MCC Official Briefs on Hope for Late 2007 Compact

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E.O. 12958: N/A
TAGS: EAID PREL EINV ECON PGOV MG
SUBJECT: MCC Official Briefs on Hope for Late 2007 Compact

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.


1. (SBU) SUMMARY AND COMMENT: Millennium Challenge Corporation (MCC)
Europe, Asia, and Pacific Managing Director Frances Reid visited
Ulaanbaatar January 31 to February 3. During her meetings with
Prime Minister Enkhbold, Finance Minister Bayarsaikhan, and MCC
Mongolia's National Council (NC) and its leader, Financial Secretary
Khurlbaatar, Reid: 1) reaffirmed MCC's commitment to do everything
possible to complete a compact with Mongolia in 2007, 2) described
two Government of Mongolia (GOM) decision options (a few
well-developed projects with a compact in 2007 OR further
development of more complex projects (the medical diagnostic and
treatment center or DTC and vocational education) with a compact in
2008, and, 3)overviewed on-going USG budget realities which
suggested funding may not become available until FY-08. She reviewed
the status of Mongolia's current project proposals (valued at about
US$200 million) in light of the NC's preference for a compact in

2007. Reid said the railroad project appears to be generally in
good shape with a few key requirements to be met; ditto the property
rights. A narrower vocational education project may be possible,
but Mongolia's DTC proposal would require extensive additional
development which risked delaying a compact until 2008, and MCC
declined to fund the information communications technology project,
which is complex and appears capable of attracting private funding
and development. Reid hoped that due diligence on the remaining
Compact elements could be finalized by the end of April, enabling
MCC's investment committee and board to review and approve the
proposals and, if approved, to submit the compact for Congressional
review by late this summer. Although MCC funding in FY07 appears
unlikely, the objective is to position Mongolia for signing as soon
as funding is available, probably at the beginning of FY08. END
SUMMARY.


2. (SBU) COMMENT: Perhaps reflecting low expectations conveyed by
MCC last December, Reid's message that Mongolia had some proposals
worthy of pursuing as part of a Compact was generally received with
relief and even some joy by those working on or familiar with its
long and difficult progress. Some on the NC had feared MCC might
totally reject Mongolia's proposals, which represented three years
of hard and sometimes politically difficult work. Some remorse is
natural given the Mongolians' investment of time and political
capital and the demise of some project elements. But for the most
part, the GOM and the NC seem eager to press forward to finish the
work remaining and conclude its Compact this year. END COMMENT.

VISIT MEETING OVERVIEW
--------------


3. (U) MCC Europe, Asia, and Pacific Managing Director Frances Reid
visited Mongolia January 31 to February 3. During her visit, she
met with the Ambassador and Embassy staff and briefed visiting EAP
DAS Christensen on the status of Mongolia's proposals and MCC's
thinking regarding achieving a compact. In separate sessions, she
also met with Ministry of Finance State Secretary Khurelbaatar, who
also chairs Mongolia's NC, and NC Secretariat Chief Enkhtuya, a
dozen NC members, NC working group chairs, the EBRD's local
representative, the Minister of Finance, and the Prime Minister (the
latter two meetings are summarized in paras 4 to 9 and 10 to 14
below).

FINANCE MINISTER BRIEFED ON PROGRAM MEMO STATUS AND PROSPECTS, USG
BUDGET CONCERNS, AND NEXT STEPS
-------------- --------------


4. (SBU) Minister of Finance Bayartsaikhan told Managing Director
Reid and the Ambassador February 2 that many Mongolians attached
great importance to MCC funding. He stated, for example, that the
head of a major local firm was planning to finance the building of a
Diagnostic Treatment Center (DTC) but was waiting for information on
MCC's health project, which included a DTC, before deciding how to
proceed. Bayartsaikhan hoped that an MCC Compact would entice more
U.S. firms to come to Mongolia, adding that his Ministry was ready
to cooperate with MCC and the Mongolian NC to achieve a Compact in

2007. He said he was concerned about the U.S. Congress's failure to

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pass a budget this year and how it might affect Mongolia's chances
for a Compact.


5. (SBU) Director Reid said that she had traveled to Mongolia to
update government officials on where Mongolia currently stood
vis-`-vis a Compact and the Compact's future direction as well as to
discuss next steps on how to come to closure on the Compact. She
praised the work of FinSec Khurelbaatar, the NC's Chairman, and Ms.
Enkhtuya, noting somewhat diplomatically that she had been impressed
with the hard work and effort coming from the NC and the working
groups in relation to Compact development. Reid gave a brief
explanation of the budgetary situation in the U.S., said that MCC
could not say how much funding it might receive this year given the
Continuing Resolution situation, and that it was unlikely Mongolia
would be able to receive any money that could be put to a Compact in
FY07. But she was hopeful that FY08 (explaining FY08 begins in
October 2007) would see a significant allocation of funds from
Congress that could allow MCC to fund a Compact with Mongolia. She
stressed that although MCC was a Bush Administration initiative, it
had enjoyed broad bipartisan support in Congress.


6. (SBU) Mongolia's Compact development, Reid went on to say, was
more advanced than roughly half of the 11 countries currently
competing for Compact monies, and was on par or slightly behind the
rest. Reid said she hoped to see Mongolia's Compact proposal
receive MCC Board approval this summer, placing it "towards the
front of the line" when MCC funding finally opened up with the start
of the new fiscal year on October 1st. She and the NC, she said,
had agreed during their February 1 meeting that the best way to move
forward would be to look at which projects were best developed now
and could be ready (i.e., have primary due diligence and structuring
completed) by the end of April, the latest date possible for a
summer approval deadline. She said that both sides had agreed to
focus on the railway project, property rights (possibly with a
peri-urban leasing component),some aspects of the health proposal
(mainly centered on prevention) and a much-reduced version of the
Vocational Education project that could build on, but not copy, a
similar program currently being implemented through the ADB. She
stressed that MCC fully understood Mongolia's need for a DTC and
considered it to be a worthy project, but that experiences in other
countries showed that it did not make sense given the current state
of Mongolia's health system without substantial additional work and
integration into a much broader health initiative. She told the
Minister that MCC had recently submitted legislation that would
allow for the implementation of a simultaneous, second Compact with
one country, although she emphasized that it was not clear that such
a possibility would be approved by Congress, and suggested - with no
promises - that perhaps a more fully developed health project could
be the basis for such a second Compact. She sought the Minister's
assistance in ensuring that development of the current Compact
proposal would continue, that adequate funding for experts would be
maintained, and that government organizations would be encouraged to
allow their employees to continue devoting time to the development
of proposals.


7. (SBU) Reid concluded that she and FinSec Khurlbaatar were "riding
on the same horse towards a successful Compact with Mongolia." She
would work closely with him, through email, telephone and digital
video conferencing, over the next few months to keep Compact
development on course. Reid estimated Mongolia's final Compact, as
currently envisioned, could come to about US$200 million, although
she could not give an exact figure just yet.


8. (SBU) Minister Bayartsaikhan said he was ready to support her and
the NC's efforts with funding. He questioned the development of
what he understood to be new projects at this stage
(health-prevention and vocational education). Reid clarified that
these were not really new projects but rather aspects of current
projects upon which most work had already been done. The Minister
said he was comfortable with MCC's strategy, but felt talk of a
second Compact now was premature. The Ambassador expressed
appreciation to all those who had participated in this new and
complicated process, stressing that political commitment to the MCC
project had remained constant. He pointed out that MCC's

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Chairperson, Secretary of State Rice, had stated in a letter to
Mongolia's Foreign Minister just the previous week, that she was
"looking forward to completing a Compact with Mongolia in 2007" The
commitment from the U.S. side, the Ambassador emphasized, was very
strong.


9. (SBU) The Minister of Finance concluded the meeting stating that
completion of an MCC Compact was not about how much money Mongolia
would receive. He said that failure to achieve the Compact could
damage the reputation of the Government of Mongolia and that
completion of a Compact would represent the expansion of the U.S. -
Mongolia relationship.

NEED TO FINISH THE COMPACT, PM SAYS
--------------


10. (SBU) Managing Director Reid, accompanied by the Ambassador,
called on Prime Minister Enkhbold late on the afternoon of Feb 2 to
provide with an update on Mongolia's progress towards an MCC
Compact. Her briefing paralleled that provided to the Finance
Minister (see para's 4-9 above). She explained the current budget
situation in the U.S., saying that Congress's implementation of a
continuing resolution throughout FY07 meant MCC's funding was in
question. She expected that sufficient funding for MCC would be
allocated in October 2007, the beginning of FY08, and said her
objective in working with Mongolia was to ensure that Mongolia would
have a Compact already approved by end summer 2007 and ready for
signing once funds become available in October. She said many
countries were working towards a Compact with MCC but that she hoped
Mongolia would arrive at the "front of the line." To do this, MCC
and Mongolia's NC would have to focus on those projects that could
be made ready by the end of April, the latest deadline for a summer
2007 approval target date.


11. (SBU) Reid explained that MCC and the National Council had
decided to pursue the railway project, property rights project, some
aspects of the health project, a revamped version of the vocational
education project, and (subject to viability) possibly a peri-urban
leasing and agribusiness project. She explained that a Compact
could not be signed until MCC had in hand all funds required for the
entirety of Mongolia's proposal. Most due diligence and design work
had been completed on the various projects but some work remained.
She stated that she was committed to working with the NC to see that
every effort was made to complete all work required for Compact
presentation by the end of April. Reid asked the PM for his
government's assistance in wrapping up these loose ends, noting
particularly that "we need to make sure that all parties involved in
the anchor rail project are aware of the project and are willing to
support it" (Note: This refers to the GOM's need to gain Russian
cooperation as part of the joint Mongolian-Russian rail company.)
Reid praised the NC's work.


12. (SBU) Prime Minister Enkhbold welcomed Reid back to Mongolia,
saying he hoped she would bring good news. He said understood the
political shift in Washington but hoped that MCC's budget would be
approved soon. He went on to say that Mongolia had worked on a
Compact since 2004 and that meetings with the Ambassador upon his
arrival at post last September had lead him to believe that a
Compact could be reached in early 2007. Now, the PM said, Mongolia
would have to wait until the end of 2007. He said he recognized
that this delay was not Mongolia's fault, stressing that for him the
most important point was to complete the Compact and get the MCC
investment process started.


13. (SBU) PM Enkhbold said that the Mongolian people had placed
great hope in the MCC and were waiting eagerly for it to begin lest
the Mongolian people start to lose confidence. But if the Compact
could be implemented in good time, it would signify a deepening of
U.S. - Mongolian relations, he said. It was also important for
Mongolia's relations with its neighbors in the region. In 2005
President Bush had called Mongolia its "third neighbor" and, as a
symbol of this neighborly relationship, implementation of the MCC
Compact would help Mongolia improve its relations with its
geographic neighbors.

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14. (SBU) The Ambassador noted that MCC was a completely new way to
do things, and political commitment to the project had remained
constant. He referred to Secretary and MCC Chairperson Rice's
letter to the Foreign Minister in which she stated she was "looking
forward to completing a Compact with Mongolia in 2007" The
commitment from the U.S. side, the Ambassador emphasized, was very
strong. The U.S. budget has been frozen for everything, he said,
including MCC, something PM Enkhbold, as head of government, could
certainly understand and empathize with.

MINTON