Institute of National Strategy article series
Mongolia’s ability to attract third neighbor investors and financiers to support funding of it’s huge development agenda has deteriorated. Providers of capital are seeking answers to two basic questions while considering lending or investing in Mongolia.
1. Is the Government of Mongolia supportive of an empowered private sector and is it proactively resolving business disputes?
2. What is the winning strategy that will turbocharge the economy?
Opinion by Cameron McRae
“In the Democratic Transition, Mongolia committed to three fundamental reforms: respect for human rights; open, democratic government; and an economy led by the private sector, not dominated by domestic or foreign state-owned companies. Mongolia’s support for human rights and political participation is beyond question. Where Mongolia has struggled is in the third reform: developing an independent, private-sector economy. Our Six-Point Plan will advance Mongolia rapidly to this goal of developing competitive industries that create jobs. With government’s focused leadership, we are confident that business will create the growth and employment that Mongolia needs.”
This is the closing paragraph from a paper written by six Mongolian business leaders, myself and an international bank, aided by McKinsey and the Economic Policy and Competitiveness Research Centre (EPCRC), Mongolia, that was presented to President Elbedorj in August 2012. The report was titled “A six-point action plan for Mongolia: Enabling business to create employment and growth”.
The six-point action plan (6PAP) thesis was that with government creating an enabling environment and proactively supporting private sector businesses, both domestic and international, then business would attract international finance and investors-partners for high quality projects which would fuel sustainable growth.
From a strategic perspective 6PAP recognized the continuing importance of agriculture, the upside from tourism, some potential viable areas of downstream processing, the potential for exporting power and the prospects for a mining service sector. This was not meant to preclude strategic consideration of other areas of economic endeavor but rather to focus attention on where Mongolia may build a competitive position relatively quickly.
The six pillars of 6PAP
Pillar 1. Stabilizing the economy
The reality is that government debt continues to rise quickly, credit lines are shrinking and becoming much more expensive. Balance of payments deficits continue and FX cover has dwindled to three months. Given the state of the national finances it is difficult for the GoM to continue stimulating the economy with large QE measures alone. Encouraging stimulatory programs driven and funded by the private sector, to build a stronger Mongolian economy takes the pressure of the GoM balance sheet.
Pillar 2. Create policy and regulatory stability
Mongolia has had a history of political populism and unpredictability towards international investors, and in particular towards the flagship OT project. While the OT dispute remains unresolved it is salutary that the GoM’s PR engine is now much less populist and more balanced in how it deals with the issues of supporting investment, both international and domestic. Resolution of the OT dispute in a way that is seen to honor the existing agreements will be very well received by the major banking institutions and international investors.
Pillar 3. Reduce GoM’s role in business and streamline bureaucracy
The parliament is debating the concept of not owning and over-managing the economy, which is understandable since Mongolia was once part of a strict communist regime. The reality today is that the GoM cannot afford to adequately fund government companies, or buy into new ventures (such as strategic mining deposits), and the track record in running SOE’s without political interference and to international standards is poor.
Pillars 4 and 6. Develop a prioritized and fundable infrastructure plan PLUS deliver critical infrastructure projects
The 6PAP recommended a) a short list of priority projects be developed and intensively supported through all stages of development, and b) that projects pass a “market needs test” and can be commercially funded.
The 6PAP targeted five critical development areas:
A. Power and heat generation
B. Power and heat transmission
C. South Gobi to China rail links
D. Urban roads and airport
E. Water sector
Pillar 5. Stabilize and strengthen the mining sector
Finalization of a competitive and world-class mining policy and the ensuring legal changes is critical and long overdue. This is work in progress and it is imperative that the GoM gets this 100 percent right. Mongolia is seen as a frontier mining economy and it needs to be extremely competitive in all stages of the mining process to ensure that international companies and financiers support “high standard” junior, mid and large scale exploration and mining.
Senior leaders are thinking deeply about the Mongolian situation. They know that advancing Mongolia’s economy requires access to international capital, best technologies, and to the right business partners.
To attract these essential components to Mongolia is no simple job, especially when the developed world is working through its own economic challenges and the developing and frontier economies are all fighting to attract any available capital and investors. Remember, the world is made up of over 200 countries – all fighting for credibility and access to the limited global capital pool.
Changing a country’s destiny is not an overnight or one-year task; it requires a clear vision, unfaltering dedication, and the strength of conviction to see the execution of that vision. Fortunately, some significant steps have been taken but show stoppers also remain in place. Now it is critical that the government, business associations and international experts consult, collaborate, and execute strategies and policies that position Mongolia as a competitive and reliable frontier investment destination.
More importantly, a new populism needs to take hold in Mongolia; whereby Mongolia is promoted as a country preparing to be a world-class economy, comprising highly competitive businesses and a business enabling government sector.
Winning the confidence of banks, investors and world class companies should be the highest priority for the political parties of Mongolia.
The complete version of Article 2 in the INS series can be found at http://nationalstrategy.mn/SOURCE: Ub Post