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2010.01.25

NATIONAL DEVELOPMENT AND INNOVATION COMMITTEE

G o v e r n m e n t a g e n c y o f M o n g o l i a

www.ndic.gov.mn

Development Bank of Mongolia:

Needs and Risks

Ch. KhashchuluunNational Development and Innovation Committee,

Government Agency of Mongolia

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Current economic conditions

• Structural weaknesses - 30% of its GDP and about 40% of the government revenue depend on the mining sector

• Growing vulnerability because of larger projects in mining

• Need to diversify into processing of mining products and agricultural raw materials such as meat, cashmere/wool, leather, develop tourism, IT, infrastructure, regional development, support green economy and environment protection, etc

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Structure of merchandise exports in Mongolia (% of total exports)

EBRD London Conference, Source: World Trade Organization, Trade Statistics

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

19961997

19981999

20002001

20022003

20042005

20062007

2008

Fuel and Mining Manufacture Agriculture

• Increasing dominance of the mining sector

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• Priority one: Developing mining sector by exploiting mineral resources deposits and setting the foundation for heavy industry: Industrial projects to develop the base for heavy industry

• Priority two: Developing intensified agriculture and implementing industrialization policy: Projects in biotechnology, intensive agriculture to increase food production

• Priority three: Developing infrastructure: Projects for developing infrastructure linked with exploiting mining deposits such as constructing new railroads, new power stations and constructing paved roads in rural areas.

• Priority four: Providing sustainable development through human development and protecting the environment: Projects on environment protection, promoting tourism, establishing training-production parks for information technology.

• Priority five: Improving governance and supporting private sector: Supporting private sector and developing public-private-partnership.

Strategic priorities in investment, 2010-2015 Government decree No 320, 2009

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№ Government Decree No 320. 2009 Project name Estimate of cost

/$ million/ Timeframe

Priority one: Developing mining sector by exploiting mineral resources deposits and

setting the foundation of heavy industry

1 “Oyu Tolgoi” project 4,000.0 2010-2015

2 “”Tavan Tolgoi” project 800.0 2010-2015

3 “Copper smelting factory” project 1,000.0 2010-2015

4 “Metallurgy complex” project 1,000.0 2011-2016

5 “Coke -chemical plant” project 700.0 2010-2015

6 “Oil refinery ” project 900.0 2011-2015

7 “Coal chemical and processing plant” project 1,000.0 2010-2015

8 “Construction materials” projects 800.0 2010-2015

Priority two: Developing intensified agriculture and implementing industrialization policy

9 “Healthy food” projects to make livestock healthy and increase meat and dairy production 150.0 2010-2015

10 “Development of irrigation systems” project 50.0

11 “Agricultural products and raw materials exchange market” project 50.0 2010-2011

12 “High-technology-based industrial complex and science parks” project 400.0 2010-2015

Priority three: Developing infrastructure

13 “Tavan Tolgoi Power Station” project 400.0 2010-2015

14 “New railroads” project 800.0 2010-2015

15 “Providing Gobi region water needs from Orkhon river” project 540.0 2010-2015

16 “National satellite for communications of Mongolia” project 100.0 2010-2015

17 “Upgrading of Ulaanbaatar roads” project 900.0 2010-2015

18 “Development of international, national and domestic auto roads” project 1,200.0 2010-2015

19 “Highway from Altanbulag – Ulaanbaatar – ZaminUud” project 1,200.0 2010-2015

20 “Power plant number 5 ” project 300.0 2011-2016

21 “Construction development project “Providing population with accommodations” 2,100.0 2010-2015

22 “Energy from waste and biomass” project 200.0 2010-2015

Priority four: Providing sustainable development through human

development and protecting the environment

23 “Information technology development and training town” project 100.0 2010-2015

24 “Students town” project 300.0 2010-2015

25 “Khar khorum – 13th century” Harkhorin tourism development project 500.0 2010-2015

26 Polluted and used water purification “ECO” project 200.0 2010-2015

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• Budget investment - Projected 2010-2013 annual revenue public investment

possibilites: 350-600 million USD

• Loans and aid - no more than 200 million dollars annually

Possibilities:

• Raising funds domestically and internationally through IPOs using mining assets

and linking the funds with development of infrastructure

• Creating a new channel of financing by mobilizing international development

finance into domestic bankable projects

• Supporting FDI

Funds available

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A proposed channel of funds into development

Shareholders

Other

Intl. Org.

IFC GoM JBIC

Private Org.

DBM

Infrastructur

e

Rural

Development Environment and green economy

Processing industry

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What is Development Bank?

• Development Bank is a national or regional financial institution

with intention of providing mid and long term capital for the

creative investment /economic development.

If we focus on the development banks as national development

institutions:

• National Development Bank is a financial institution primarily

concerned with offering long-term capital finance to projects

generating positive externalities and hence underfinanced by

private creditors.

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Development Banks’ yesterday

• At the time of industrial revolution, the banks in England,

French, Italy were performing some of the functions of modern-

day development banks for their growing industries.

Medici Bank, Rothschild and the House of Morgan etc.

• After World War II, the lack of long-term funding for

investment projects encouraged many countries to make

decisions of establishing Development Banks. Korea Development Bank, Development Bank of Japan, KFW Banking

Group of German etc.

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Development Finance in the market economy

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HIGH

HIGH

LOW

LOW

Profitability

of operation

Public nature

of operation

B. Mixed public and

private sector

A. Public sector

C. Private sector

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Operating Scope of the Development

Bank of Mongolia(DBM)

To make mid and long term

loans and do other financial

activities with the intentions

to support development of the

sectors referred in Mongolia’s

development policy, produce

more value added goods and

improve the economical

competitiveness.

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Development Bank and Economic Growth

• The Roles of a Development Bank, a development finance

institution, are vital for a nation’s economic growth,

particularly during the crisis.

International Conference on Financing for Development (Monterrey,

Mexico,2002), Doha Declaration on Financing for Development(2008)

• The establishment of the Development Bank of Mongolia takes

a critical place for Mongolia’s development.

Exploit the strategically important mining deposits

Accelerate economic growth through implementation of large

industrialization projects

Develop processing industry

Re-structure economy

Promote competitiveness of Mongolia in a global arena

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The scope of financing options is limited to implement large

volume infrastructure and industrial projects referred in the

government action plan.

Domestic financial sector remains scarce and lending rates of commercial

banks are high.

• The DBM needs to be established to expand more investment

for the implementation of government action plan, to create a

new source of the official development assistance and to develop

national financial market.

13The Government Action Plan and

the Development Bank of Mongolia

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Development Bank Partnership with Commercial Banks

• The DBM will not compete with commercial banks in their

funding activities, it will provide conditions for

harmonious and mutually beneficial cooperation with

commercial banks.

The DBM will provide long term funding for large, technology intensive

industrial projects that CBs can’t provide.

• The DBM partnership with CBs will create new banking

activities.

Funding large projects through loan syndication

Assisting in raising funds in international markets

Providing guarantees to private sector

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ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО

З а с г и й н г а з р ы н т о х и р у у л а г ч а г е н т л а г www.ndic.gov.mnThe DBM and International Bond Market

• The current credit rating for Mongolia that evaluates herability to repay her debt on time is lower to issue sovereignbond in international bond market.

Standard & Poor’s –BB/, Moody’s Investors Service В1

• To issue its bond in international market, the one’s credit ratingmust be BBB at least.

• Credit rating for the DBM can be higher than Mongolia’s.

Downgraded credit rating for the government doesn’t have to mean thather total industrial output declined.

A legal entity whose investors are well known in global arena andmanaged to build strong competitive advantages in international marketcan upgrade its credit rating while the government credit ratingdowngrades.

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Common reasons for success of Development Banks:

• The DBs only make loans to bankable projects.

• Interest rates of the DBs must be determined to be sufficient to

cover its expenses.

• The independence of loan decision process must be ensured.

• The management team of DB should be independent

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Corporate Governance of Development Bank

• Good corporate governance of the DBM is a key factor for not

repeating the state owned commercial banks’ failures in the

past.

• Therefore, on one hand the DBM needs to secure equity

participation from international organization and on the other

hand the DBM’s Board of Directors should include

representatives from the government and domestic investors.

• Finding and attracting the best experienced specialists with the

required skills set are vital to the DBM, while their

compensation should be competitive with the compensation

offered by commercial banks.

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JICA Experts’ advice on establishment of the DBM

• Lend in accordance with the government development

programs

• Lend only bankable projects with interest rates that cover

funding costs and other expenses.

• Have a mechanism to receive subsidy or equivalent in case the

DBM has to lend not bankable projects, but priority to the

GOM projects.

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JICA Experts’ advice on establishment of the DBM

• Have an able management team with determination to

lend based on objective credit analysis

• Cooperate with Mongolia’s commercial banks

• Carry out ample training with an emphasis on

management of development bank and credit analysis

• Number of expected employees are 45.

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