any incentive to do so.
MP Damiran expressed similar concerns, noting the large number of
strategies that had been developed in the past seventeen years, and
quoting a Russian expression on the risks of planning without
implementation: "Good dreams lead to hell, good efforts lead to
heaven."


7. (SBU) Representatives from the EBRD, ADB, UNDP and World Bank all
stressed the need for greater prioritization, with the EBRD
emphasizing the importance of quantifiable and measurable targets.
Others, including the Japanese Ambassador and the UNDP, suggested
that the GOM appoint a body to take charge of monitoring and
coordinating NDS implementation. (COMMENT: The GOJ has often urged
the creation of a "planning ministry" which many here see as
creating yet another layer of bureaucracy probably lacking in
sufficient authority to achieve the desired objectives.) Others
expressed concern that poverty reduction and social development not
be neglected in the NDS, with the UNDP Representative saying the
poverty reduction must remain the document's top priority.

Working Groups Achieve Mixed Results At Best
--------------


8. (SBU) Five working groups created at previous technical meetings
led break-out discussions on the first day of the technical meeting
and presented their results and plans for the next six months at a
plenary session on the following day. Each group was led by a
Ministry representative and co-chaired by an external partner. The
Energy Working Group, for example, was chaired by the Minister of
Fuel and Energy and co-chaired by USAID. Attendees noted that some
working groups - particularly the Education group - functioned well
and achieved significant results (and therefore didn't even meet at
this session),while others illustrated the lack of GOM engagement
on certain key issues, especially energy and private sector
development. In the energy sector, the observation was made that
Minister was "too busy" to be involved in the Working Group in the
six months since the last technical meeting. For private sector
development, the responsible ministry (of Industry and Trade) did
not organize even one working group meeting and asked its external
partner co-chair to make the presentation at the technical meeting.
Moreover, many GOM presentations were little changed since the last
technical meeting in October 2006.

Disconnects: Attracting Private Investment, Restructuring and
Reform, Private vs. Public
Sector Roles, and Procurement Rules Hijinx
--------------


9. (SBU) Several common themes emerged from the working groups,
including the need to assess the GOM's role in developing each
sector, the financial sustainability of Government strategies, and
potential disjoints between stated Government policy and actions.
In transport and energy, in particular, the respective ministries

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have massive investment plans, but these often fail to take into
account the economic risks and returns of specific investments,
where financing will come from, and how essential private sector
investment will be identified and attracted. External partners in
both the Energy and Transport Working Groups called for greater
consideration of achieving market-driven, rationalized tariff
structures and the application of commercial operating principles in
service delivery. The disconnect between the GOM's stated policy
and its actions is especially strong in regard to private sector
involvement and the role of the Government in development.


10. (SBU) Across all sector strategies and in several presentations,
GOM counterparts noted the importance of private sector investment,
but several partner reps observed that ongoing actions would suggest
that this is merely lip service to a principle the GOM knows is
important to donors. The Minister of Construction and Urban
Development, for example, acknowledged that the Government's role in
the housing sector was to create a system conducive to investment
and create a favorable financial environment. However, the Ministry
is pushing a bill in the State Great Hural (SGH, parliament)
Parliament that would effectively give it a monopoly on the mortgage
market, while at the same time issuing bonds and hiring contractors
to build housing in line with the Government's 40,000 Apartments
Program.


11. (SBU) The Energy Ministry's presentation likewise acknowledges
the importance of private investment, donor reps noted, but fails to
outline a plan to restructure the sector (especially with regard to
tariffs and regulation),without which there will be little or no
private investment. Finally, a recent change in the public
procurement law allows ministries to enter into contracts without
tendering and to exclude foreign bidders from all investments under
ten billion tugrik (US$8.6 million, which includes more than 99% of
planned procurements for 2007). This clearly undermines the GOM's
stated aim to attract private investment and could result in the
signing of inside deals that result in shoddy work.

USAID-Led Energy Working Group Flags
Restructuring and Investment Needs, Risks
--------------


12. (SBU) In the Energy Working Group break-out session, USAID
expressed strong concerns about the financial sustainability of the
sector and the lack of progress in restructuring it. (Septel on
energy concerns will follow.) USAID also voiced concerns that
several planned or pending investments in energy assets will
actually increase the financial burdens on the already highly
indebted sector (a member of the State Property Commission put the
sector's debt at US$300 million). For example, a planned hydropower
plant to be financed by a US$300 million Chinese government loan
will produce electricity at a cost 50% higher than current retail
rates, by World Bank and USAID estimates, meaning that tariffs will
have to increase or its operation will have to be subsidized by the
state or other generating assets.


13. (SBU) Most troubling of all, these recent developments in the
sector suggest that it will continue to be a drag on Mongolia's
economy, rather than providing the economic boost that is so
essential to mineral development and to realizing the many goals
outlined in the NDS. For its part, the Ministry of Fuel and Energy,
represented by the Director of the Policy Department, acknowledged
that the sector is bankrupt and that tariffs need to be increased.
Unfortunately, the Minister's own recent public pronouncements -
that tariffs will not be increased and that new energy capacity will
actually reduce tariff rates - suggest that the Ministry's
presentation only sought to tell external partners what they wanted
to hear. (COMMENT: Energy provision and pricing are seen as
bellwether issues, either of which, according to political party
reps on both sides of the aisle, could become common cause for

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citizens at all levels of society, filling the streets with
protestors.) During a closing plenary discussion on April 4, the DCM
reiterated that the energy sector needed reform and restructuring
plus an improved business climate if it is to attract the
substantial amounts of private sector FDI needed.

Private Sector Working Group Focuses on SMEs,
IFI Assistance to Mining Development
--------------


14. (U) The Private Sector Working Group session consisted of two
presentations: one by the Ministry of Industry and Trade (MIT),
dealing primarily with a proposed law on small and medium
enterprises (SMEs) and a government scheme to provide concessional
loans to SMEs; and a presentation by the EBRD about proposals by it,
the World Bank Group and ADB to provide technical assistance to the
GOM and equity and debt financing to promote the development of
mining and related infrastructure in Mongolia. An MIT
representative indicated that the Government had earmarked 15
strategic mineral deposits which they wanted to develop, starting
with only a few key deposits. He noted the Government's desire to
ensure that the process of mining development be fair to Mongolian
citizens, transparent and that the Government would be a fair
partner in implementing projects to develop these strategic
deposits.

Little Discussion on Declining Investment Environment
-------------- --------------


15. (SBU) Partners later observed that very little was said during
the day and a half technical meeting about the marked decline in
Mongolia's investment climate in 2006 for mineral development, as
demonstrated by the Frasier Institute's recent ranking of countries
with mineral resources. According to that report and as cited
during the technical meeting, Mongolia fell from 33rd to 62nd out of
65 countries in terms of attractiveness for investments in the
mineral sector. Most analysts feel this drop was due to the passage
of the Windfall Profits Tax (WPT),which imposes a 68% tax on copper
and gold exports, and to changes in the Minerals Law, which included
ill-defined clauses calling for government ownership of large stakes
in so-called "strategic deposits" of up to 50%. In his closing
remarks, World Bank Mongolia Country Director David Dollar did note
that new mining regulations "may discourage investmen." Dollar and
others, including the IMF Representative, noted that the new public
procurement law allowing ministries to do direct contracting may
result in poor quality work and corruption. On the other hand, in
his opening statement, World Bank Group Vice President Michael Klein
said nothing of the deteriorating investment climate, but said he
was encouraged by Mongolia's focus on transparency.

Mongolia's Macroeconomic Policy Vulnerable To Shocks
-------------- --------------


16. (SBU) Both the IMF and the World Bank expressed concerns about
the sustainability of current macroeconomic policy, under which the
GOM rapidly expanded its budget in 2006, especially on social
spending subsidies for newly weds, children, babies, etc. The IMF
Resident Representative urged the GOM to reduce its vulnerability to
internal and external economic shocks, meaning potential downturns
in mineral prices which would seriously affect GOM revenues. This
is in line with a message delivered regularly by the IMF, World Bank
and others that increases in recurring expenditures such as wages
and social benefits on the back of revenues from unusually high
copper prices is not sustainable. The IMF also expressed concern
about a lack of budget transparency, noting that the Government's
40,000 apartments construction program is not accounted for in the
budget. The ADB Representative made a similar point in the Energy
Working Group session, regarding Government subsidization of the
energy sector, which is not clearly accounted for and is not

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targeted to benefit those least able to pay.

Donors Also Need To Prioritize
--------------


17. (SBU) Towards the end of the technical meeting, several
Mongolian participants expressed some frustration at donors' calls
for prioritization. The Prime Minister's Economic Advisor
complained that external partners insist that the GOM consult with
civil society and the public, but then expect the GOM to set
priorities among diverse issues of public concern. Another speaker
called for external partners to make recommendations about what
should be Mongolia's development priorities. The meeting closed
with a speech from the Finance Minister, who thanked the external
partners for their critiques of and suggestions for the NDS. He
also asked that each of the working groups submit a plan of action
to the Ministry by the end of the month, outlining what will be
accomplished by the next technical meeting in early September.

Goldbeck