2010 Mongolia Investment Climate Statement, Part 3 of 3

UNCLAS SECTION 01 OF 11 ULAANBAATAR 000029

SENSITIVE
SIPDIS

STATE PASS USTR, USTDA, OPIC, AND EXIMBANK
STATE FOR EAP/CM AND EEB/CBA
USAID FOR ANE FOR D. WINSTON
USDOC FOR ZHEN-GONG CROSS

E.O. 12958: N/A
TAGS: EINV ECON OPIC KTTB USTR MG
SUBJECT: 2010 Mongolia Investment Climate Statement, Part 3 of 3

REF: 09 STATE 124006

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1. As requested ref, post provides the 2010 Mongolia Investment
Climate Statement. This cable, Part 3, contains sections A.10
through A.16. See septels for sections A.1-A.9

A.10 Competition from State-Owned Enterprises (SOEs)

Mongolia passed and implemented a competition law applying to
foreign, domestic, and state-owned entities active in Mongolia. As
a practical matter, competition between state-owned and private
businesses had been declining for the simple reason that many
parastatals have been privatized. The exceptions are the
state-owned power and telecom industries, a national airline
(international only at present),the national rail system
(half-owned by Russia),several coal mines, and a large copper
mining and concentration facility (also half-owned by Russia).

Although the trend had been for the GOM to extract itself from
ownership of firms and other commercial assets, both the current
Minerals Law of Mongolia and the 2009 Uranium Law bring the state
back into mining. (See Chapter A.1: Openness of Government to
Foreign Investment for fuller discussions of both the 2009 Uranium
Law and Minerals Law) Under both laws, the GOM granted itself the
right to acquire equity stakes ranging from 34% to perhaps 100% of
certain deposits deemed strategic for the nation. Once acquired,
these assets are to be placed with one of two state-owned management
companies: Erdenes MGL, for non-uranium assets; or MonAtom for
uranium resources. These companies are then mandated to use the
proceeds from their respective activities for the benefit of the
Mongolian people.

In addition, the GOM has publically discussed using the expected
proceeds from mining to underwrite SOE projects in variety of
sectors, beyond its current mining portfolio. These include
operations in flour milling, meat-processing, telecommunications,
and pharmaceuticals. Business observers have found such plans
unsettling; for rather than use the revenues to create
infrastructure or to provide affordable financing, the GOM seem to
want to enter into direct competition with both foreign and domestic
private investors. From statements by GOM policy representatives,
investors might conclude the GOM is clearly considering giving its
SOE preferential financing at rates not available to commercial
firms.

The role of state as an equity owner, in terms of management of
revenues and operation of the mining asset, remains unclear at this
point. Currently, most GOM's assets are managed by professionals
appointed by the State Property Committee (SPC),which ultimately
answers to Parliament and the Prime Minister. How the SPC selects
management and boards of directors remains non-transparent, but
observers perceive the process to be politicized, with Parliament
playing a key role in appointments.
There are some concerns over the capacity of the GOM to deal with
conflicts of interest arising from its position as both regulator
and owner of these strategic assets. Specifically, firms are
worried that the GOM's desire to maximize local procurement,
employment, and revenues may comprise the long term commercial
viability of any mining project. In addition, discussions are
underway to set up three new state-owned holding entities to manage
assets in three priority areas -- mining, energy, and infrastructure
-- then take the companies public to raise investment revenues
through the capital markets.

Mongolia currently lacks a sovereign wealth fund (SWF); however, the
GOM has expressed an interest in using mining revenues to create
such a fund. The issue remains under review.

A.11 Corporate Social Responsibility (CSR)
It is early days for corporate social responsibility (CSR) in
Mongolia. Most western companies make a good faith effort to work
with the communities in which they invest. These efforts usually

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take the form of specific projects aimed at providing missing
infrastructure-wells, power, medical and educational structures-or
such support for education as books and scholarships. The larger
western firms tend to follow accepted international CSR practices
and underwrite a full range of CSR activities across Mongolia;
however, the smaller ones, lacking sufficient resources, limit their
CSR actions to the locales in which they work. Only the largest
Mongolian firms regularly undertake CSR actions, with small to
medium -sized enterprises generally (but not always) limiting the
use of limited resources to underwrite CSR actions.
Generally, firms that pursue CSR are perceived favorably, at least
within the communities in which they act. Nationally, responses
range from praise from politicians to cynical condemnation by
certain civil society groups of CSR actions as nothing more than an
attempt to "buy" public approval.

A.12 POLITICAL VIOLENCE

Mongolia is peaceful and stable. Political violence is rare.
Mongolia has held nine (9) peaceful presidential and parliamentary
elections in the past 16 years. However, a brief but violent
outbreak of civil unrest followed disputed parliamentary elections
on July 1, 2008. Accompanied by some property destruction and
bodily injury, the unrest was quickly contained and order restored.
There has been no repeat of this civil unrest since July 1.
Mongolia held peaceful presidential elections in May 2009 in which
the incumbent president was defeated and power smoothly transitioned
to the current president

Mongolia has an ethnically homogenous population: 97percent of the
population is Khalkh Mongol. The largest minority, numbering an
estimated 90,000 people, is Kazakh (Muslim),concentrated in the far
western part of the country.

There have been no known incidents of anti-American sentiment or
politically motivated damage to American projects or installations
in at least the last decade. However, Mongolia has seen a gradual
and perceptible level of rising hostility to foreign nationals in
general and to Chinese nationals in particular. This hostility has
led to some instances of improper seizure of Chinese-invested
property; and in more limited cases acts of physical violence
against the persons and property of Chinese nationals resident in
Mongolia. Other Asians living in Mongolia have expressed concern
that they may inadvertently become victims of this hostility.

A.13 CORRUPTION

Corruption in Mongolia, including bribery, raises the costs and
risks of doing business. Corruption corrodes market opportunities
in Mongolia for U.S. companies as well as the overall Mongolian
business climate. It also deters international investment into
Mongolia, stifles economic growth and development, distorts prices,
and undermines the rule of law.

It is important for U.S. companies, irrespective of their size, to
assess the business climate in Mongolia to have an effective
compliance program or measures in place to detect and prevent
corruption, including foreign bribery. U.S. individuals and firms
operating or investing in such foreign markets as Mongolia should
take the time to become familiar with the relevant anticorruption
laws of both Mongolia and the United States in order to comply with
them, and where appropriate, they should seek the advice of legal
counsel.

The U.S. Government seeks to level the global playing field for U.S.
businesses by encouraging other countries to take steps to
criminalize their own companies' acts of corruption, including
bribery of foreign public officials, by requiring them to uphold
their obligations under relevant international conventions. A U. S.
firm that believes a competitor is seeking to use bribery of a
foreign public official to secure a contract should bring this to
the attention of appropriate U.S. agencies, as noted below

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Current Views on Mongolian Corruption

In mid-2005, the USAID Mission to Mongolia, in collaboration with
USAID/Washington and The Asia Foundation (TAF),funded a corruption
assessment conducted by Casals & Associates, Inc. (C&A) The
complete report is available at http://www.usaid.gov/mn. Follow-up
surveys of the problem show that the results of this assessment
remain valid in 2010. The study found that opportunities for
corruption continue to increase in Mongolia at both the "petty" or
administrative and "grand" or elite levels. Both types of
corruption should be of concern to Mongolians, but grand corruption
should be considered a more serious one because it solidifies
linkages between economic and political power that could negatively
impact or ultimately derail or delay democracy and development.
Several inter-related factors contribute to Mongolia's corruption
problem:

--A blurring of the lines between the public and private sector
brought about by systemic conflicts of interest at nearly all
levels;

--A lack of transparency and access to information, stemming in part
from a broad State Secrets Law that surrounds many government
functions and has yielded criticism that it renders the media
ineffective and hinders citizen participation in policy discussions
and government oversight;

--An inadequate civil service system that gives rise to a highly
politicized public administration and the existence of a "spoils
system;"

--Limited political will to actually implement required reforms in
accordance with the law, complicated by conflicting and overlapping
laws that further inhibit effective policy implementation;

--Weak government control institutions, including the Central Bank,
National Audit Office, parliamentary standing committees, Prosecutor
General, Generalized State Inspection Agency, State Property
Committee, and departments within the Ministry of Finance.

The aforementioned systemic shortcomings have allowed for an
evolution of corruption in Mongolia that "follows the money,"
meaning that graft on the most significant scales generally occurs
most often in the industries and sectors where there is the most
potential for financial gain. During the early 1990s, in the early
transition toward democracy and market economy, two areas that
offered particular opportunities for grand scale corruption at that
time were foreign donor assistance and privatization of state-owned
enterprises. As Mongolia later embarked on further policy changes
to institutionalize capitalistic practices, corruption reared its
head in the process of privatizing public land. As the economy
continues to develop, emerging areas for corruption include the
banking and mining sectors. There also are several areas that
provide stable and consistent opportunities for corruption, both
grand and administrative in nature, such as for procurement
opportunities, issuance of permits and licenses, customs,
inspections, the justice sector, among high-level elected and
appointed officials, and in the conduct a variety of day-to-day
citizen- and business-to-government transactions, notably in
education, health care, and city services.

Despite the fact that few of the conditions to prevent corruption
from getting worse are in place, the situation has not reached the
levels that are evident in many other countries with contexts and
histories similar to that of Mongolia. Perhaps more importantly,
there are a number of efforts underway to actively combat
corruption, including:

--Government commitments to international anti-corruption regimes
and protocols, such as the Anti-Corruption Plan of the Asian
Development Bank/Organization of Economic Cooperation and

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Development (ADB/OECD) and the United Nations Convention Against
Corruption (UNCAC);

--Development of a National Program for Combating Corruption and
formation of a National Council for coordinating the Program and a
Parliamentary Anti-Corruption Working Group;

--Implementation of an anti-corruption law that has included the
formation of an independent anti-corruption body;

--Short- and medium-term anti-corruption advocacy and "watchdog"
programs initiated by civil society organizations, often with
international donor support.

There is, in fact, time for Mongolians and the international
community to nurture these efforts and take further action before
corruption grows too large to rein in. In general, the main need in
Mongolia is to develop effective disincentives for corrupt behavior
at both the administrative and political levels. In its broadest
configuration, this implies a strategy of increasing transparency
and effective citizen oversight, as well as intra-governmental
checks and balances. Without these major changes, administrative
reforms may provide some small improvements, but they are unlikely
to solve the problem. Specifically, the aforementioned
USAID-sponsored report of 2005 makes several strategic
recommendations, which remain relevant in 2010, including:

--Diplomatic engagement focused on keeping anti-corruption issues on
the policy agenda, promoting implementation of existing laws related
to anti-corruption, and highlighting the need for further measures
to promote transparency and improved donor coordination;

--General programmatic recommendations to address conflict of
interest, transparency/access to information, civil service reforms,
and the independent anti-corruption body, with a definitive focus on
engaging civil society and promoting public participation utilizing
UNCAC as a framework;

--Specific programmatic recommendations to address loci of
corruption, such as citizen- and business-to-government
transactions, procurement, privatization, customs, land use, mining,
banking, the justice sector, and the political and economic elite

In addition, the reputable international anti-corruption NGO
Transparency International (TI) opened a national chapter in
Mongolia in 2004 (for more information, see: www.transparency.org).
U.S. technical advisors are working with TI to train Mongolian staff
to monitor corruption and to advocate on behalf of anti-corruption
legislation and, TI first included Mongolia in its annual
"Perceptions of Corruption" survey in September 2004. In that
initial survey, Mongolia ranked 85 out of 145 countries and its
score of 3 on the Corruption Perception Index was "poor." (TI's CPI
Score relates to "perceptions" of the degree of corruption as seen
by business people and country analysts and ranges between 10
(highly clean) and 0 (highly corrupt). TI's 2005 Survey ranked
Mongolia 85 out 158; and again Mongolia earned a "poor" score of 3.
In TI's 2006 survey, Mongolia had dropped to 99 out of 163
countries, receiving a score of 2.8-poor. In 2007, Mongolia was
still 99 but out of 179 nations and had achieved a score of 3.0, a
slight uptick but still poor. 2008 saw Mongolia drop to 102 out 180
nations, maintaining its poor score of 3. 2009 found Mongolia
dropping to 124 out of 180 nations, and declining to a poorer score
of 2.7, In short, Mongolia has declined.

One factor raising concerns about Mongolia's commitment to fight
corruption is the series of amnesties granted to Mongolians found
guilty of corruption or those under investigation for abuses. These
amnesties happen about every three years, usually through
presidential legislative action, with the most recent occurring in
late 2009. Because they allow corrupt officials and those who
enable them to avoid substantial prison time and fines for their
improper acts, these amnesties are demoralizing for the IAAC and the

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public, who question the value of tackling corruption with a
government lacking the will to hold malefactors to account.

Current Anti-Corruption Law

In 2006, Parliament passed an Anti-Corruption Law (ACL),a
significant milestone in Mongolia's efforts against corruption. The
legislation had been under consideration since 1999.
The ACL created an independent investigative body, the Independent
Authority Against Corruption (IAAC). The IAAC has four sections.
The Prevention and Education Section works to prevent corruption and
educate the public on anti-corruption legal requirements. The
Investigation Section receives corruption cases and executes
investigations. The third section collects, checks, and analyzes the
legally required property and income statements of government
officials. The fourth section, the IAAC's Secretariat, handle s
administrative tasks. The IAAC formally began operations in August

2007. (For a review of the IAAC's activities from its inception
through late 2008 and a general assessment of the public's current
views of corruption in Mongolia see the series of Mongolia
Corruption Benchmarking Surveys prepared for USAID Mongolia:
http://www.usaid.gov/mn; and by The Asia Foundation Mongolia:
http://asiafoundation.org

Anti-Corruption Resources Available to U.S. Citizens about the
U.S. Foreign Corrupt Practices Act: In 1977, the United States
enacted the Foreign Corrupt Practices Act (FCPA),which makes it
unlawful for a U.S. person, and certain foreign issuers of
securities, to make a corrupt payment to foreign public officials
for the purpose of obtaining or retaining business for or with, or
directing business to, any person. The FCPA also applies to foreign
firms and persons who take any act in furtherance of such a corrupt
payment while in the United States. For more detailed information on
the FCPA, see the FCPA Lay-Person's Guide at:
http://www.justice.gov/criminal

Guidance on the U.S. FCPA: The Department of Justice's (DOJ) FCPA
Opinion Procedure enables U.S. firms and individuals to request a
statement of the Justice Department's present enforcement intentions
under the anti-bribery provisions of the FCPA regarding any proposed
business conduct. The details of the opinion procedure are
available on DOJ's Fraud Section Website at
www.justice.gov/criminal/fraud/fcpa. Although the Department of
Commerce has no enforcement role with respect to the FCPA, it
supplies general guidance to U.S. exporters who have questions about
the FCPA and about international developments concerning the FCPA.
For further information, see the Office of the Chief Counsel for
International Counsel, U.S. Department of Commerce, Website, at
http://www.ogc.doc.gov. More general information on the FCPA is
available at the Websites listed below.

Other Assistance for U.S. Businesses: The U.S. Department of
Commerce offers several services to aid U.S. businesses seeking to
address business-related corruption issues. For example, the U.S.
and Foreign Commercial Service can provide services that may assist
U.S. companies in conducting their due diligence as part of the
company's overarching compliance program when choosing business
partners or agents overseas. The U.S. Foreign and Commercial
Service can be reached directly through its offices in every major
U.S. and foreign city, or through its Website at www.trade.gov/cs.


The Departments of Commerce and State provide worldwide support for
qualified U.S. companies bidding on foreign government contracts
through the Commerce Department's Advocacy Center and State's Office
of Commercial and Business Affairs. Problems, including alleged
corruption by foreign governments or competitors, encountered by
U.S. companies in seeking such foreign business opportunities can be
brought to the attention of appropriate U.S. government officials,
including local embassy personnel and through the Department of
Commerce Trade Compliance Center "Report A Trade Barrier" Website at
tcc.export.gov/Report_a_Barrier/index.asp.

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Exporters and investors should be aware that generally all countries
prohibit the bribery of their public officials, and prohibit their
officials from soliciting bribes under domestic laws. Most
countries are required to criminalize such bribery and other acts of
corruption by virtue of being parties to various international
conventions discussed above.

Other Instruments: It is U.S. Government policy to promote good
governance, including host country implementation and enforcement of
anti-corruption laws and policies pursuant to their obligations
under international agreements. Since enactment of the FCPA, the
United States has been instrumental to the expansion of the
international framework to fight corruption. Several significant
components of this framework are the OECD Convention on Combating
Bribery of Foreign Public Officials in International Business
Transactions (OECD Antibribery Convention),the United Nations
Convention against Corruption (UN Convention),the Inter-American
Convention against Corruption (OAS Convention),the Council of
Europe Criminal and Civil Law Conventions, and a growing list of
U.S. free trade agreements. Mongolia is party to the UN Convention
Against Corruption and prohibits the bribery and solicitation of its
public officials.

OECD Antibribery Convention: The OECD Antibribery Convention entered
into force in February 1999. As of December 2009, 38 nations are
party to it, including the United States (see http://www.oecd.org).
Major exporters China, India, and Russia are not parties, although
the U.S. Government strongly endorses their eventual accession to
the Convention. The Convention obligates the Parties to criminalize
bribery of foreign public officials in the conduct of international
business. The United States meets its international obligations
under the OECD Antibribery Convention through the U.S. FCPA.
Mongolia is not a party to the OECD Antibribary convention.

UN Convention: The UN Anticorruption Convention entered into force
on December 14, 2005, and there are 143 parties to it as of December

2009. The UN Convention is the first global comprehensive
international anticorruption agreement. The UN Convention requires
countries to establish criminal and other offences to cover a wide
range of acts of corruption. The UN Convention goes beyond previous
anticorruption instruments, covering a broad range of issues ranging
from basic forms of corruption such as bribery and solicitation,
embezzlement, trading in influence to the concealment and laundering
of the proceeds of corruption. The Convention contains
transnational business bribery provisions that are functionally
similar to those in the OECD Antibribery Convention and contains
provisions on private sector auditing and books and records
requirements. Other provisions address matters such as prevention,
international cooperation, and asset recovery. Mongolia is a member
of the UN Convention Against Corruption.

Local Laws: U.S. firms should familiarize themselves with local
anticorruption laws, and, where appropriate, seek legal counsel.
While the U.S. Department of Commerce cannot provide legal advice on
local laws, the Department's U.S. and Foreign Commercial Service can
provide assistance with navigating the host country's legal system
and obtaining a list of local legal counsel.

Anti-Corruption Resources: Documents and Contacts

Resources for combating corruption in global markets include the
following:

--Information about the U.S. Foreign Corrupt Practices Act (FCPA),
including a "Lay-Person's Guide to the FCPA" is available at the
U.S. Department of Justice's Website at:
http://www.justice.gov/criminal/fraud/fcpa.

--Information about the OECD Antibribery Convention including links
to national implementing legislation and monitoring reports is
available at: http://www.oecd.org. See also new Antibribery

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Recommendation and Good Practice Guidance Annex for companies:
http://www.oecd.org

For general information about anticorruption initiatives, such as
the OECD Convention and the FCPA, including translations of the
statute into several languages, go to the Department of Commerce
Office of the Chief Counsel for International Commerce at:
http://www.ogc.doc.gov.

--Transparency International (TI) publishes an annual Corruption
Perceptions Index (CPI). The CPI measures the perceived level of
public-sector corruption in 180 countries and territories around the
world. CPI is available at: http://www.transparency.org. TI also
publishes an annual Global Corruption Report which provides a
systematic evaluation of the state of corruption around the world.
It includes an in-depth analysis of a focal theme, a series of
country reports that document major corruption related events and
developments from all continents and an overview of the latest
research findings on anti-corruption diagnostics and tools. See
http://www.transparency.org.

--The World Bank Institute publishes Worldwide Governance Indicators
(WGI),which six dimensions of governance in 212 countries, including
Voice and Accountability, Political Stability and Absence of
Violence, Government Effectiveness, Regulatory Quality, Rule of Law
and Control of Corruption. See http://info.worldbank.org. The
World Bank Business Environment and Enterprise Performance Surveys
may also be of interest and are available at:
http://go.worldbank.org.

--The World Economic Forum publishes the Global Enabling Trade
Report that assesses both border administration transparency
(focused on bribe payments and corruption) and corruption and the
regulatory environment: http://www.weforum.org

--For additional information on corruption see the U.S. State
Department's annual Human Rights Report at http://www.state.gov.
--Global Integrity, a nonprofit organization, publishes its annual
Global Integrity Report, which provides indicators for 92 countries
with respect to governance and anti-corruption. The report
highlights the strengths and weaknesses of national level
anti-corruption systems. The report is available at:
http://report.globalintegrity.org/

A.14 BILATERAL INVESTMENT AGREEMENTS

(NOTE: Table of bi-lateral investment agreements entered into by
Mongolia deleted due to requirements of cable format. END NOTE.)

Taxation issues of Concern to American Investors

Taxation remains a key concern for Americans, other foreign
investors, and Mongolian domestic investors and businesses. 2009
saw some changes in the Mongolian tax system, most of which, with
the exception of the revocation of the value-added tax exemption for
mining equipment, were greeted positively by most foreign and
domestic investor in Mongolia. Observers noted that recent
experience with tax-code revisions does suggest that both the GOM
and Parliament are amenable to revising legislation if the economic
benefits to the state, the public, and investors can be proven.

Windfall Profits Tax on Copper and Gold Sunsets in 2011

Since passage in 2006, the Windfall Profits Tax Law has generated
criticism regarding the depth of the GOM's commitment to creating an
open, predictable, and fair environment for foreign direct
investment. The speedy legislative process for passing the WPT was
unprecedented. This bill was passed in six days without any
consultation with outside stakeholders on any its provisions. The
entire process raised concerns among investors about the stability
and transparency of Mongolia's legislative and regulatory
environment, which intervening years and experience with other

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non-transparently passed legislation did little to alleviate.

The WPT imposes a 68percent tax on the profits from gold and copper
mining respectively, and for gold originally kicked in when gold the
price for gold hit USD500 per ounce; however, in late 2008
Parliament raised the threshold to USD850. For copper, the
threshold is USD 2,600 per ton. Mining industry sources claim that
the 68percent tax rate, when combined with other Mongolian taxes,
makes the effective tax 100percent on all proceeds above the copper
threshold price.

The recent Oyu Tolgoi Investment Agreement entailed further
amendment to the WPT as a condition precedent to its passage. OT's
private investors successfully argued that they would not be able to
run a commercially viable OT operation when faced with the WPT.
Consequently, the Parliament agreed to amend the WPT Law: The WPT
will officially end for all copper concentrate and gold products in

2011.

Revisions of the Mongolian Tax Code

Effective since January 1, 2007 the current tax code reduces tax
rates, flattens the tax schedule, removes discriminatory loopholes
and exemptions, and introduces appropriate deduction opportunities
for corporate investment. The current law allows firms to deduct
more types of legitimate business expenditures: training, business
travel, cafeteria expenses, etc. The current law levels the playing
field between foreign and domestic investors, eliminating the
majority of discriminatory tax exemptions and holidays, most of
which favored international investors.

2009 changes into the tax code's treatment of exemptions present
something of a mixed bag for investors. On the down side,
Mongolia's Parliament revoked an exemption available on value-added
tax (VAT) taxes of 10percent on equipment used to bring a given mine
into production. Most jurisdictions, recognizing that most mines
have long development lead times before production begins, either
waive or do not tax such imports at all. Parliament, with no
consultation with investors, international advisors provided by
donor organizations, or even of its own tax officials, chose to
impose the VAT, which immediately makes Mongolian mining costs
10percent higher than they would otherwise be, impairing
competitiveness and dramatically varying from global practice.

On the plus side, Parliament revised loss-carry forward provisions,
extending from two (2) years to eight (8) years the ability to
deduct losses from taxes after incurring a loss. Like the revision
of the WPT, this change is also a condition precedent of passing the
OT Agreement. Most investors find eight years sufficient for many
Mongolian investments that require impose long, expensive
development horizons before producing any sort of profit.

Unfinished Taxation Business: Improving Institutions and Practices

As reported in the 2009 Investment Climate Statement and Country
Commercial Guide, both the GOM and Parliament has been intending to
take up additional tax reform measures since 2007 but have made no
substantive progress since promising additional reforms. These
measures include revisions to the law on customs and customs
tariffs. While the exact nature of the proposed changes to the
customs law remains murky, the GOM states that changes will be
consistent with Mongolia's WTO obligations and best practices.

Despite overall solid, positive changes, international financial
institutions warn that tax reforms by themselves are insufficient to
improve Mongolia's business environment. They report that reform
must go beyond changes to the tax code to restructure the operations
of the key agencies - the tax department, the customs administration
and the inspections agency - that directly interact with private
firms and individuals.

Specifically, tax authorities charged with enforcing the tax codes

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require a more customer-based approach to dealing with their
business clientele and a more detailed and rigorously enforced
regulatory framework under which to audit company accounts. Many
foreign and domestic investors argue that the lack of such a clear,
implementable code of ethics and enforceable set of guidelines leads
to arbitrary, capricious, or predatory tax audits.

A.15 OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

The U.S. government's Overseas Private Investment Corporation (OPIC:
(www.opic.gov) offers loans and political risk insurance to American
investors involved in most sectors of the Mongolian economy.

The U.S. Export-Import Bank (EXIM: www.exim.gov)offers programs in
Mongolia for short-, medium-, and long-term transactions in the
public sector and for short- and medium-term transactions in the
private sector.

Mongolia is a member of the Multilateral Investment Guarantee Agency
(MIGA: www.miga.org).


A. 16 LABOR

Mongolia's labor pool is generally well educated, relatively young,
and adaptable, but shortages exist in most professional categories
requiring advanced degrees or training. Only time and investment in
education and training will remedy this deficit of trained skilled
labor. Unskilled labor is sufficiently available. Shortages exist
in both vocational and professional categories because Mongolians
who obtain such skills frequently go abroad to find higher wages.
Foreign-invested companies are dealing with this situation by
providing in-country training to their staffs, raising salaries to
retain employees, or hiring expatriate workers to provide skills and
expertise unavailable in the local market. In addition, the USG
funded Millennium Challenge Corporation (MCC) is underwriting a
five-year training and vocational education program (TVET) to
develop sustainable programs to help Mongolia meet its needs for
skilled blue- collar workers (http://www.mca.mn or
http://www.mcc.gov).

Mongolian labor law is not particularly restrictive. Investors can
locate and hire workers without using hiring agencies -- as long as
hiring practices are consistent with Mongolian Labor Law. However,
Mongolian law requires companies to employ Mongolian workers in
certain labor categories whenever a Mongolian can perform the task
as well as a foreigner. This law generally applies to unskilled
labor categories and not areas where a high degree of technical
expertise nonexistent in Mongolia is required. The law does provide
an escape hatch for all employers. Should an employer seek to hire
a non-Mongolian laborer and cannot obtain a waiver from the Ministry
of Labor for that employee, the employer can pay a fee of USD 140.00
per employee per month. Depending on a project's importance, the
Ministry of Labor can exempt employers from 50percent of the waiver
fees per worker.

Foreign and domestic investors consistently argue that they bear too
much of the social security costs for each domestic and foreign hire
under the amended 2008 Social Insurance Law enacted in July 2008.
Foreign employees became liable for social insurance taxes if they
reside within Mongolia for 181 days within a 365 day period. Under
this law, foreign and domestic workers pay up to 108,000 tugrik per
month (USD 74) for this tax, no matter their respective rates of
pay. Employers must pay a tax equivalent to 13percent of the annual
wage on both domestic and foreign workers. Given that state
pensions have yet to broach even USD 100, employers argue that
pensions are not commensurate with worker contributions, especially
those of highly-paid ex-patriot employees. In addition, workers
must pay in for twenty years in order to be vested, highly unlikely
for many ex-patriot employees, who reside in Mongolia for less than
three years on average. Local and foreign business associations are
attempting to work with both the government and Parliament to
address these perceived inequalities.

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ILO conventions

Mongolia has ratified 15 ILO conventions (http://www.ilo.org) (NOTE:
Table of ILO conventions ratified by Mongolia deleted due to
requirements of cable format. END NOTE.)


A. 17 FOREIGN TRADE ZONES/FREE PORTS

The Mongolian government launched its free trade zone (FTZ) program
in 2004. Currently there are two FTZ areas located along the
Mongolia spur of the trans-Siberian highway: one in the north at the
Russia-Mongolia border town of Altanbulag and the other in the south
at the Chinese-Mongolia border at the town of Zamyn-Uud. Both FTZs
are inactive, with no development at either site. The port of entry
of Tsagaan Nuur in Bayan-Olgii province is being considered as the
site of a third FTZ.

Management for the Zamyn-Uud Free Trade Zone (ZUFTZ) was originally
tendered to a Chinese firm. In 2006, the GOM voided the agreement
for non-compliance with the terms of the tender. The GOM
re-tendered the management contract in 2006, but later voided that
contract, alleging that the current holder of the management rights
in the ZUFTZ had failed to live up to the terms of the tender.

So far, there are no indications that government will not keep
promises to open the zone to any who satisfy the relevant legal
requirements. However, there are concerns about the Mongolian free
trade zones in general and Zamyn-Uud in particular. In April 2004,
the USAID sponsored Economic Policy Reform and Competitiveness
Project (EPRC: http://www.eprc-chemonics.biz/) made the following
observations of Mongolia's FTZ Program. In 2010, these issues
remain concerns:

--Benchmarking of Mongolia's FTZ Program against current successful
international practices shows deficiencies in the legal and
regulatory framework as well as in the process being followed to
establish FTZs in the country.

--Lack of implementing regulations and procedural definitions
encapsulated in transparency and predictability quotient required to
implement key international best practices.

--A process of due diligence, including a cost-benefit analysis, has
not been completed for the proposed Zamyn-Uud FTZ.

--Identifiable funding is not in place to meet off-site
infrastructure requirements for Zamyn-Uud and Altanbulag sites.

--Deviations from international best practices in the process of
launching FTZs risks repeating mistakes made in other countries and
may lead to "hidden costs" or the provision of subsidies that the
government of Mongolia did not foresee or which will have to granted
at the expense of other high priority needs.


A. 18 FOREIGN DIRECT INVESTMENT STATISTICS:

The Foreign Investment and Foreign Trade Agency (FIFTA) provides
most of the data for tracking FDI in Mongolia. However, the data
has limitations:

Incomplete reporting

Many foreign firms provide FIFTA with inaccurate or incomplete data
on their annual investment amounts. FIFTA's registration regime
requires companies to document business plans and total FDI for the
coming year. FIFTA uses these amounts to determine FDI for the
year. However, firms reportedly believe FIFTA may not be able to
guarantee the confidentiality of proprietary business information,
and so they withhold complete data on their actual activities.

Mongolia suffers from promised investment that never materializes or

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which comes in at a lower level than originally stated. FIFTA does
not update reports to account for these or other changes to
investments during the year. (See Chapter 6, Section A.5:
Performance Requirements and Incentives).

Many of Mongolia's largest foreign- owned or foreign-invested
entities are in the mining sector, which because of a quirk of the
current Minerals Law of Mongolia are not necessarily defined as
foreign-invested firms. The current minerals law specifies that
only domestically registered mining firms can have mining licenses
registered in their names, which means that foreign investments
associated with mining may not be recorded by FIFTA, even though the
investment is demonstrably foreign. For example, the investment by
Ivanhoe Mines Mongolia (a Canadian company) into Mongolia has
reached nearly USD 1 billion, yet this investment is not recorded
among the data provided by FIFTA.

Data not Available

Neither FIFTA nor any other Mongolian agency to our knowledge tracks
Mongolia's direct investment abroad.

(NOTE: Mongolian FDI statistics deleted due to requirements of cable
format. END NOTE.)

ADDLETON