GO TO ASIA CAPSTONE PRO JECT - ada.edu.az Report.pdf · Exploring business opportunities in...

Exploring business opportunities

in Mongolia

GO TO ASIA

CAPSTONE PROJECT

2014

Araz Borchali Laman Azizova

Farzin Farzad Samra Humbatova

Gulnar Bayramova Samir Sultansoy

Gunel Osmanova Tereza Kotaskova

Hajar Huseynova Uldis Villeruss

Ilaha Abbaszade

Laman Azizova

Samra Humbatova

Samir Sultansoy

Tereza Kotaskova

Uldis Villeruss

List of Acronyms

ADB-Asian Development Bank

BBC-British Broadcasting Company

BCM- Business Council of Mongolia

BEFI – Business Entity with Foreign Investment

BTI- Bertelsmann Stiftung’s Transformation Index

CBM-Central Bank of Mongolia

CES-Central Energy Systems

CPI-Consumer Price Index

DBM - The Development Bank of Mongolia

DP-Democratic Party

DPRK-Democratic People’s Republic of Korea

DTT- Double Taxation Treaty

ERC- Energy Regulatory Commission

FDI-Foreign Direct Investment

FIFTA- Foreign Investment and Foreign Trade Agency

FLI- Foreign Investment Law

GDP-Gross Domestic Product

GoM-Government of Mongolia

HV-High Voltage

IFC-International Financial Corporation

ICRG- International Country Risk Guide

ICJ-International Court of Justice

IMA- Invest Mongolia Agency

IMF-International Monetary Fund

ISAF - International Security Assistance Force

IZNN- Irgenii Zorig-Nogoon Nam- Civil Will-Green Party

LV-Low Voltage

MNDP-Mongolian National Democratic Party

MNCCI- Mongolian National Chamber of Commerce and Industry

MNT-Tugrik (Mongolian national currency)

MOE-Ministry of Energy of Mongolia

MP-Member of Parliament

MPP-Mongolian People’s Party

MPRP-Mongolian People’s Revolutionary Party

MV-Medium Voltage

OT-Oyu Tolgoi

PM-Prime Minister

PWC-PriceWaterhouseCoopers

SCADA-Supervisory Control and Data Acquisition

SEFIL – Strategic Entities Foreign Investment Law

SGH-the State Great Hural (Parliament of Mongolia)

SOE – State Owned Enterprises

SRO –State Registration Office

TRACECA (Transport System Europe-Caucasus-Asia)

TT-Tavan Tolgoi

UB-Ulaanbaatar-the capital of Mongolia

WES-Western Electricity Systems

WHO-World Health Organization

WCID-Washington Convention on settlement of Investment Disputes

© 2014 ADA University / MADIA 2014

11 Ahmadbey Aghaoglu Street

Baku, Azerbaijan, AZ1008

Telephone: +994 12 437 3235; Internet: www.ada.edu.az

All rights reserved.

A publication of the graduate students Araz Borchali, Farzin Farzad, Gulnar Bayramova, Gunel Osmanova, Hajar Huseynova, Ilaha Abbaszade, Laman Azizova, Samra

Humbatova, Samir Sultansoy, Tereza Kotaskova and Uldis Villeruss of ADA University.

This work is a product of the graduate students of ADA University with external contributions. Please note that the aforementioned graduate students does not necessarily own

each component of the content indicated in the work. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the graduate

students representing ADA University. Graduate students of ADA University do not guarantee the accuracy of the data included in this work. The information contained in this

publication is for general information only.

CONTENT

Executive Summary

◎Country Overview 1

◎Risk Analysis 10

◎Doing Business 34

◎Power Sector 42

◎Business Opportunities 52

◎Recommendations 71

Appendix

A country on the rise, Mongolia’s unparalleled endowments of natural resources and advancing democracy has allowed the country’s economy and society to continually reach unprecedented heights. Throughout this transition, Mongolia presents both great challenges and even greater opportunities, which are elaborated in this document. The following report provides, firstly, a comprehensive and up-to-date insight into Mongolia’s political, economic and financial situation, and secondly, gives a detailed overview of the operational and market factors of Mongolia’s power sector, with an in-depth analysis of the underlying opportunities for AzerEnerji, Azerbaijan’s leading power producer, who made this report possible.

Mongolia political, economic, and financial indicators present significant, yet manageable risks. In the political realm, Mongolia’s advancing democracy still allows for corruption and reactionary, populist measures to make the investment climate volatile, especially during election cycles. Much of the major investment decisions are made through the society’s tight-knit networks, as the country struggles to combat corrupt practices. The economic and financial outlook in the short-term are truly dependent on the progress of the Oyu Tolgoi (OT) mine, which is slated to provide one-third of the country’s GDP by 2020. Until this is resolved, currency volatility, inflationary risks, excessive debt, along with the threat of “Dutch Disease” are issues that contribute to the overall country risk score.

Development of Mongolia’s power sector has been identified to be among the top priorities of the government. Modernization of the infrastructure and an expansion of power production and distribution capacities are in dire need, as the current infrastructure is outdated and operates at full capacity. To do this, significant private sector involvement is required not only in terms of construction and modernization of the existing infrastructure, but in advisory capacity as well throughout the country and the South Gobi in particular, where a majority of the mines are concentrated. Competition is fierce as the Chinese are cost-effectively producing much of the products required for these projects as Japanese, Korean, and Western firms are engaged in construction. Knowledge of the market, Mongolian cultural-business practices, and necessary partnerships are key to doing business in-country.

This report details several opportunities for investment from long-term project tenders such as phase 2 modernization of CHP5, upcoming CHP3 expansion, and finally, construction of power stations for Mongolia’s mine operators. Other opportunities include the sale of power sector-related products, import and export of tradable goods and services, and various other infrastructure projects, which should be closely monitored for tender announcements. The operational elements of doing business in Mongolia are also provided, including information on taxation and the legal environment.

1

INSIDE BRIEF HISTORY……….………..……………..……………..……….. 3

GENERAL INFORMATION…..……………..…………………… 5

GEOGRAPHY….……………..……………..……………..……….…. 6

LOGISTICS…………………………...……………..……………… 7

POLITICS.………..………..………..…………………..….……………… 8

COUNTRY

OVERVIEW

2

The current state of Mongolia has inherited the cultural estate of one of the greatest empires throughouht history. The famed Mongol conquests of the 13th century created the largest land empire on Earth’s history, leaving a political-military & historical legacy that is well known and a point of pride in the psyche of Mongolians. The current Mongolian political culture is an obvious reflection of Mongolia’s nomadic past, Soviet influence, and the transition to democracy in 1992. And while Mongolian history predates the 13th century, it is almost impossible to evade the historical legacy left by Timujin—or more famously known by the title Genghis Khan (Great Khan)—who along with his sons and grandsons who succeeded in conquering 33,000,000 square kilometers or 22% of the entire planet. His empire had a population of over 100 million people and it is said to this day that 0.5% of all males on the planet can directly trace their lineage back to Genghis Khan himself. While Genghis Khan’s name itself evokes historical memories of brutality, Mongolians recognize him for creating the empire’s impressive governance structure, system of laws, and the preserving local cultures—attributable to the Mongolians’ adaptive nature influenced by nomadic life. Mongolian pride in the leader is evoked in the inescapable imagery seen throughout the country on statutes, monuments, and a majority of souvenirs and novelty items.

Tibetan Buddhism made its way to Mongolia in the 16th and 17th centuries and at the end of the 17th century, Mongolia was incorporated into the Qing dynasty where it remained until 1911. The collapse of the Qing Dynasty brought a short-lived independence under Bogd Khan, however, the Chinese once again invaded Mongolia. Mongolia remained de facto part of China until 1921, and with the help of both the Russian white forces and then the Soviet Red Army were able to free Mongolia to become a Soviet Republic in 1924. Formal declaration of independence, however, was not achieved until 1945, when Mongolia gained international recognition. Within this time, however, a series of Soviet-sponsored purges resulted in the deaths of tens of thousands, including many in the Buddhist clergy. Mongolians still retain strong anti-Chinese sentiments from the occupation and continue to complain of Chinese economic imperialism, but ironically newer generations do not show much historical resentment toward Russia. Mongolians celebrate their independence from China on July 11 when Outer Mongolia became a sovereign state, as Inner Mongolia1 remained part of China until today. General consensus is that pan-Mongolianism is a defunct ideology and it is only the Monoglians in China that would like to unite as a part of a greater Mongolia. For Mongolians in Mongolia proper, practicality is the law of the land and they are keen on avoiding measures that would agitate their two powerful neighbors.

Figure 1. Political Parties of Mongolia

Figure 1: Political Parties of Mongolia

Party Seats Description

Civil Will-Green Party (CWGP)

3% A coalition of the Civil Will Party and the Green Party since 2000. Environmental issues are important. The Civil Will Party was founded by the sister of Zorig, one of the country’s most prominent democratic icons.

1 Part of traditional Mongolian

territory, known as Inner Mongolia, remains part of Northern China. The National Bureau of Statistics in China estimates that there are over 24 million Inner Mongolians living in China. It is rumored that prospects of Mongolian unification are still an important issue with Inner Mongolians; this is only a pipe dream among the more practicality-oriented Outer Mongolians. Furthermore, while some labor migrants from China are outer Mongolians, they are regarded more so as Chinese nationals than their ethnic kin.

1. Brief History

3

Democratic Party (DP)

44% The center-right Democratic Party, as a member of the

Democratic Union Coalition, was the first new party to win a majority of seats in the SGH after the Soviet collapse. 5 separate party factions united to form the DP in 2000. It currently holds a majority of seats in the Great State Hural along with the Presidency.

Mongolian People’s Party (MPP)

34% The current opposition party with 26 seats. The MPP is the oldest political party in Mongolia, dating back to the Soviet-era and retaining Marxist-Leninist ideology until it adopted the social democracy model in 1997. It ruled Mongolia from 1921-1996. In 2010, the party dropped the term 'revolutionary' from its name causing the MPRP to splinter off into a new faction. In 2008, the then MPRP was accused of vote-rigging, causing riots.

Justice Coalition (MPRP & MNDP)

15% A coalition of the Monoglian Peoples Revolutionary Party, an offshoot of the MPP; and the Mongolian National Democratic Party. Holds 11 seats in the Great State Hural.

Source: Mongolia Real Estate Report

Mongolia shared much of the same fate as the rest of the Soviet Union until the collapse of the early 1990s led by the Zorig Sanjaasuren2, one of the country’s most prominent democratic icons. The single-party Mongolian People’s Party ruled the country until 1990, when the country transitioned to a multi-party democracy. Mongolians take pride that their 1990 revolution was bloodless and relatively smooth. The new young Mongolian elite1 formally ratified a new democratically oriented constitution in 1992 and by 1996, the communist party was defeated for the first time since 1921 in the Great State Hural, the Mongolian parliament. By 1993, Mongolia had its first democratic-elected President. Since then Mongolia has effectively democratized, holding successful, yet often controversial parliamentary and presidential elections. Mongolia often went unnoticed until the 2001 discovery of the massive Oyu Tolgoi gold-copper mine, which produced its first its first shipment of copper last year. Currently the Government of Mongolia (GoM) and Turquoise Hill Resources, a venture mostly owned by the Anglo-Australian firm Rio Tinto are embroiled in negotiations over the share of ownership. This one mine, which is set to account for one third of the entire GDP of Mongolia by 2020, is the most politically-charged and most discussed topic in the country and one can hardly have a discussion in any sector of Mongolian life without addressing this particular issue.

1 Zorig was one of the most

prominent leaders of the transition to a multi-party system. He was assassinated in 1998. While some believe that his murder was politically-motivated, it remains unsolved. An NGO operating in UB under his namesake, the Zorig Foundation, works to promote good governance practices in Mongolia. The Zorig Foundation was founded and is currently headed by his sister Oyun Sanjaasuren, who is also an MP the current minister of Environment and Green Development. 1 Many of the organizers of

the protests and hunger

strikes went on to key

positions in government,

including current president

Tsakhiagiin Elbegdorj.

4

Power

Mongolia is a landlocked country in East and Central Asia. It is bordered by Russia to the north and the People's Republic of China to the south, east and west. Ulaanbaatar city is the capital and largest city, which is home to about 38% of the population.

General statistics* Population: 2,796,484 Territory: 1,564,116 km2 (approx. 603,909 sq.miles) Neighboring states: Russia, China Titular nationality: Mongol 95%, Ethnic minorities: Kazakhs 4%, others 1% Capital: Ulaanbaator (pop. 2,122.300) Other main cities: Erdenet (pop 95,000) Currency: Tugrug (MNT)

http://worldpopulationreview.com/countries/mongolia-population/

2. General Information

5

http://www.adrc.asia/country

report/MNG/2010/MONGOLI

A_CR2010B.pdf

3. Geography

6

Basic indicators *

Area (km ²) Land 1 553 556,00 Water 10,56 Total 1,564,116

Land Boundaries (km) China 4 677,00

Russia 3 543,00 Total 8 220,00

Total Railways (km) Total 1 908,00 Total waterways (km) Total 580,00 Total roadways (km) Paved 3 015,00

Unpaved 46 234,00 Total 49 249,00

Mongolia is a land-locked country in Central Asia situated between Russia and China. Six zones such as: desert, mountain, mountain taiga, mountain forest steppe, arid steppe and taiga covers Mongolia. It is rich in comparatively high levels of surface and ground water resources. Total length of the border is 8,158 km out of that Mongolia shares a 3,485 km border with Russian Federation to the north and 4, 673km with the People’s Republic of China to the South. The highest point in Mongolia is the Khuiten Peak in the Tavan bogd massif in the far west at 4,374 m (14,350 ft). The basin of the lake Uvs Lake, shared with Tuva Republic in Russia, is a natural World Heritage Site. Most of the country is hot in the summer and extremely cold in the winter, with January averages dropping as low as −30 °C (−22 °F). The country is also subject to occasional harsh climatic conditions known as Dzud. Ulan Bator has the lowest average temperature of any national capital in the world. Mongolia is high, cold, and windy. It has an extreme continental climate with long, cold winters and short summers, during which most of its annual precipitation falls. The country averages 257 cloudless days a year, and it is usually at the center of a region of high atmospheric pressure. It experiences a continental climate, with hot summers (temperature up to 410oC) and cold winters (temperatures to -53oC). Diurnal temperature changes too can be very large. Rainfall is relatively low, varying from 5 cm in the southern desert region, to 40 cm in mountain areas. 80 to 96 % of precipitation falls in the warm period from April to October. In the south, significant rainfall begins in July.

http://hongkong.mfa.gov.m

n/en/?p=2026

http://www.selenatravel.co

m/80/mongolia_climate

http://dlca.logcluster.org/dis

play/public/DLCA/2.2.1+Mo

ngolia+Chinggis+Khaan+In

ternational+Airport;jsession

id=EE4424001548B8161F

43C89EF1FEEAE9

http://dlca.logcluster.org/dis

play/public/DLCA/2.2+Mon

golia+Aviation

See price of fuel and key

transportation indicators in

Annex 4.

4. Logistics

Transportation

Mongolia has a state road network of just over 11,200 km, of which only about 1,500 km are paved, 1,440 km has a gravel surface and 1,346 km has an improved earth surface. Over 6,900 km is earth tracks. On the state road network there are 364 bridges with a total length of just over 13,500 meters (an average length of 37 meters). But of these, 178 are of wooden construction and account for about 20 percent of the total length. Ulaanbaatar has a road network of 464 km, of which about 78 percent is paved, the remainder being mostly earth tracks within ger districts. Of the 50 bridges in Ulaanbaatar, almost 90 percent are of concrete construction. The paved road network has remained largely unchanged in length for two decades, during which time the vehicle fleet has more than doubled.

There are 450 km of sidewalks and 203,600 m2 of designated parking areas in the city. At an average of 100 m2 per parking place this gives only just over 2,000 parking spaces for the estimated 10,000 cars that enter the city each working day. The city roads are generally in a poor condition with extensive cracking, potholes and subsidence. This condition results from substandard quality of the original design and construction with inadequate drainage, and subsequent lack of maintenance, annual, routine and periodic. Mongolia, a vast, sparsely populated country with very little infrastructure, relies heavily on air transport. It has 44 functioning airports, although only 12 of those have paved airstrips. The international airport faces frequent closures because of strong winds, sand or snow storms. The runway is relatively short for a full service international airport (3100 x 60 meters; maximum size of aircraft: B767). It has limited capacity in terms of aircraft movement, handling equipment, parking area, storage, and passenger/cargo terminal. Chingis Khaan International Airport in Ulaanbaator receives 98% of international flights. Flights are available from Berlin, Moscow, Beijing Hong Kong, Seoul, Irkutsk, and Tokyo. Construction of a new international airport is located at Khoshigt valley, 60 km south of Ulaanbaatar. It started in 2012 and is planned to be finished till 2016 .

7

http://hongkong.mfa.gov.mn/en/?p=2026

http://hongkong.mfa.gov.mn/en/?p=2026

http://www.selenatravel.com/80/mongolia_climate

http://www.selenatravel.com/80/mongolia_climate

http://dlca.logcluster.org/display/public/DLCA/2.2.1+Mongolia+Chinggis+Khaan+International+Airport;jsessionid=EE4424001548B8161F43C89EF1FEEAE9






http://dlca.logcluster.org/display/public/DLCA/2.2+Mongolia+Aviation



Politics

Mongolia’s 26 provinces (aimag) continue to be administered by a multi-party parliamentary Republic. The government consists of the Legislature, knows as the SGH; the executive branch comprising of Prime Minster and cabinet; the elected Head of State, which is the President; and the Judiciary consisting of the Constitutional Court and Supreme Court. Voters of at least 18 years of age elect a maximum 2-term president representatives in the SGH every four years1. Currently, all branches of government are dominated by the Democratic Party. A new law enacted in 2012 prevents individuals from running, restricting candidates to those nominated by parties.

Figure 2. Mongolia’s Ministries

Fig. 2 Mongolia’s Ministries

Ministry Minster Party Foreign Affairs and Trade L. Bold Democratic Party

Finance Ch. Ulaan Mongolian People's Party

Justice and Home Affairs Kh. Temuujin Democratic Party

Environment and Green Development

S. Oyun IZNN

Defense D. Bat-Erdene Democratic Party

Education and Science L. Gantumur Ekh-Oron Ardchilal

Roads and Transport A. Gansukh Democratic Party

Human Development and Social Welfare

S. Erdene Democratic Party

Industry and Agriculture Kh. Battulga Democratic Party

Fuel Mineral Resource and Energy

D. Gankhuyag Democratic Party

Health N. Udval Mongolian People's Party

Culture, Sport and Tourism

S. Oyungerel Democratic Party

Construction and Urban Development

Ts. Bayaraikhan Democratic Party

Energy M. Sonompil Mongolian People's Party

Economic Development N. Batbayar Democratic Party

Labour Ya. Sanjmyataw Democratic Party

Source: Mongolia Real Estate Report

http://www.parliament.mn/en/state-great-hural

http://www.cacianalyst.org/p

ublications/analytical-

articles/item/12918-

mongolias-former-president-

plots-political-return-despite-

corruption-convition.html

5. Politics

8

http://www.cacianalyst.org/publications/analytical-articles/item/12918-mongolias-former-president-plots-political-return-despite-corruption-convition.html






Mongolia’s unicameral legislature goes by the name of the SGH, which comprises of 76 members elected under a mixed direct election/proportional representation system. In the last election in June 2012, four major parties including one coalition party received a majority share of the Great Hural (see Fig. 1). Following elections, members of the majority party or coalition are tasked with appointing the government, which consists of the Prime Minster and his/her cabinet (see Fig. 2) of Ministers, who in turn appoint local governing officials. The SGH also appoints 3 of the total 9 seats of the SGH repealed the 68% windfall profit tax, which allowed for a massive influx of FDI1 only to be replaced by the unpopular SEFIL (discussed in Legal). Once FDI dropped by almost 50%, the government enacted a new investment law that was friendlier to foreign investment effective since 01 November, 2013.

Mongolia’s president Tsakhia Elbegdorj of the Democratic Party (DP) was elected in June 2013 with just over 50% of the vote. The president enjoys popularity not only in the capital of UB but also in the rural areas. Many Mongolians polled view that an effective leader and president is much more vital than a functioning parliament, which they view as corrupt. The president is viewed as upholding many civil rights measures including abolishing capital punishment in 2012. Freedom House reports, however, that the Prime Minister, currently Norovyn Altankhuyag (DP), still holds the most power in the government. Altankhuyag, who was appointed in 2012 as the 27th PM, enjoys popularity and is credited with initiatives for the advancement of democracy and raising Mongolia’s international relations profile.

In 2013, Mongolia

successfully hosted

delegations from Japan and

North Korea to mediate on

the issue of Japanese

citizens abducted by the

DPRK. For more

information, see:

http://www.theguardian.com/

world/2013/oct/25/mongolia-

north-korea-special-

relationship

5. Politics

9

8. Financial Risks

http://www.theguardian.com/world/2013/oct/25/mongolia-north-korea-special-relationship




V

10

INSIDE

RISK METHODOLOGY………..……………..……………..…..12

POLITICAL RISKS………..………...……………..………………14

DEMOGRAPHIC RISKS……………………..…………………18

LEGAL RISKS.………..……..…………………..….……………...21

ENVIROMENTAL RISKS………………..……………..……24

ECONOMIC RISKS……………..……..………………………..26

FINANCIAL RISKS…………….……..……………..…………..30

HIGHLIGHTS:

Government decisions prone to populist trends, but

contract law is slowly taking precedent

Foreign investors should be cautious of the changing

practices of government’s corruption authority

Network-based system where factions within

parties transcend party lines

Despite its Third Neighbor Policy, Russia & China still

pressure Mongolian political decisions

Excessive pollution spawning environmental

protests

Low political violence risks, but civil disobedience is

common during election cycles and centered around

major economic decisions & fears of exploitation

Political and economic dependence on China & Russia

“Dutch Disease” is an ever-increasing possibility

Expansionary monetary policy may lead to inflation

High debt to GDP ratio is causing a slowdown in

international financing for public projects

Current Account deficit continues to increase

Exchange rate volatility and currency depreciation

continue to trouble financial markets

11

The country risk score is a combination of the Operational Risk, which includes political, demographic, legal & environmental risks; and Economic Risk, factoring in macroeconomic and financial indicators of risk. Risk analysis is based on a modified version of the International Country Risk Guide (ICRG), combined with the Bertelsmann Stiftung’s Transformation Index (BTI) and adapted for a more nuanced approach to risk analysis that includes factors of importance to Mongolia and the region. Political and economic risk sections are rated on a scale from 1-100, where each factor is assigned a score and weighted according to significance. Risks are combined to form a total country risk score:

TRS = 0.1(0.5Or + 0.5(Er + Fr)) Therefore: 0.1(34 + 13 + 15) = 6

Whereas TRS = Total Risk Score; Or = Operational Risk;

Er = Economic Risk; Fr = Financial Risk

Political and economic risks are weighted evenly, both contributing to one half of the total country risk score. The combined score is then multiplied by 0.1 to give us a score on a 1 – 10 scale. The final product is the total risk score of Mongolia, which was calculated to be a 6, in the somewhat low risk range in the short- to medium-term.

OPERATIONAL RISK

Operational risk is the total combined non-financial risks of doing business in Mongolia, ranging from political and demographics considerations to legal and environmental risks. Operational risk is weighted as importantly as economic and financial risk due to emerging market volatility and a high degree of government control of major economic decisions.

OPERATIONAL RISK PROFILE Categories Factors Possible Score Score Political A Government Stability 8 8

· Government Unity/Monopoly of the Use of Force

· Legislative Strength/Administration

· State Identity

· Popular Support B Democratic Accountability 6 5

· Free and Fair Elections

· Assembly Rights/Freedom of Expression

· Separation of Powers/Independent Judiciary

· Property Rights

· Military in Politics

· Performance of Democratic Institutions

1. Risk Methodology

12

MONGOLIA RISK SCORE: 6 RANGE

0 – 1.49 Very High 1.5 – 3.49 Relatively High 3.5 – 4.49 Somewhat High 4.5 – 5.5 Medium Risk

5.51 – 6.5 Somewhat Low 6.51 – 8.5 Relatively Low 8.51 - 10 Very Low Risk

OPERATIONAL RISK PROFILE

Categories Factors Possible Score Score

POLITICAL

C

Internal Conflict 8 7 · Civil War/Threat of a Coup

· Terrorism/Political Violence

· Ethnic & Religious Conflict

· Civil Disorder

D

External Conflict 6 6 · Threat of War or Cross-Border Conflict

· Foreign Pressures/Autonomy DEMOGRAPHIC

E

Population

6 5 · Population growth/Immigration

· Urbanization

F

Socioeconomic Conditions 8 4 · Unemployment

· Consumer Confidence

· Socioeconomic Barriers

· Poverty/Income Disparity

G Education 8 5 · Labor Force Education

LEGAL

H Independence of Courts 6 3

I

Crime & Corruption 8 4 · Anti-Corruption Policy

· Prosecution of Office Abuse

· Cybersecurity

· Other Crimes (petty & violent) J Bureaucracy Quality 6 4

K

Investment Profile 8 5 · Contract Variability/Expropriation

· Profits Repatriation

· Payment Delays L Ease of Doing Business 6 5

ENVIRONMENTAL

M

Pollution

6 1 · Air Quality

· Land & Water Pollution

N Exogenous Factors

4 2 · Climate Change

O Environmental Policy 6 4 Total 100 68

2. Profile

13

Power

Elections are considered free and fair by Freedom House1 and the Economist Intelligence Unit ranked Mongolia 65th in the world in its Democracy Index in 2012, figures which have steadily improved year-on-year. Since 2011, Mongolia took advantage of its 2-year tenure at the Community of Democracies (COD) to raise its profile and legitimacy as a functioning democracy, which Mongolians value greatly. Therefore the stability of Mongolian democracy and thus government are ranked high, showing little risk.

One thing in particular that should be monitored is the slow crackdown on press freedoms causing some journalists to engage in self-censorship practices. Journalists do so usually when reporting on government corruption to avoid sentencing under the State Secrets Law. There have been several cases brought before the courts by ministers against journalists for defamation or libel. Independent media is scarce, most outlets being owned by large corporations tied to specific political interests. As for international news, internet access is not limited and foreign media, including outlets such as the BBC, are increasingly broadcast on Mongolian television. Bloomberg TV Mongolia, the first international news organization broadcast in country reporting on domestic issues, was launched in 2012. Given the aforementioned factors, Freedom House ranks press freedom in Mongolia as being “partly free.”

While the government functions similar to that of other democracies, unlike Western practices Mongolian parties are not bound to a particular ideology. Party politics and party ideology seem to be arbitrary and much of the backdoor political deals are done within kinship networks, which are very strong and omnipresent. What really matters therefore are the factions within each party. Domestic sources claim that politicians themselves and the factions within their parties can disagree on a variety of issues. Occasionally, members of one faction within a party may ally themselves with members of another faction of a completely different party. That being said, due to Mongolia’s high level of social cohesion and political engagement, the majority of the parties themselves take populist stances on issues. Therefore, anyone willing to do business in Mongolia must be mindful of popular opinion as well as the communal networks embedded into Mongolian society. Even the Mongolian communist party (MPP) has changed much of its rhetoric to adopt national and populist stances on a variety of issues. For example, it is said that Rio Tinto purchased much of Turquoise Hill Resources from Ivanhoe Mines as a measure of necessity due to the negative publicity of the latter company. Accordingly, it has been rumored that the reason a previous investment law was passed, heavily regulating FDI, was due to government fear over popular backlash over China’s aims at becoming the sole stakeholder of a coal mine in Mongolia’s south.2

While Mongolia is reaching out to Western, Japanese, and Korean firms to develop infrastructure and increasingly establishing military cooperation with the United States under its famed Third Neighbor Policy3, nearly all of Mongolia’s trade is dictated by market considerations. Politically-motivated economic linkages are few and far between in a country landlocked between two great powers. One must consider the risks involved in this duality between the Mongolian government’s appeals to popular

1) Freedom House, 2013

http://www.freedomhouse.org/report/freedom-world/2013/mongolia-0#.U1_nMV5CNuY

2) ABC News, http://abcnews.go.com/International/mining-gobi-battle-mongolias-resources/print?id=19897898

3) Mongolia enacted the Third Neighbor Policy in the 1990s to diversify its trade away from strictly Chinese and Russian goods, and expand relations with other liberal-democratic countries, the United States in particular.

3. Political Risks

14





http://abcnews.go.com/International/mining-gobi-battle-mongolias-resources/print?id=19897898





trends along with its market orientation when doing business in the country. One must also take into consideration the unusually high percentage of time that the SGH spends in recess, allowing the Executive branch (President and Prime Minister) a disproportional share in decision-making.

Given the government’s history with OT, TT, and other large-scale projects, the risks of expropriation and contract renegotiation remain quite high. It must be noted, however, that there is a learning curve for these matters, which might have been overcome after the problems caused by these measures far outweighed their returns. There is reason to believe that unless major damage is done by foreign companies in the future, contracts and private property will be subject to the rule of law.

Political Violence & Civil Disobedience

Mongolia’s population density coupled with its rural nomadic heritage and the few major cities outside of the capital constrain the grass-roots social movements and political violence mostly to Ulaanbaatar4. Thus political violence has been somewhat of a rarity since Mongolia’s peaceful revolution in 1990, famed for its bloodless transition where “not a single window was broken.” One reason is that UB is small enough for societal networks to matter. Often times members of the government and protesters were either related to one another or maintained close relationships.

Nonetheless, there are on occasion protests coinciding with election cycles—the next parliamentary election being in 2016 and presidential election in 2017. Before 2008, democratic transitions had been quite peaceful. However when the legitimacy of the victory of the MPRP (currently MPP) was challenged in the 2008 elections, protests ensued. Small-scale protests escalated to violence prompting the government to declare a state of emergency for four days whereby 700 people were arrested and 5 people were reportedly killed5—a new and worrisome precedent for Mongolia.

Despite tensions during subsequent elections, there has not been electoral violence since. While cause for alarm should be kept at a minimum, it is worth noting that Mongolians are consistently taking a hostile approach to foreigners and petty crime and occasional non-life threatening acts are taken against foreigners mostly at night in or around nightclubs and bars. The rising xenophobia may give way to some anti-foreigner sentiment throughout the next election cycle, but the chances are still quite slim. It would, however, be a mistake to rule out political violence out in the future, particularly as unpopular economic initiatives and government gentrification programs expand. Worker strikes are also an issue for future concern, particularly as a result of the deplorable conditions in mines. As is stands, however, the mines do not employ enough people for large-scale disruptions and the benefits of work currently outweigh health concerns.6

It is unclear, however, to what extent the government’s failure in addressing environmental issues coupled with xenophobic fears of exploitation will change peoples’ behavior. There already are rumors of emerging neo-Nazi inspired nationalist gangs that might tend to harass foreign travellers and ex-pats in the future. One such group

4) UB aside, there are no other cities in Mongolia that surpass a population threshold of 90,000 residents.

5) Freedom House, 2013 http://www.freedomhouse.org/report/freedom-world/2013/mongolia-0#.U1_nMV5CNuY

6) The Guardian. http://www.theguardian.com/world/2014/apr/20/mongolia-gobi-desert-coal-mining

15





group, Tsagaan Khass7 already has at least 100 members and has shifted its tone from harassing women who fraternize with foreigners to one that advocates for the protection of the environment. Political violence is more likely as society develops, severing the kinship bonds that have existed in Mongolia for centuries. In most meetings, Mongolians will anecdotally tell you of a running joke in their society which says that if two Mongolian strangers talk long enough, they will discover that they are in fact related. It is unclear how long these traditions will uphold, but aside from the more aggressive environmental organizations (discussed in the environmental risks section), political extremism in Mongolia continues to be rare—contrary to their pacifist culture. And so, violent behavior is mostly confined to petty crimes around the cities black market and nightclub districts. It can be concluded that in the short-term political violence should not be a concern and the government will remain stable. Medium- and long-term risks, however, should be monitored.

Terrorism, Civil War, & Internal conflict

The threat of terrorism or internal conflict is extremely low. Reports indicate that there is some concern that as the Afghan War draws to close, foreign fighters might spread throughout the region, including Mongolia. Such concerns, however, are few and far between and such a scenario is highly unlikely. It would be wise, however, for the Mongolian government to reach out to foreign institutions to increase border security. The authorities should make it a priority to reform and improve airport security, which by anecdotal experience is quite relaxed.

Cybersecurity, on the other hand, might become an issue as Mongolia continues to update and integrate its infrastructure. While a cyber-attack is unlikely, Mongolians have been cooperating with international organizations such as NATO on cyber defense, after having signed a NATO Individual Partnership and Cooperation Programme (IPCP) agreement in March 2012.8

Ethnic and religious conflicts also remain extremely low due to Mongolia’s religious and ethnic homogeneity. The other major ethnicity, the Muslim Kazakhs represent such a small minority and have been integrated so much so into Mongolian society that they pose no real threat to the state. As a matter of fact, after the collapse of the Soviet Union, the exodus of the Kazakhs to the independent state of Kazakhstan was short-lived. Many returned back to Mongolia for work and identify themselves as Mongolian citizens. A 2012 census showed that 4% are Kazakhs and represented the majority of Muslims in the country. The subject of the Kazakhs in Mongolia is rarely discussed and almost seems to be a taboo if the issue is raised. It is understood that they are less economically successful than the ethnic Mongols, but there are no structural limitations to the Kazakhs seeking political participation and upward social mobility. The limiting nature of the network-based Mongolian system, though, might pose a potential problem. This is a minute issue, however, and the Kazakhs pose no credible threat to the regime. They are quite complacent with their rural/nomadic lifestyle in the West of the country in the province of Bayan Ulgii-Aimag.9 There is evidence that rest of Mongolian society, which is wholly secular as a

7) The Atlantic. http://www.theatlantic.com/infocus/2013/07/a-mongolian-neo-nazi-environmentalist-walks-into-a-lingerie-store-in-ulan-bator/100547/

8) NATO. http://www.nato.int/cps/en/natolive/news_85430.htm?selectedLocale=en 9) Mongolia enacted the Third Neighbor Policy in the 1990s to diversify its trade away from strictly Chinese and Russian goods, and expand relations with other liberal-democratic countries, the United States in particular.

3. Political Risks

16

result of Soviet influence, is rediscovering its Buddhist past. But due to the pacifist nature of Tibetan Buddhism and the relatively low number religious minorities who practice shamanism and Christianity alongside Islam, religious tensions are very low.

The government, does however, perceive a threat in the burgeoning environmentalist movement. New groups are forming that claim that the government is not upholding its environmental promises, such as that of a 2009 law popularly called the “Long Name Law”, which prevented mining exploration near water sources. In January, the courts handed down a heavy sentence of 21-years to the leader of an environmentalist group that goes by the name “Fire Nation.” Six other members were also convicted. Authorities claimed that he was carrying “firearms and grenades” during one of the group’s protests a year earlier and had fired a shot into the air and scattered bombs near UB’s government house.10 As the environmental conditions continue to deteriorate, extremist environmental groups could proliferate.

External Relations

Mongolia is the only country in Asia that is not embroiled in a territorial dispute, which makes it quite stable and unlikely for external conflict. Mongolians do complain about political pressure exerted from China and Russia, whose aims are rooted in the imperial past of both countries over Mongolian territory. For example, in 2012 Russia had cut off hydrocarbon supplies to Mongolia, and China once completely shut down the border upon hearing of the Dalai Llama’s visit to UB, halting all trade. This is troubling since 85% of Mongolia’s exports go directly to China—mostly in the form of mineral deposits—its economy is unrelentingly tied to Chinese demand for these commodities, which are now in a continual decline.

Yet while Mongolia is economically dependent on its two powerful neighbors and must balance the interests of both China and Russia, the government finds no real geopolitical threats. The threat of war or any external conflict is highly unlikely even as Inner Mongolians continue to press for more rights in China. As stated earlier, Mongolia maintains a pragmatic foreign policy towards its neighbors. There are also many issues of trilateral cooperation for all three states are pursuing, such as discussions to build a Mongolian-Russian-Chinese Railway corridor.

In terms of other countries, Mongolia continues to press on with its Third Neighbor Policy and push for more cooperation with the West and East Asian countries such as Japan and Korea, who have been involved infrastructure development projects. Obama once referred to Mongolia as a key partner partially due to Mongolia’s contribution to ISAF forces in Afghanistan and a recent visit by Secretary of Defense Chuck Hagel solidified US-Mongolian military cooperation. Furthermore, Mongolia has been pushing aggressively to establish new embassies abroad and inviting many foreign guests and dignitaries—late last year the Turkish Prime Minister paid UB a visit.11

10) English News.

http://english.news.mn/con

tent/168445.shtml

11) Info Mongolia.

http://www.infomongolia.co

m/ct/ci/5826

17

http://english.news.mn/content/168445.shtml


The GoM has also been quite proactive in becoming a significant player in the region. In 2013, it launched two initiatives the International Cooperation Fund (IFC) and the Ulaanbaatar Dialogue on Northeast Asian Security, forums which work to strengthen soft power diplomacy and regional stability respectively. The Prime Minister has also been quite active in expressing his interest in becoming a party in mediating the North Korean conflict, exploiting the country’s special relationship with the DPRK.12

DEMOGRAPHIC RISKS

Mongolia’s population density, history, and environmental concerns have all contributed to its economic development for the past few years. The quick transition from a somewhat self-sufficient agrarian society to a foreign capital-induced resource economy has rekindled Mongolian fears of exploitation and has caused occasional xenophobic pangs of social unrest. Furthermore, rising income disparity, forced gentrification, and the poor conditions in the ger districts is spawning a rising tide of social discontent. Whether or not these will simply be recognized as growing pains in an emerging market or translate into political turmoil remains to be seen. As it stands, however, the political-social environment is quite stable, but might shift negatively in the medium- to long- term should society’s expectations outpace government capacity. In the global ranking of the Human Development Index (HDI), Mongolia is ranked 108, putting it in the medium category for HDI among states. Thus far, the government seems to be quite proactive in using mining revenue to subsidize many social programs, including education and health care, as well as infrastructure development.

Mongolia’s public programs can be seen as populist measures to appease a politically-charged and socially-cohesive population. One need only to look at the progress of the Oyu Tolgoi (OT) Mine whereby social unrest led the government to suggest nationalist measures to halt production in favor of a better deal with Rio Tinto, to see how the extent of power the Mongolian population yields on decisions. The government also adopted a National Development Strategy, setting up the Human Development Fund (HD Fund) in order to reach the developed world in terms of human development by 2020. However, two-thirds of this fund has been spent as merely handouts to populations to bait Mongolians for electoral votes. The Minister Zorigt Dashdorj stated that this policy would be reconsidered to allocate more money toward health insurance, public housing and education.”13 Yet while the President and PM seem to maintain popular support, Mongolians remain skeptical of the promises of politicians, who repeatedly campaign on improving the living standards of Mongolians newly urbanizing population.

12) In 2013, Mongolia successfully hosted delegations from Japan and North Korea to mediate on the issue of Japanese citizens abducted by the DPRK. For more information, see: (http://www.theguardian.com/world/2013/oct/25/mongolia-north-korea-special-relationship)

13) Brookings. http://www.brookings.edu/research/opinions/2012/01/10-mongolia-campi#_ftn1

The Guardian. http://www.theguardian.com/environment/2011/nov/07/gobi-mega-mine-mongolia

4. Demographic Risks

18





http://www.brookings.edu/research/opinions/2012/01/10-mongolia-campi#_ftn1



Population trends

Figure 3.

http://worldpopulationrevie

w.com/countries/mongolia-

population/

http://www.nationmaster.co

m/country-

info/profiles/Mongolia/Peop

le

19

44.5% of Mongolian population is between 25-54 years

Urban population – 68.5%, Urbanization – 2.81% per year

Mongolia’s population is expected to grow steadily at 1.44 % (2013 est.)

Therefore, in the future, massive immigration is likely to support its growing economy, causes its own risks, such as possible tensions with foreign labor

Ulaanbaatar hosts over 1.7 million people with a density of 672 inhabitants per square mile, and urbanizing at 69.35 % (2012 est.) which leaves little room for growth outside of mines and the capital.




14) Managing for

development results.

http://www.mfdr.org/source

book/2ndEdition/5-

1MongoliaCivilSociety.pdf

Health

According to the World Bank, public health expenditure seems to be quite high in relation to other transition economies, keeping steady at about 60% of total health expenditure and the WHO estimates that as of 2011, 5% of total government expenditure went toward healthcare. And while government has made significant strides in improving the child mortality rate; sanitation; prevention & treatment of diseases; and other health factors, per capita health expenditure has risen significantly and could become unsustainable. This is part of a larger trend of government expenditure outpacing revenue. Significant risk factors arise here if mining projects continue to be delayed adding much needed revenue to the government budget. The ensuing austerity measures, reversing social welfare programs, could create a strong backlash from the population.

Civil Society

As a result of many years of advocacy by the OSF and other civil society organizations, the Mongolian Parliament adopted the Mongolia “Public Service Broadcasting (PSB)” law in January 2005, and the former state-owned National Radio and TV service was converted into a public broadcasting entity.

In Mongolia, civil society’s first priority was to gather all available public sector management information and make it accessible to society, in other words, create public governance transparency. This information includes key economic issues, projects, influences on and processes of decision making, names of people involved, size of budgets and final project outcomes. Second priority has been to enforce accountability of local and central government officials. Towards this end, the OSF succeeded in establishing a coalition of organizations to promote open and responsible budgeting processes14.

In June 2011, the GoM amended the Public Procurement Law of Mongolia (PPLM) to include a new formal role for civil society and professional organizations

4. Demographic Risks

20

Due to regular organizational structural changes, short-term thinking, little accountability on the part of the public leaders, and the absence of performance measuring systems, Mongolia has faced many challenges in its transition from a centrally planned economy to a market economy.

Initiatives such as the National Development Dialogue, the Social Auditing Pilot Model for Participatory Assessment and Monitoring, and the World Bank’s Public Expenditure Tracking Survey, the Open Society Forum (OSF) is helping to build a platform where a successful national dialogue and shared vision occurs.

Civil society involvement plays a key factor in the success of these initiatives. This ensures citizen participation in policy formulation, implementation and monitoring processes of public management.

in bid evaluation and contract monitoring. Private and specialized nongovernmental organizations can be selected according to the provision 35-39 of this law to perform monitoring, evaluation and auditing of customer’s activity, contract performance and quality progress and execution. Procurement in Mongolia has been characterized by the familiar problems of political interference and lack of transparency, which are particularly pronounced given the small size of the formal sector and the close ties between politicians and the construction industry. Mongolia has also opted into the Global Partnership for Social Accountability (GPSA) to enable Mongolian civil society groups to apply for financial support from the international donor community to monitor public contracting and improve development results by supporting capacity building for enhanced citizen feedback and participation. In addition, Mongolian agencies have entered into memoranda of understanding with civil society groups to monitor their public contracting.

In Mongolia, the Law on Information Transparency and Right to Information, Article 10, states “The principles of transparency, fairness, efficiency, economy and accountability shall be upheld in the procurement policy and such policy shall be made available in an easily accessible manner on the website of the organization, and made public through other means.”

LEGAL RISKS

Mongolia’s legal system is influenced by Soviet & Romano-Germanic traditions. The highest legal body in Mongolia is the Supreme Court, whereby judges are appointed for life by the president, ratified by the SGH, and are tasked with appointing judges in the constitutional court—alongside the SGH and Government, each of which is allocated 3 constitutional court seats, 9 in total. While by law, the Supreme Court is independent of government, corrupt practices rarely allow for independent judgments by the judiciary15.

Rule of law. Due to Mongolia’s lack of true independence in its judiciary, the courts usually rule in favor of domestic actors over foreign entities notwithstanding the case. The courts have a reputation for being inefficient and manipulable under corrupt practices. To counter this, any agreement between foreign investors and domestic companies should have a clear and strong arbitration clause as a means of dispute settlement. The most popular destinations for dispute settlement are Singapore, France, and the UK.

15) For more information on Mongolian Kazakhs, see: http://www.macalester.edu/academics/geography/mongolia/mongolian_kazakhs.html

5. Legal Risks

21

Under the Investment Law, any domestic or foreign investor may invest in any industry or sector without any limitation or government approval, except that any foreign state owned enterprise (SOE) investing in more than 33 percent of an entity in the minerals, communication or financial sectors must obtain approval from the newly established Invest Mongolia Agency. A foreign SOE is defined as an entity of which a foreign sovereign state owns directly or indirectly more than 50 percent.

Judges in Mongolia are now rumored to be the highest paid public officials. Transparency international gives judicial independence a score of 2.6/7 and puts Mongolia in the 41-percentile rank of all countries for adherence to the rule of law16.

Crime & Corruption

Mongolia is generally a safe place to visit. Violent crime is rare against foreigners; however on occasion, one does hear reports of pretty crime against foreign nationals. Petty crime can be easily avoided and is not of much concern to major foreign investors.

Corruption, on the other hand, is still a major problem for Mongolia, not only in regards to petty legal corruption by officers of the law, but also systemically in politics and in the judiciary. In recent years, however, the GoM has taken some public strides to publicly out those accused of political corruption. The Independent Authority Against Corruption (IAAC) has been active in this regard, famously arresting MPRP party leader and former President of Mongolia Nambaryn Enkhbayar on charges of graft, embezzlement, misappropriation of government properties and misuse of his position and sentenced to 7 years (3 years commuted) in prison and banned from elections that year. 17 He was convicted of illegal privatization of newspapers and a hotel and was also fined 54 million in damages.18 Naturally, he and his followers claimed that the charges were politically motivated and blown out of proportion. Corruption charges have also be filed against politicians close to the OT mine—one being the former head of the Mongolia Mineral Resources authority.

The IAAC has also caused some alarm among other foreign investors for its aggressive tactics in investigating corruption. Currently around 50 foreigners19—at least 3 have been in Mongolia for two years—from both East Asia and even the US are being held in Mongolia under travel bans after investigations have linked them to companies engaging in corrupt practices. Foreign investors should be cautious of the changing practices by the IAAC in pursuing corruption.

Electoral fraud remains possible. It had been rumored that a seat in parliament costs $2 million, as PMs officially make only $800 a month20. This, too, is being addressed. To reduce the risk of fraud, in 2012 Mongolia used electronic voting.21 It must be noted though that like any developing country, Mongolians make errors along the road to development. Yet what distinguishes Mongolians is their drive and determination to learn from past mistakes and adapt to new constructs. This mentality is attributable to their nomadic past. One local resident claimed that Mongolians are quite adaptive to new scenarios—should corruption be the norm, they will learn and excel in the system and reversely, if democratic good governance is accepted, they will excel in this process as well.

16) OT related government officials’ annual revenue has been growing rapidly since then. For example, former OT-Agreement era PM S.Bayar’s income increased 20 fold from MNT5.3 million to MNT109 MNT in 2009. His savings rose from MNT94 to MNT156 million. Former Finance Minister S.Bayartsogt, who has also been accused of having offshore company that has an account in Switzerland, had his income risen from MNT249 million to MNT665 million. The family revenue decreased but his income was increasing. It is odd to find out that their income was increasing when the whole country or world was in crisis and recession. For further information, see (http://www.business-mongolia.com/mongolia/2013/10/08/tree-of-debt/#sthash.2u3YIMWx.dpuf)

17) http://www.freedomhouse.org/report/freedom-world/2013/mongolia-0#.U1_nMV5CNuY

18) http://mad-research.com/mongolia/overview-of-the-political-system/

19) Bloomberg Businessweek (see: http://www.businessweek.com/articles/2014-04-17/mongolia-foreign-executives-detaine)

20) http://www.theguardian.com/world/2012/jun/27/mongolia-new-wealth-rising-corruption

21) http://www.theguardian.com/world/2012/jun/27/mongolia-new-wealth-rising-corruption

5. Legal Risks

22

http://www.business-mongolia.com/mongolia/2013/10/08/tree-of-debt/#sthash.2u3YIMWx.dpuf





ENVIROMENTAL RISKS

Air pollution

Air pollution is the biggest environmental concern in Mongolia. The main sources of air pollution in the city are coal and briquettes, household heating systems, industrial boilers, power plants, public and private transport, dust emissions—construction, road and fly ash resuspension, and burning garbage. The pollution level in UB equals to PM2.5 (tiny particulate matter, which can penetrate deep into lungs) which is six or seven times higher than the WHO's most lenient air-quality guidelines for developing countries22. The studies show that air pollution constitutes 10% of the overall mortality of the city23. Despite the fact that a lot of programs and campaigns are being launched for decreasing the level of the air pollution in Ulaanbaatar, still the price advantage of the coal and harsh winters creates incentive in people mostly living in ger districts to burn coal in the stoves, which continues to contribute to the air pollution. The Mongolian government has tried to offset carbon pollution by introducing solar and wind panels. ‘Sainshand’ is going to be one of the biggest wind parks in Mongolia by producing 190 GWh of electricity every year. The total value of the project amounts to approximately 120 million US dollars and is intended to connect to the grid at the end of 2015. Ferrostaal Industrial Projects GmbH is taking a major stake in the “Sainshand” wind farm project.

The country is interested in expanding its electricity supply grid and recently more emphasis is being placed on developing renewable energy sources. According to the ‘Wind Energy Development Roadmap for Mongolia’ by 2020 wind energy stands to be among one of the most important energy resources of the country24.

22) In Ulan Bator, winter

stoves fuel a smog

responsible for one in 10

deaths.2013

http://www.theguardian.com/w

orld/2013/oct/20/ulan-bator-

killer-winter-stoves

23) An assessment of air

pollution and its attributable

mortality in Ulaanbaatar,

Mongolia.

http://www.ncbi.nlm.nih.gov/p

ubmed/23450113

24) Wind Farm for Mongolia:

Forrestal Joins 52 MW Wind

Farm Project, 2014.

http://www.prnewswire.com/n

ews-releases/wind-farm-for-

mongolia-ferrostaal-joins-52-

mw-wind-farm-project-

246107901.html

6. Environmental Risks

23

http://www.theguardian.com/world/2013/oct/20/ulan-bator-killer-winter-stoves



http://www.ncbi.nlm.nih.gov/pubmed/23450113

http://www.ncbi.nlm.nih.gov/pubmed/23450113

http://www.prnewswire.com/news-releases/wind-farm-for-mongolia-ferrostaal-joins-52-mw-wind-farm-project-246107901.html





Water Scarcity

According to international experts, lack of water resources is one of the major risks to Mongolia’s economic boom. Research done by 2030 Water Resources Group revealed that the demand for water in Mongolia for the next two decades is expected to triple, whereas the water resources continue to shrink and the country will face a 244,000m3 per day water deficit by the end of the next decade. The water scarcity problem poses a challenge to mineral exploitation as well. Most of the Mongolia’s copper and gold reserves are found in the driest spot of the country, the South Gobi. Mining companies are trying to use water as efficiently as possible by reclaiming, recycling and reusing water. One of the biggest projects of Mongolia, Oyu Tolgoi draws its water from a 560km2 subterranean aquifer, located about 400m below the desert surface and 70% of its water supply are being reused again25. Still there are some concerns on the impact of mining companies on agriculture. Experts warn that directing already scarce water to mining may affect agriculture. As a result of political pressure by some groups government passed the law on protection of watersheds in some areas by restricting mineral exploitation. Still locals are concerned about enforcement of the law. Currently, some policies for shifting the agricultural production to the east and west of the country, where water resources are more available are being considered by the government.

Cold winters

As a result of Mongolia’s extremely continental climate, UB has been recognized as the coldest capital in the world. The average temperature in the winter is -20° C in January and February, with night temperatures dropping to -40° C in most years26. Generally, the harsh winters mean that the construction period is short, mainly from April through September. Therefore construction companies need specially trained and experienced engineers for planning, design, construction and maintenance of the infrastructure projects, as well as construction equipment with special heating arrangements taking the weather into consideration.

25) See:

http://www.theguardian.co

m/sustainable-

business/mongolia-water-

scarcity-threaten-economic-

boom-mining

26) See:

http://lcweb2.loc.gov/frd/cs/

mntoc.html

6. Environmental Risks

24

http://www.theguardian.com/sustainable-business/mongolia-water-scarcity-threaten-economic-boom-mining





http://lcweb2.loc.gov/frd/cs/mntoc.html

http://lcweb2.loc.gov/frd/cs/mntoc.html

Land degradation

Land degradation has been identified as another major environmental concern in Mongolia. According to the definition given by International Convention to Combat Desertification, 90% of Mongolian territory can be regarded as vulnerable to desertification27. Climate change, inappropriate mining exploitation, water scarcity, and overgrazing among other internal and external factors have all been claimed to contribute to Mongolia’s land degradation. Given the fact that most of Mongolia’s nomads depend heavily on pasturelands and rely on their livestock for food and income, land degradation is adversely affecting their livelihoods, prompting people to move to the capital because in search of employment opportunities.

ECONOMIC RISK PROFILE29

Categories Factors Possible Score

Score

ECONOMIC

A GDP per capita

Estimated GDP per capita ($3,673 in 2012)

5 0

B Real GDP Growth

Annual Change in the estimated GDP (12.3% in 2012)

10 10

C Annual Inflation Rate

Estimated annual inflation rate (15% in 2012)

10 6

D Budget Balance as a percentage of GDP

Estimated central government budget balance (-7.7% in 2013)

10 6

E Current Account as a % of GDP

Estimated balance on the current account of the balance of payments (-31.3% in 2013)

15 2

Total 50 24

27) Rala Report NO. 200.

http://www.rala.is/rade/ralar

eport/batjargal.pdf

28) Mongolia: 'The Gobi

desert is a horrible place to

work’ 2014.

http://www.theguardian.com

/world/2014/apr/20/mongoli

a-gobi-desert-coal-mining

29)For country economic

indicators see:

http://www.worldbank.org

http://www.tradingeconomic

s.com

7. Economic Risks

25

Challenges of working in Gobi Desert:

Taking into consideration the icy winds that occur in the Gobi desert that blows dust into 50

meters above and fogs the horizons the conditions for working in Gobi desert is really harsh

and challenging. Workers that are working in Tavan Tolgoi live in gers and have to wear heavy

work wear which makes working conditions even tougher. 350-450,000 tons of coal is produced

in a month and according to calculations even by working round the clock the production may

go for a centuries28.

http://www.rala.is/rade/ralareport/batjargal.pdf

http://www.rala.is/rade/ralareport/batjargal.pdf

http://www.theguardian.com/world/2014/apr/20/mongolia-gobi-desert-coal-mining



http://www.worldbank.org/

http://www.tradingeconomics.com/

http://www.tradingeconomics.com/

This assessment was done according to the ICRG methodology. These strengths and weaknesses are assessed by assigning risk points to a pre-set group of factors, termed economic risk components. The minimum number of points that can be assigned to each component is zero, while the maximum number of points depends on the fixed weight that component is given in the overall economic risk assessment. In every case the lower the risk point total, the higher the risk, and the higher the risk point total, the lower the risk30. Although ICRG rating determines Mongolian economic risk as very low, this is about the current situation; however there are some other economic risk factors, like being dependent on natural resources as well as Chinese economy, government’s direct involvement into economic processes and etc.

Figure 4.

Real GDP Growth

As any economy mainly dependent on natural resources, Mongolian economy also has a threat of “Dutch disease”. The main risk to the Mongolian economy is its vulnerability to the mining sector; 30% of Mongolian GDP comes from mining sector. Additionally decline in production sector (except cashmere) is another weakness of Mongolian economy. As a result of natural resources’ revenues Mongolian currency – Tugrug becomes stronger, which gives an opportunity to sell Mongolian products with higher prices. However as the economy progresses from agriculture based economy, which is labor intensive, into capital intensive mineral economy, there are such kind of challenges:

30) ICRG Methodology,

http://www.prsgroup.com/I

CRG_Methodology.aspx#

EconRiskRating

31) World Bank Group in

Mongolia, 2013, Mongolia

Economic Update.


content/dam/Worldbank/do

cument/EAP/Mongolia/MQ

U_April_2013_en.pdf

7. Economic Risks

26

- Huge FDI in Mongolia as a result of mining boom reduces competitiveness of manufactured goods, even if production is small. - The natural rate of unemployment is likely to increase31.

http://www.prsgroup.com/ICRG_Methodology.aspx#EconRiskRating



http://www.worldbank.org/content/dam/Worldbank/document/EAP/Mongolia/MQU_April_2013_en.pdf




The prospect of industrialization is restricted by the Dutch disease and thus there is loss of competitiveness. To view it from a different angle Mongolia is moving from a relatively diffuse agricultural economy towards a point-resource based economy. As a consequence more income inequality is expected in the future. In order to support domestic production Mongolian government allocated “Chinggis bonds” in order to help local businesses mineral and cashmere industries32.

Another main risk for Mongolian economy is its dependence on China, due to the fact that Chinese products are cheaper and there is no jurisdiction limiting trade with certain countries. China has more than 60% of Mongolian foreign investment share and also 70% of imports are Chinese products. This means that any slowdown in Chinese economy will damage Mongolian economy as well. For instance, GDP growth in 2012 was less than expected, being affected by Chines slowdown. However due to historical factors, Mongolians are eager to diversify their economy, therefore there is plan of railway linking Mongolia with the Russian ports.

Double digit GDP growth has been achieved by consumption and investment activities, which means that country is dependent on FDI. On the other hand, in 2012 agriculture sector’s expansion contributed almost 15% to the overall GDP33.

INFLATION

In first quarter of 2013, double digit inflation fall to single digit. The major influence to the influence is volatile food prices, which is caused by the supply shortages due to the weather conditions. In 2013, food, especially meat prices went down, which also positively affected overall inflation. Energy and fuel prices also has a huge impact on inflation, government intervenes in order to decrease fuel prices, however if Russia or Chine increases border prices for energy, then prices will automatically go high, which will also push up inflation. Therefore, the government is interested in establishing new Power Plant, CHP5, however due to political reasons, the discussions are going on.

32) For further information:

MAD Research, 2013 The

Mongolian Real Estate Report.

http://mad-research.com/



Economic Update.

http://www.worldbank.org/cont

ent/dam/Worldbank/document/

EAP/Mongolia/MQU_April_20

13_en.pdf

27

http://mad-research.com/





is interested in establishing new Power Plant, CHP5, however due to political reasons, the discussions are going on.

In order to slow down inflation Government of Mongolia signed Stabilization Program with Bank of Mongolia in order to achieve:

However along with this program which are supply-side measures, there also should be monetary policies in order to lessen demand-side pressure on inflation.

Monetary & Fiscal policies

The direct involvement of Mongolian governments in the economy is the other risk generating factor. It’s often argued that the fiscal policy is pro-cyclical and monetary policy is countercyclical in Mongolia. Since what matters most for the economy is the confluence of these two policies an accurate measurement of their stances is necessary for successful policy coordination. The issue of exchange rate sluggishness is also explored here35.

Expansionary character of monetary policy that increases inflation and there is need for tightened monetary policy. Although official budget was kept within the ceiling of the Fiscal Stability Law, fiscal policy is expansionary as well due to Chinggis bonds. These bonds are used to finance public investment outside of budget. Public debt is increasing and repaid loans which were given in the framework of Chinggis bonds is equal to 20% of the GDP. The use of these bonds will create fiscal burden.

Additionally, it is worth mentioning that about 20% of the overall population lives under poverty rate36.

Figure 6.

1,70% 2,40%

3,10% 2,70%

0,50%

-4,50% -5,20%

-3,70% -7,70%

-2,00%

-10% -8% -6% -4% -2% 0% 2% 4%

2004

2006

2008

2010

2012

2014

Mongolian Goverenment Budget Percentage in GDP



Economic Update.

http://www.worldbank.org/co

ntent/dam/Worldbank/docu

ment/EAP/Mongolia/MQU_

April_2013_en.pdf

35) See article: Bataa,

Erdenebat., 2013,

Macroeconomic Risks of

Mongolia and Ways to

Mitigate Them.

36)

http://www.worldbank.org

7. Economic Risks

28

- Price stability of staple food; - Price stability of fuel retail; - Reduction the cost of imported consumption goods;

- Promotion construction sector & achieve price stability of houses34.






Financial risk contains five indicators and is rating on a scale from 1 to 50 where each indicator is assigned certain scores. In order to rate the variables 50 score is divided among five components and to each is given scores being 5 minimum and 15 maximum. The higher the overall score lower the financial risk. The level is defined according to the percentage of overall scores. As in economic risk components, financial variables also are 5 being foreign debt as a percentage of GDP, foreign debt service as percentage of export of goods and services, current account as percentage of export of goods and services, net international liquidity as month of import cover and exchange rate stability.

FINANCIAL RISK PROFILE

Categories Factors Possible Score

Score

FINANCIAL

A Foreign Debt as a Percentage of GDP

Gross foreign debt in a given year

10 6

B Foreign Debt Service as a Percentage of Exports of Goods and Services

The estimated foreign debt service, for a

given year, as a percentage of the sum of the

estimated total exports of goods and services

for that year

10 9

C Current Account as a Percentage of Exports of Goods and Services

The balance of the current account of the balance of payments

15 6

D Net International Liquidity as Months of Import Cover

Months of payments can be met by official reserves

5 3

E Exchange Rate Stability

Currency Appreciation

10 6

Total 50 30

Foreign Debt as a percentage of GDP

Country’s national debt to its GDP indicates the country’s ability to pay back its debt. In 2012, Government debt of Mongolia reached record level- 51.70% of country’s GDP. Usually, this figure is announced by World Bank. From 1992 till 2011 the record high and low levels were 105.50% in 2003 and 24.50% in 1992 respectively. Government debt for 2013 was 49.50, just a bit below 50% which was permitted for that year. In November, the Parliament blocked the bill to raise the debt ceiling up to 60%. The suggestion failed to muster the necessary two-thirds approval by the Parliament. Nevertheless, the limit for 2014 is 40%. The desire to issue more bonds comes from the increasing volume of the infrastructure projects in the country.

8. Financial Risks

29

the increasing volume of the infrastructure projects in the country. The country is increasing its spending on road infrastructure, railroad and power plant constructions and on mining. During 2013 most of the spending on infrastructure improvement facilitated by proceeds from the sale of dollar bonds in 2012.37 The forecasters predict that during 2014 growth will decrease because of the 40% limitation adopted by the Parliament. However, as in previous years the growth is expected to be two digit number. Certainly, rising the debt ceiling can result in serious burden in the future. Rapid increase of government debt in 2012 made government to think about the limits and eventually the Parliament ended up to decreasing it by 10% comparing with the previous year. The big amount of debt also can negatively affect fiscal allowance. For example, the borrowing over USD $2 billion through Development Bank of Mongolia and the Chingis bond imply that the external loans have to be paid after the bond will reach its mature level- approximately in 5-10 years. So, during this maturity period the large burden of repayment may limit the fiscal allowance. It would also has negative impact on the borrowing cost. It is difficult for investors to support the government’s decision issuing big amount of debt unless the investors are not sure how the part of the issued amount will be spent. For now, sovereign spread of Mongolia is stable.

Foreign Debt Service as a Percentage of Exports of Goods and Services

Debt service is the sum of principle repayments and interest payments actually paid on debt to non-residents.38 It differs from the standard debt for its long term since it covers only long term and publicly guaranteed national debt to IMF. Debt service is calculated according to the World Bank’s Debt Reporting System. According to World Bank data in 2012 the publicly guaranteed debt of Mongolia was USD $3.242 million versus to USD $1.307 to private non-guaranteed one. For 2012, foreign debt service was 4.5% in Mongolia slightly law than Azerbaijan where it was 5.1% of exports of goods and services in that year indicating very low risk in ICRG ranking.

Current Account as a Percentage of Exports of Goods and Services

The current account variable in this rating should not be amounted as same terms as the current account is more general perception including itself net amount received for domestically-owned factors of the production issued abroad. In other words, if a Mongolian citizen lend a house in any other country the payment of rent amounts as current account of Mongolia. It also includes net transfer payments such as foreign aid. Actually, it is hard to find this indicator for Mongolia on the online sources. Thus, we found the current account of the country for a year and calculate its percentage regarding to the exports of goods and services for that specific year. For example during 2012, the current account of Mongolia was USD $-3.3 billion comparing with the exports of goods and services USD $5.2 billion. The -64% indicates very high risk for this variable affecting the overall result of the analysis. This variable is the only among five which reveals very high risk in the ICRG ranking. Current account deficit recorded USD $-71 million in February 2014.The number was not so pleasing during 2013.

37)

http://www.bloomberg.com/

news/2013-11-15/mongolia-

parliament-rejects-bill-to-

raise-country-s-debt-

ceiling.html

38)

http://data.worldbank.org/in

dicator/DT.TDS.DECT.EX.Z

S

8. Financial Risks

30

http://www.bloomberg.com/news/2013-11-15/mongolia-parliament-rejects-bill-to-raise-country-s-debt-ceiling.html





http://data.worldbank.org/indicator/DT.TDS.DECT.EX.ZS



2013. For this reason in its semi annual report World Bank urged Mongolia to tighten its monetary and fiscal policy to cope with increasing current account deficit and to ensure economic stability in the country.39

Net International Liquidity as Months of Import Cover

This financial indicator is the sum of all official reserve in form of cash and gold (converted to USD) divided by the average monthly merchandise import cost for the same year. The variable excludes foreign liabilities and credits given by IMF. Foreign reserves of Mongolia estimated USD $2.4 billion for the first month of 2014 gradually dropping over 2013. (USD $3.7 billion in March, 2013).40 CBM is favoring to keep and increase reserves rather than to spend it. It announced that the 40% of overall reserves will be kept as “hot money” and could be withdrawn at the moment of necessity. By preferring long term stability CBM is continuing to build up reserves and to increase nation’s overall credit rating.4 1 Overall, from given maximum 5 points Mongolia gets 3.5 which indicates moderate risk in the analysis.

Exchange Rate Stability

Exchange rate stability is the lack of movement in exchange rate of the country over the time. In April 2014, tugrik reached 1,800 per USD which is an unwelcome milestone. Depreciation of MNT is a strong indicator of trouble in the economy. In 2009, the country experienced currency crisis when MNT suddenly depreciated. The depreciation rate from 2013 to 2014 is 23% against USD. The percentage was 11.4 in 2011 according to the Central Bank of Mongolia (CBM). (USD $1=1,392 MNT in January 2013, USD $1=1,714.26 MNT in January 2014). It seems that the government again will have to sell its reserves to stem exchange rate volatility as it did in 2011 and as a result reserves declined 2.27 billion, approximately 25% of country’s GDP.42 Thereby, 23% of depreciation appeared as a red line in the rating indicating high risk.

Overall results

Overall rating gives a level of moderate risk in the financial risk analysis for Mongolia. These results followed by the sum of separate scores for five variables given in the financial risk part of the country risk assessment. All date has been obtained from the World Bank data reports and 2013 has been taken as a base year. For some variables the indicators has not been available, yet strong World Bank projections has been used instead.43 (Only for the second variable). In other cases, the percentages and ratios have been formulated by careful calculations taken the separate indicators for the same period or comparative comparison of two years for showing the change over the year. (For example, exchange rate stability has been calculated by looking at the exchange rate within 12 months). Financial risk analysis revealed different scores for each variable. Each risk level has been highlighted with different colors in order to make a difference among the levels.

As the table indicates only one out of five indicators rated as very low risk. Three components revealed high level of risk one being even higher. Totally obtained 31

39)

http://www.worldbank.org/e

n/news/press-

release/2013/11/06/the-

world-bank-urges-mongolia-

to-tighten-economic-

policies-toward-economic-

stability

40)

http://www.mongolbank.mn/

eng/dbgrossreserves.aspx

41) http://mad-

research.com/mongolia/ma

croeconomics-

mongoila/foreign-reserves-

mongolia/

42)

http://www.mongolbank.mn/

eng/frontier.aspx

43)

http://data.worldbank.org/in

dicator/DT.TDS.DECT.EX.Z

S/countries?order=wbapi_d

ata_value_2009%20wbapi_

data_value%20wbapi_data

_value-first&sort=asc

31

http://www.worldbank.org/en/news/press-release/2013/11/06/the-world-bank-urges-mongolia-to-tighten-economic-policies-toward-economic-stability







http://www.mongolbank.mn/eng/dbgrossreserves.aspx

http://www.mongolbank.mn/eng/dbgrossreserves.aspx

http://mad-research.com/mongolia/macroeconomics-mongoila/foreign-reserves-mongolia/





http://www.mongolbank.mn/eng/frontier.aspx

http://www.mongolbank.mn/eng/frontier.aspx

http://data.worldbank.org/indicator/DT.TDS.DECT.EX.ZS/countries?order=wbapi_data_value_2009%20wbapi_data_value%20wbapi_data_value-first&sort=asc






FINANCIAL RISK MODERATE RISK

Financial risk components Indicator Points

Foreign Debt as % of GDP

49.50% HIGH RISK 6

Foreign debt service as % of export of goods and services

4.50% VERY LOW RISK 9

Current account as % of export of goods and services

-64% VERY HIGH RISK 6

Net international liquidity as month of import cover

6.47 MODERATE RISK 3

Exchange rate stability (depreciate) -23% HIGH RISK 6

TOTAL 30

As the table indicates only one out of five indicators rated is at very low risk. Three

components revealed high level of risk one being even higher. Totally obtained 30 score

is approximately 60% of the maximum total score. This implies that the score is in

between 60-70% meaning that the financial risk for Mongolia is in moderate level.

8. Financial Risks

32

33

3

34

INSIDE

LEGAL ISSUES………..……………..……………..………….…….. 36

TAXATION…………..……………..……………..…………………… 39

EASE OF DOING BUSINESS.……..……………..…………. 40

35

GENERAL INFORMATION

The Mongolian law is based on the Roman – German (continental) legal system. The principal legal act is Constitution (1992) 1.Arbitration law was adopted in 2003 and regulates arbitration disputes. Parties are free to choose the arbitrations in Mongolia.

INTERNATIONAL LEGISLATION

INVESTMENT PROTECTION INSTRUMENTS

1. Mongolia is party to the New York Convention on recognition and enforcement of Foreign Arbitral awards. In cases of disputes regarding the foreign investments, businesses can get arbitration and enforce them easily in Mongolia. For this they need put the arbitral clause in their agreements.

2. Mongolian legislation recognizes the primacy of International Treaties in cases of conflict with domestic legislation.2

3. Mongolia is also party to Washington Convention on the settlement of Investment Disputes between the State and National of Another State (WCID)

4. Another international document is Seoul Convention on Investment Guarantee Agency – which ensures eligibility of foreign investors for risk insurance through MIGA (Multilateral Investment Guarantee Agency). MIGA belongs to World Bank. Risks are expropriation, war and civil disturbance, breach of contract. “Oyu Tolgoi LLC” is protected from the aforementioned risks my MIGA.( http://www.miga.org/)

5. Azerbaijan doesn’t have bilateral trade agreement (BTA) and agreements on Exemption on Double Taxation Treaties (DTA) with Mongolia. According to Deloitte the best way or those without DTT is to establish a LLC.

DOMESTIC LEGISLATION LABOR LAW

Major legislative instruments dealing with labor are: Labor Code, Law of Legal Status of Foreign Citizens, Social Insurance Law

There is no legally fixed employment agreements form in Mongolia.

Salaries may not be lower than minimum wage fixed by the Government (192,000 MNT, as of January 2014)

Social insurance is compulsory for both citizens of Mongolia and foreign citizens employed in Mongolia

Obtaining work permit for foreign citizens 4 weeks before prior to entry and 2 additional weeks after entry to the country can be time consuming. Late registration (after 7 days) will be fined MNT 1,000,000.3

According to the legislation work permit must be obtained through Ministry of Labor. Next step is to extend visa and get residence permit, which must be obtained from immigration Agency.

There are foreign workers quotas for locally owned and foreign owned companies operating in Mongolia. Depending on the sectors quotas changing from 5-80%. There is no clear-cut list of sector quotas because they are changing based on the priority of the government. Should be checked on the

36

38

1) Invest Mongolia Guide by Invest Mongolia Agency / FIFTA

2) Invest Mongolia Guide by Invest Mongolia Agency / FIFTA

3. DOING BUSINESS

3.1. Legal issues

36

companies operating in Mongolia. Depending on the sectors quotas changing from 5-80%. There is no clear-cut list of sector quotas because they are changing based on the priority of the government. Should be checked on the time of starting the business.

If you your project more than 50 million USD you need approval from parliament and that is almost impossible.

Under the Investment Law, any domestic or foreign investor may invest in any industry or sector without any limitation or government approval, except that any foreign state owned enterprise (SOE) investing in more than 33 percent of an entity in the minerals, communication or financial sectors must obtain approval from the newly established Invest Mongolia Agency. A foreign SOE is defined as an entity of which a foreign sovereign state owns directly or indirectly more than 50 percent.

The parliament is not able to make decision and all the regulations are not clear. They changed the law again in and now there is only one law for all investors no matter local or foreign investors. You need to go State registration office. They still haven yet finalized the registration procedures. None of the foreign companies have come since that law. Because the procedures are not clear.

GENERAL DOMESTIC LAW

State bodies are allowed to give regulations and some of them are considered legal acts. The arbitration Bureau in Mongolia is operated by National Chamber of Commerce.3

Competition Law – first passed in 1993 then was amended in 2010 by Parliament. The purpose of this law is to prevent any business for market domination and to ensure competitive atmosphere.

Company law of 2009 was replaced with new one in 2011 by Parliament – mainly focused on sanctions on administrative level for non-compliance and also regulates the reorganization of companies in the form of merging, separation, transformation, division and etc.

One of the major concerns about Mongolian Legislation and legal acts is sudden changes due to the several factors. One of the obvious example happened recently in Mongolia about t Canadian Company. The Canadian Company, which got the License from government for operating in Uranium exploration industry, was subject to sudden change in license policy. The license was canceled for that company and given to Russian company. Through international arbitration Canadian company sued Mongolian state and won the case. This example also supports the idea that the most effective way to solve investment disputes is arbitration.

HIGHLIGHTS FROM NEW INVESTMENT LAW

According to the Investment law and Company Law businesses can be established with Limited or no foreign Investment (BELFI) or with foreign

3) PwC DB report 2012/13

3. 1. Legal issues

37

HIGHLIGHTS FROM NEW INVESTMENT LAW

According to the Investment law and Company Law businesses can be established with Limited or no foreign Investment (BELFI) or with foreign investment (BEFI). BEFI is the company with assets of value more than 100,000 USD of which 25% are owned by foreign investors.4

Any changes after 2013 May, in investment law should be passed by 2/3 of Parliament. This is done in order to regain the confidence of investors and encourage them to invest.

One note is important that the tax exemptions and stabilization certificates and other incentives are not automatically available and they are mostly uncertain and subject to applicable laws and discretion of local authorities.

There are several benefits from new FIL (Foreign investment Law) - such as Tax exemption, tax discounts, and deduction of employees training costs from taxable income. Especially zero percent VAT for some equipment during construction period (March to October) for power plant, railway construction and for other processing plants, petroleum.

The new FIL can be considered an improvement but still the wording of the law in some cases is too vague, which poses risks on foreign investors working under the legislation of Mongolia. The non-precise provisions and wording leaves room for the discretion of respective states bodies over the investment related issues.

Currently available forms of incorporation in Mongolian are the followings5: 1. Joint Stock Company

Can be either open or closed JSC

Must be registered in State registration Office for legal status.

Minimum amount of charter capital for listing a JSC at the Mongolian Stock Exchange is MNT 10 million.

Termination can be either by court decision including insolvency or by agreement of its shareholders

2. LLC – limited Liability Company

Can be founded by one or more individuals or legal entities.

LLC operating in mineral resources, banking and finance, media and communication sectors might be need confirmation from Government of Parliament.

Minimum amount of charter capital for foreign invested LLC is USD 100,000 that must be paid prior to registration.

No limits for amount of issued shares of LLC

4) PwC DB report 2012/13

5) Doing Business report 2014

3. 1. Legal issues

38

Termination can be either by court decision including insolvency or by

agreement of its shareholders.

3. Partnership

There 2 types of it (extract from Law on Partnerships): Limited and Unlimited

In Limited Partnership – must be at least one partner with unlimited exposure on liabilities of partnership and the other partners have liability limited to their capital obligations

In Unlimited Partnership – partners are liable in joint way and there are no limits to capital contribution and private property.

4. Representative office

Representative offices are considered as extension of their main office not separate legal entities.

One important note is that representative offices cannot have income-generating activities.(It is highly recommended to have first representative office because of market research)

No charter capital required for registration

Similar registration procedures to other legal entities

Is required to be registered with Invest Mongolia Agency /FIFTA

No record of registration fee but it is higher than for LLC registration.

Table 1.

Type of insurance Employer tax Employee tax

Pension insurance 7% 7%

Benefit insurance 0.50% 0.50%

Health Insurance 2% 2%

Industrial accident and occupational disease insurance

1-3% N/A

Unemployment insurance 0.5% 0.5%

Source: Investment Guide to Mongolia 2014 by Invest Mongolia Agency / FIFTA

TAXATION

All the taxation is subdivided into direct and indirect taxes. VAT and excise tax are accepted as indirect taxes. Excise tax - An indirect tax charged on the sale of a particular good.

Double Taxation Treaties (DTT) – Mongolia currently concluded DTT with 30 countries. Azerbaijan doesn’t have DTT with Mongolia. This is a drawback for Azerbaija

3. 2. Taxation

39

Azerbaijani businesses and in absence of this treaty they will be subject to additional taxes.

Principal taxes:

Taxes on corporate income 10% is applicable for annual income up to 3 billion / 2,2 USD MNT 25% applicable over 3 billion MNT

Personal income tax

Social insurance Tax

Value-added Tax (VAT) VAT of 10% is imposed on supply of goods and services

Customs and Excise Duties Tax Applicable to imported goods such as tobacco, alcohol, gasoline and diesel

fuel.

Immovable Property Tax 0, 6% of the value of immoveable property.

Mining Tax (license fees and royalties)

Foreign investors can get stability agreement and get Tax Certificate. This Certificate will immune the Foreign Investors from any increases in taxation , but they will be able to benefit from positive (decreases in taxes) changes. For mining sector tax stability and other business rights stability are given for certain periods according to the amount of investment: USD 50 million – 10 years USD 100 million – 15 years USD 300 million – 30 years

Courts

Courts are not independent and, my recommendation is to have as it was mentioned above arbitral clauses in business agreements. The highest court is Supreme Court and then there are regional courts as well. The president of Mongolia appoints judges.

EASE OF DOING BUSINESS

Mongolia stands at the 25th place in the ranking of ease of doing business.

Procedures required for doing business: No Procedure Required

time (day) Cost associated

1 Check the uniqueness of company name at the State Registration Department of the Tax Authority. Once the name has been checked, the State Registration Office gives the entrepreneur a card authorizing him or her to open a bank account within the same office. The entrepreneur opens a temporary account at the bank within the same office and at the same time can instruct the bank to make a payment to the account of the Tax Authority.

1 MNT 500

2 Pay the registration fee. 1 No charge

3. 3. Ease of doing business

40

3 Register at the State Registration Office, Under the General

Department of State Taxation.

By registering at GASR Legal Entity Registration Department, the company also registers for VAT and corporate income tax. The Registry automatically publishes a notice of company formation. The Registry issues a letter of approval to open bank accounts. The stamp fee is TG 22,000.

Starting from February, 2013, GSAR prepares periodic updates of new registrations and provides them to GDP, which updates its own record without the need for involvement by the new business.

Required documents and other information for LLC registration:

1. Application for registration of legal entity in state registry (Form UB-03) – 3 copies

2. Name verification slip for legal entity (From UB-09) 3. Founder’s decision to establish a new legal entity – 2 copies. For a

legal entity with more than one member, meeting minutes and decision from the founders’ meeting are required.

4. Article of association of the legal entity – 3 copies. 5. Notice to open bank account of a legal entity (Form UB -10). 6. Payment receipt for a stamp fee for state registration. 7. ID copies of founders(s) – 2 copies 8. Beginning balance sheet – 2 copies 9. Other relevant document (payment receipt, list of assets, lease

agreement when applicable).

4 MNT 22,000

4 Apply for social security with the Social Insurance Department.

Registration for social security with the social insurance department at the district is free (there is no regulated fee/payment for registration with social insurance office).

Even though it is free of charge, the cost to pay for Social Insurance Certificate (paper certificate) for the legal entity is MNT 5000.

1 No charge

5 Make a seal 1 MNT 46,000

41

42

INSIDE

Modernization of Large Thermal Power Plant maintains a key lifeline for

the people of Mongolia

MAJOR FINDINGS:

1. Mongolia’s power infrastructure is severely

outdated, and operating at full capacity is

experiencing substantial efficiency loss as well as

possesses risks to surrounding environment.

2. Without a strong acceleration of power market

development and modernization the country is

about to face energy shortfall in view of the

exponen

exponentially growing demand particularly from

South Gobi region.

3. Mongolia is seen as a country of great potential,

thus it attracts world’s top companies competing

for projects and tenders within the power sector

43

MARKET STRUCTURE AND KEY PARTICIPANTS…….... 44

SECTOR ANALYSIS…………………..……………..…………….…… 45

ELECTRICITY TARIFFS AND PRICES……………..…………... 48

LEGAL ISSUES………………..………..……….………..……….…….. 48

HYDRO AND RENEWABLES…………………..……….…..….… 50

COMPETITION AND PROSPECTS……………..…………….. 51

1. POWER MARKET is designed of three main regionally interconnected systems: Central, Western, and Eastern, and few very small isolated grids. See the detailed map below.

Map 1. Energy grids

Central Energy Systems (CES) is the largest one, representing around 91% of all installed generating capacity and 96% of all electricity supplied in Mongolia. CES supplies electricity to the capital and largest urban center, and also to the largest industrial parks – Erdenet, Baganuur and Darkhan. CES also serves in Ulaanbaatar, Erdenet, Darkhan district heating networks and provides steam for industry.

Participants

Power markets generation, transmission and distribution network is compromised of the following companies:

1. Market Structure: Key Participants

44

The following companies (apart from NDC) are owned by - 41% - to the Ministry of Infrastructure / 39% - to the State Property Committee / 20% - to the Ministry of Finance and Economy. Nevertheless, the Ministry of Energy manages the whole power market, thus most of the tenders and projects are announced by this authority (NDC2, 2012).

During our research we designed for future convenience and clarification a step-by-step guide to how Mongolia’s power market – generation, distribution, and transmission is organized (REEP3, 2012):

2. SECTOR ANALYSIS

Generation

Mongolia’s main power generating capacity lies on 5 coal-fired combined heat and power plants. See figure below. (NDC, 2012)

Plant Installed electricity capacity (MW)

Self-consumption

Available electricity capacity (MW)

Heat capacity (Gcal/h)

Thermal efficiency

TPP#2 21.5 16.4% 18.0 31 23.3% TPP#3 136 21.0% 107.4 518 34.2% TPP#4 540 14.8% 460.1 1045 39.3% Darkhan TPP

48 18.5% 39.1 181 28.1%

Erdenet TPP

28.8 22.8% 22.2 120 43.8%

Figure 7.

As we can see from the figure above, the thermal efficiency, as well self-consumption rates are very high, thus indicating a loss in efficiency. Another very crucial factor to consider not mentioned in the figure is the load factor. Currently, as estimated by the officials and experts of the industry, the stations operate at almost full capacity. This is alarmingly high and raises risk for accidents, as the infrastructure has not been tested for such high loads during extreme weather conditions in winter.

Related appendices:

Mongolian Electricity

Market Outlook, Annex 5

2)NDC, 2012, Country

Presentation: Mongolia.

Link:

http://www.energy.mn

3) REEP Policy Database

(REEP), 2012, Policy and

Regulatory Overview.

Link:

http://www.reegle.info/prof

iles/MN

2. Sector Analysis

1. Five power-generating companies sell electricity at regulated tariffs to the

single buyer.

2. The central regional energy transmission company sells the purchased

electricity to ten distribution companies.

3. The central regional distribution company, which functions as the single

buyer, sells the purchased electricity at wholesale prices.

4. Distribution companies distribute electricity and supply it to the end-users at

distribution prices.

5. In accordance with this sequence, regulated generation tariffs are set, then

tariffs for transmission and distribution, and finally, tariffs for end-users.

45

http://www.energy.mn/

http://www.reegle.info/profiles/MN

http://www.reegle.info/profiles/MN

Power

Energy source by production

From NDC, 2010 & 2012

Below the energy source by production is provided. A very minor part as mentioned comes from diesel-fueled stations and even less from solar, hydro and wind that are extremely marginal. Mongolia’s power market overall covers around 70% of the population, the rest is ensured by diesel stations and hydropower plant generation.

Transmission and Distribution

In figure 8 you can find the general characteristics of CES network and its output results (ERC, 2013)

GWh unless stated

CES generation gross output 3,594

CES generation self-consumption 16.5%

CES generation net output 3,000

Imports 130

CES net supply 3,132

Transmission and distribution losses 17.4%

CES final supply 2,587

Figure 8.

We can conclude that a major efficiency loss is within transmission and distribution as mentioned in the previous section, due to severely outdated infrastructure and capacities (ERC, 2011).

According to NDC (2012) in figure 9 production has been increasingly higher than distribution, by an average of 652 mln kWh in 2011.

Figure 9

2006 2007 2008 2009 2010 2011

production 3433 3595 4000 3998 4127 4312

distribution 2832 2987 3385 3376 3482 3660

0

1000

2000

3000

4000

5000

Mln

kw

h

Electricity production and distribution

Related appendices:

Economics of energy

technology, Annex 5

Source: Energy Regulatory

Commission (ERC), 2010.

Annual Report 2010. Link:

http://www.erc.mn

NDC, 2012, Country


Link: http://www.energy.mn

2. Sector Analysis

46

Thermal

Power

2010: 94.3%

2012: 93.0%

Diesel Fuel

600 stations, 60-1000 kW

2010: 0.3%

2012: 6.0%

Imported 2010: 4.7%

2012: 0.55%

Wind/Solar

2 sta. each, total 6.6 MW

2010: 0.0%

2012: 0.25%

Hydro

13 stations

2010: 0.7%

2012: 0.2%

http://www.erc.mn/


As we look at the consumption portions of the electricity in figure 10, we can see that the most is used by the industry and consumption, with main sector being mining and construction. It is expected that mining will remain as the main growth driver for power market. Second most important conclusion derived is the portion devoted to station internal use and losses in transmission, distribution – about 18% and 14% respectively, most of which according to the experts, are mostly due to outdated infrastructure and equipment.

Figure 10.

Cross Border Trade

Electrical systems

IMPORT EXPORT

2009 2011 2009 2011

MW GWh MW GWh MW GWh MW GWh

CES 120 132 120 205 25 21 15 21.4

WES 15 60.3 18 75.2 - - - -

Total 135 192.3 138 280.2 25 21 15 21.4

Table 2.

According to NDC1 (2012) CES and the WES both are connected to the Russian grid. 220kV double lines connect CES and WES is connected at 110kV. Around 10 MWs is imported from Russia into WES and up to 130MWs into CES, during the high peak months. NDC claims that the maximum capacity available from Russia is 250MW. Export as can be seen from the table 2 is marginal, at happens on request basis to China – Inner Mongolia part of the country.

42%

2.80% 0.9%

16.30%

5.90%

14%

18.10%

Export 0,20%

Energy consumption

Industry and Consumption

Transport and Communication

Agriculture

Communal housing

Other

Lossess in transmission anddistribution

Station internal use

Export

NDC, 2012, Country


Link: http://www.energy.mn

47


3. Electricity Tariffs and prices

Mongolia’s power sector is experiencing currently a substantial loss of around 60 billion MNT, thus in face of that government has increased the prices and tariffs for electricity and introduced addition monthly base fee based on the size of the subscriber, thus the total price is composed of the 2 respective elements. (Infomongolia1, 2013). See below the current tariffs for electricity:

Table 3. Tariffs and prices.

Total expense composition, as of August 2013

Electricity prices 1 MNT to USD 0.00056

Segment Price, MNT (Tugruk) per 1kWh per month

Price, USD

Consumers in apartments or Ger distrcits

(consuming up to 150kwh) 79 0.04424

Consumers in apartments or Ger distrcits (from 150 to 200kwh per month) 90.85 0.050876

Extracting and processing industries in the mining sector 130 0.0728

Other industries and economic entities 105.6 0.059136

Monthly base fee added to the bill (only for residents)

as of August 2013 depending on m2 of the house or apt., - monthly fee added to the bill Price, MNT Price, USD

< 40m2 3000 1.68

40m2 to 80m2 5000 2.8

> 80m2 10000 5.6

4. LEGAL ISSUES

Energy licensing

Mongolia is a signatory to Energy Charter Treaty and the Protocol for Energy Efficiency and Related Environmental Aspects. The respective treaties are aimed at implementing and increasing energy efficiency policies and minimizing environmental harm.

Mongolia’s power market regulator – Energy Regulatory Commission (ERC), is the institution responsible for setting energy prices, administrating energy system operations, this includes dispatching and any other issues related to development or improvements within energy sector. It is also responsible for issuing licenses and advising the market participants on their operations. ERC operates under the Ministry of Energy.

Infomongolia, 2013. Electricty

price increase. Link:

http://www.infomongolia.com/ct/ci

/6337

Related appendices in

Annex 7:

Central energy system

electricity prime costs per

unit (performance by

2012)

Cost structure of central

region licensees

(performance by 2012)

Electrcity cost per unit


Central region licensees’

heat cost structure


Energy Regulatory



http://www.erc.mn

3. Electricity Tariffs and prices

4. Legal Issues

48

http://www.erc.mn/

Key legal acts governing power market (MOE, 2014):

In the following sections below the team has provided extracts from Law of Mongolia on Energy, which are important for starting operations in the field of energy in Mongolia – please see below extracts on type of activities requiring a license and procedures required for obtaining one.

Related appendices:

Annex 1, 2, 3

Declaration of undertaking

Project assessment criteria

Projects references

Source: Ministry of Energy

(MOE), 2014. Link:

http://energy.gov.mn/

4. Legal Issues

49

1. Law of Mongolia on Energy - “purpose of this law is to regulate matters relating to energy generation, transmission, distribution, dispatching and supply activities, construction of energy facilities and energy consumption that involve utilization of energy resource”;

2. Renewable Energy Law of Mongolia – “purpose of this law is to regulate generation and supply of energy utilizing renewable energy sources”;

3. Nuclear Energy Law – “purpose of this law shall be to regulate relations connected to exploitation of radioactive minerals and nuclear energy on the territory of Mongolia for peaceful purposes, ensuring nuclear and radioactivity safety, protecting population, society and environment from negative impacts of ionized radioactivity”.

The following activities in energy field require obtaining a license (Article 12, Law of Mongolia on Energy):

12.1.1. Electricity generation;

12.1.2. Heating generation;

12.1.3. Electricity transmission;

12.1.4. Heating transmission;

12.1.5. Dispatching;

12.1.6. Electricity distribution;

12.1.7. Heating distribution;

12.1.8. Regulated supply of energy

12.1.9. Unregulated supply of energy;

12.1.10. Importation and exportation of electricity; and

12.1.11. Construction of energy facilities.

Procedure for obtaining a license (Article 21, Law of Mongolia on Energy):

21.1. An interested legal entity shall make an application for a license to the Regulatory Authority or Regulatory Board of aimag or the Capital city.

21.2. A legal entity shall attach the following documents to its application for a license according to the activities to be engaged in:

21.2.1. Feasibility study;

21.2.2. Survey of energy resources to be used for energy generation;

21.2.3. Type, quantity and quality indexes of the energy to be generated, transmitted, distributed or supplied;

21.2.4. Major technical specifications of equipment to be used in operations;

21.2.5. Scope of services, boundaries of possession, the balance of energy generation, supply and consumption;

21.2.6. Environmental impact assessment;

21.2.7. Action plan for environmental protection;

21.2.8. Statements of financial capability and resources of the legal entity;

21.2.9. Starting date of operations, amount of initial investment and sources of financing;


5. HYDRO AND RENEWABLES POWER OVERVIEW

Basic findings (ERC, 2013):

Hydropower potential of Mongolia is calculated to amounting to 6417.7 MW, and there is a possibility to produce 56.2 kWh energy per year

Mongolia has on average 270 to 300 sunny days, while the average duration of solar illumination; annual mean solar energy, and the daily solar intensity are identified respectively as 2250-3300 hours; 1400 kWh/m2, and 4.3-4.7 kWh/m2.

The wind power capacity resource is estimated as 836.8 billion kWh and an annual duration of its potential exploitation is 3500-4600 hours.

Mongolia’s hydro power resources are estimated to be substantial, thus the hydro power issue has gained some attention from the government in their Natural Renewable Energy Plan (NREP) aimed at increasing the share of renewables in their consumption (target is 25% of the total). Nevertheless, the sector hasn’t seen any significant growth, as the total portion still is negligible around 1% of the total power produced. Mongolia is very rich in its northern part of the country with rivers, thus good potential for hydro power stations. But the issue is that is 100% dependent on government subsidies for creation of economies of scale, and as outlined in financial risk sections, current status and economic condition of the government shrinks the outlook for the hydro power market for now.

Energy Regulatory



http://www.erc.mn

4. Legal Issues

5. Hydro and Renewables

50

21.2.10. Description of skills and experience of technical personnel.

21.3. Regulatory Authority and Regulatory Boards of aimags and the Capital city may appoint an independent expert to review and evaluate applications and attached documents, where necessary.

21.4. A decision whether to issue a license shall be made within 60 days from the date of receipt of the application for a license.

21.5. The application and attached documents which fail to meet the requirements shall be returned to the applicant within 10 days from receipt.

21.6. The decision to issue a license or the ground for refusal to do so shall be published.

21.7. A license shall be issued to a financially capable legal entity, which is experienced or is able to operate in the given field.

21.8. In case several legal entities make applications for the same type of license, the license shall be issued on the basis of selection.

http://www.erc.mn/

6. COMPETITION

With a regard to competition for projects and tenders in Mongolia following conclusions have been reached:

- preference is given to local bidders and companies - Mongolia is seen as a market of great potential thus it is attracting all major energy construction companies – Schneider electric, GDF Suez, E.On and other major companies from Japan, South Korea - as climate is of serious challenge in the construction process, a good advantage is company’s experience in similar conditions and challenges - from local market perspective – the market lack financial resources to be able to execute large scale projects, thus joint ventures are formed. - Locally there two strongest holding companies with whom a potential joint venture for bidding on large projects, or perhaps for assessment as a competitor on small projects are – MCS (http://www.mcs.mn) and NewCom (http://www.newcom.mn/en)

7. PROSPECTS

Ministry of Energy estimates (MOE, 2014) even together with development of CHP#5, the would be a shortfall in supply of electricity within CES of about 600 MW by 2015, and by 2020 amounting already of 900MW. The biggest growth driver is seen the South Gobi region, as it is rich in resources and besides OT mine a lot of other mines are being developed, and that is excluding basic consumption growth within the capital. The country is in desperate need of developing its power networks by new stations, providing good integration for power plants developed by mining companies and modernizing the current state of infrastructure.

Ministry of Energy (MOE),

2014. Link:


6. Competition and Prospects

51

http://www.mcs.mn/

http://www.newcom.mn/en


52

INSIDE

POWER SECTOR………..……………………..……………..……….. 54

TECHNOLOGIES PARK………..……………..…………………… 59

CONSTUCTION SECTOR………..…..……………..….………. 60

ENERGY CONSTRUCTION SECTOR……...………………. 65

AGRICULTURE.………..………..……….………………..….…….… 67

OTHER OPPORTUNITIES………………..…………………..…. 69

In 2014, the Mongolian economy is expected to grow by a blistering 15.3%, and

the IMF expects it to be the fastest-growing economy in the world over the next

decade. –Forbes

53

CONSULTING SERVICE OPPORTUNITIES

OPPORTUNITY NO.1

Invitation for Expression of Interest, Consulting Services for a network analysis and a feasibility study-CES Transmission System, Ref-N°.: 2099 15 430, Mongolia

Deadline of the submission: 30th May 2014, 18:00 CET

Project background: Project is intended to improve and modernize the Central Energy System (CES) through the rehabilitation, replacement and expansion of the existing power transmission by use of efficient and environmental-friendly installations. The larger objective of the project is to assist in the development of a robust and modern power transmission system operated by (NPTG)) in order to sustain the fast growing electricity demand development of Mongolia.

Project locality: CES Transmission System

Project Client Information: Ministry of Energy

The project is promoted by the Ministry of Energy (MoE), the Project-Executing Agency (PEA) for the Consultant Services, with its sector-overseeing responsibilities. The beneficiary of the subsequent investment programme is supposed to be the National Power Transmission Grid State Owned Joint Stock Company (NPTG).

Address: 17060 Government Building 14, Chinggis Avenue Khan-Uul District, Ulan Baatar, Mongolia

Project Financing: Project is funded by “kfW Bankengruppe” (www.kfw.de), a German government-owned development bank, based in Frankfurt.

Project parameters: The requested services of the consultant shall comprise all relevant professional activities for the preparation of a Feasibility Assessment that includes:

a) Review of demand data and a Network Analysis for the power transmission system of the HV system (>220kV) of the CES to form the basis for decisions to identify measures for the rehabilitation/replacement or construction (HV Transmission Line to South Gobi) of the below mentioned distribution and transmission system components. The transmission system to South Gobi Region requires an assessment of the optimum transmission voltage.

1. Power Sector

54

SUMMARY: Currently there is 1 open tender for invitation for expression of interest (see below) and there are two developing projects (see further sections) that in the next few months should be announced for tenders.

Recommendation: (1) Pursue Opportunity No.1 (2) Monitor project opportunities for future tender announcements

http://www.kfw.de/

b) The feasibility study for the then prioritized and selected components shall

be undertaken.

This feasibility assessment shall take place in two steps: First the Network Analysis including the identification of the most urgent needs for rehabilitation and the reasons (energy efficiency, necessities for the system) for new lines and in the second step the feasibility assessment for the then chosen investment activities. The transmission systems, especially the substations were designed in accordance with former Russian standards with double busbars and a transfer bus. Owing to the competencies of the operating personnel, the installations are in an operational condition, although standards are often compromised. Most of the equipment (HV, MV and LV) is based on designs of the 60s and 70s and therefore inapt to respond to a modern power system operation. In addition, due to expected growth in the power market as well as to provide stability and redundancy (n-1 criteria), and expansion.

Requirements for potential Contractors: Services are to be provided by a team comprising of international and local short-term competencies such as Transmission specialist, Substation specialist, expert in Network Analysis, SCADA/Telecom specialist, Protection specialist, Environmental specialist, Sociologist, Civil Works, Contractual Engineer and other professional and administrative support staff. Efficient management and backstopping services shall be made available. Consultants are free to associate themselves with other firms to ensure that all required know-how and experience are available to them.

Review of tender documents and their requirements: The Expression of Interest in English language shall have the following structure and content and shall be presented in the same sequence as shown below:

55

• Darkhan 220/110/35 kV Substation,

• Ulan Baatar 220/110/35 kV Substation

• Baganuur 220/110/35 kV Substation

• 220 kV Transmission Lines connecting the substations

• HV Transmission system Ulan Baatar – Mandalgobi to the South Gobi Region;

• Erdenet 220/110/35 kV Substation (optional)

• Choir 220/110/35 kV Substation (optional)

(i) Covering Letter, comprising the firm’s name, address, contact person, telephone, fax, email, if applicable mentioning the association for this project. The letter should be on a letterhead of the Company or that of Authorized lead Agency in case of associations and signed by an Authorized representative of the company or lead Agency.

(ii) Presentations of firms (maximum 10 pages), inclusive clear statements of type, property and key task of the association, if applicable.

(iii) Statements and Declarations:

Power

1) Freedom House, 2013 http://www.freedomhouse.org/report/freedom-world/2013/mongolia-0#.U1_nMV5CNuY

2) ABC News, http://abcnews.go.com/International/mining-gobi-battle-mongolias-resources/print?id=19897898 3) Mongolia enacted the Third Neighbor Policy in the 1990s to diversify its trade away from strictly Chinese and Russian goods, and expand relations with other liberal-democratic countries, the United States in particular.

1. Power Sector

56

a) Declaration of submitting a proposal in case of being short-listed; b) Statement on affiliations of any kind with other firms which may

present a conflict of interest in providing the envisaged services (in case of an association one separate declaration for each member).

c) In case of an association – the intended contractual arrangement with international and local firms, nominating the lead consultant and including letters of intent of participating firms (in case of local partners a fax copy of such letter of intent is sufficient).

d) Declaration of Undertaking to observe the highest standard of ethics during execution of the con-tract. Applicants should be aware that any fraudulent or corrupt activities disqualify them immediately from participation in the selection process and will be subject to further legal investigation. The said declaration shall be submitted and duly signed according to the form as provided in. See Annex 1.

e) Certified statement of financial capacity of the lead consultant and all associated partners (Balance sheet, statement of turnover or annual tax statement or profit and loss account all of the last three (3) years).

f) Statement about Quality Control Management; (iv) List of project references carried out as Annex 3 shows covering the

recent 5 years and strictly related to the envisaged services (maximum 10 references).

- An outline of the firm's and its associates’ (if any) recent experience on feasibility studies and design works of HV Transmission System works of 220 kV and above;

- An outline of the firm's and its associates’ (if any) recent experience related to complex rehabilitations works of substations of HV Transmission Systems of 110 kV and above;

- An outline of the firm's and its associates’ (if any) recent experience related to HV Transmission Line works of 220 kV and above;

- an outline of the firm's and its associates’ (if any) recent (5 years) experience on having conducted or supervised ESIA, ESMP and RAP-study works for transmission systems.

(v) Brief CVs on personnel proposed for backstopping and home office support.

(vi) List of available personnel structure for the envisaged services with information about education, professional experience, regional experience, years with firm, specific project-related experience and experience in similar posts. This list shall allow a profound judgment on the consultants’ general ability to provide the required personnel having the specific experience for the project in case of an offer. Personal belongs to the firm or have a long cooperation gets more points.










Procedure of submission:

1.The prequalification proposal shall be submitted in one (1) printed original and one (1) electronic copy (unprotected PdF-format) on a CDROM to the Tender Agent, with the address given below,

Walter Klotz, Consulting

Am Reitplatz 2B

D 65779 Kelkheim/Ts

Germany

Tel: +49.172 58 57 412

Fax: +49.6195.8428

Email: [email protected]

2. The prequalification proposal shall also be submitted, for reference, in one (1) printed original and one (1) copy to the Project-Executing Agency, with the address given below.

Ministry of Energy

Department of Strategic, Policy Planning

c/o Tovuudorj.P., Director General

Chinggis Avenue, Khan-Uul District

Ulan Baatar – 17060 Mongolia

Tel.: 976.62 26 30 60

Email: [email protected]

Note: For the requirement of timely submission, only the submission to the Tender Agent shall be relevant. In the event of any discrepancy between the printed original, printed and electronic copies, the printed original shall govern.

3. Two copies of the prequalification proposal shall be submitted to KfW, with the address give below, on the same date.

KfW Bankengruppe

LEc6 Asien Energie

Attn.: Ms. Carolyn S. Neufeld,

Palmengartenstrasse 5-9

D-60325 Frankfurt am Main

Tel.: +49 69 7431-3233

Fax.: +49 69 7431-4775

Email : [email protected]

www.kfw.de

* It is planned to establish a short-list of not more than five (5) prequalified consultants not later than four weeks after the submission date and to invite technical and financial proposals from these consultants.

Assessment criteria: The evaluation procedure for the prequalification process will follow the latest version of the „Guidelines for Assignment of Consultants in Financial Co-operation Projects“ (refer to homepage of KfW development bank www.kfw-entwicklungsbank.de). See Annex 2.

4) UB aside, there are no

other cities in Mongolia that

surpass a population

threshold of 90,000

residents.

5) Freedom House, 2013

http://www.freedomhouse.or

g/report/freedom-

world/2013/mongolia-

0#.U1_nMV5CNuY

6) The Guardian.

http://www.theguardian.com/

world/2014/apr/20/mongolia-

gobi-desert-coal-mining

57

mailto:[email protected]





DEVELOPING PROJECTS WITH UPCOMING TENDERS

1. Energy Efficiency and Urban Environment Improvement

Project funding: ADB – Project No. 46343-002

Source to track: http://www.adb.org/projects/46343-002/main

Project structure (from the source): “The proposed Energy Efficiency and Urban Environment Improvement Project will upgrade the electrical transmission and distribution networks in and around Ulaanbaatar, thereby improve energy efficiency, reduce transmission and distribution losses and emission of greenhouse gases and other air pollutants from existing power plants in Ulaanbaatar. It will also facilitate financial closure of an on-going combined heat and power plant number 5 (CHP 5) through a public-private partnership (PPP) model, which has been supported by Asian Development Bank (ADB). The components of the project include (i) upgrading the electrical transmission and distribution networks, (ii) computerizing the system at load dispatch center, transmission and distribution level, and (iii) capacity building” (ADB)

Consulting opportunities:

Part 1 (data gathering and preliminary assessment) will require individual consultants (2 international, 4 person-months; and 2 national, 4 person-months)

Part 2 (preparation of feasibility studies, capacity building, and due diligence) will require a consulting firm (8 international, 34 person-months; and 10 national, 103 person-months). The consulting firm will be engaged through quality- and cost-based selection method (with a quality-cost ratio of 90:10) using a simplified technical proposal.

2. Transaction Advisory Services for the Combined Heat and Power Plant 5

Project funding: Asian Development Bank – Project No. 47091-001

Source to track: http://www.adb.org/projects/47091-001/details

Project structure: 1. Technical studies of rail infrastructure, coal resources, water resources, and ash management 2. Legal support 3. Financial analysis support 4. Negotiation support

TA will engage international and national consultants to prepare technical studies and provide advice on the technical parameters of the project agreements

7) The Atlantic.

http://www.theatlantic.com/

infocus/2013/07/a-

mongolian-neo-nazi-

environmentalist-walks-

into-a-lingerie-store-in-

ulan-bator/100547/

8) NATO. http://www.nato.int/cps/en/natolive/news_85430.htm?selectedLocale=en

9) For more information on Mongolian Kazakhs, see: http://www.macalester.edu/academics/geography/mongolia/mongolian_kazakhs.html

1. Power Sector

58

http://www.adb.org/projects/46343-002/main

http://www.adb.org/projects/47091-001/details

OPPORTUNITIES FOR SUMGAYIT TECHNOLOGIES PARK

All the information in this report is also applicable to the business opportunities for STP in Mongolia. But there are specific points that need to be highlighted.

Mongolia is notorious for its harsh climate in terms of the highest temperatures above or below zero, therefore all constructions are underway mainly in summer starting from March when it gets warmer and ends in September. As power generation surpasses the distribution (See figure 9 in power sector part, construction of new power grids as well as import of cables is necessary. Therefore, big electricity transmissions projects are underway in the country (for ex: Power Plant #5 (CHP5), its construction is to be launched in 2016). All transmission lines, equipment is under government control (via Ministry of Energy) and they have not decided yet which company to work with. There is a tendency to build power plants and transmission lines near the mines to protect ecology of the city and save money since the land is getting expensive in and around the major cities. Currently Mongolia needs to import low and medium voltage housing wire cables and solar panels. Thus, there is need for more renewable energy therefore solar tariff is low and demand for solar energy products is high. Renewable energy is very expensive while being unable to yield any benefit in the short-run, for example, the wind park will pay back in twelve years.

Currently there is an international tender on building railway (according to Transparency International). Railway construction tenders has been ended and the construction is about to start (according to Deloitte) which enables STP to offer its wagons to the contractors that are dealing with the procurement. American companies together with Russian ones are keen to take the lead in this sector. Currently, the purchase of Russia-made wagons is under consideration for the upcoming projects. Besides, road infrastructure, coal handling processing plants, airport and metro construction are crucial sectors in the near future which open an opportunity for the sale of STP products. The government is planning to build CHP 5 based on PPP principle as well as new technology and industrial parks, which will be located in eastern Gobi Province. The park project initiated by the government mainly aims to bring different kind of small productions to the relevant parks. The tender will be announced by State Procurement agency and the only way to follow the tenders is to check the website and also check the Mongolian news sources. Thus, STP can offer consulting services in the construction of the parks and bringing necessary equipment to Mongolia as well as establish own production facilities there. Therefore, STP can contribute with its expertise and know-hows in this regard. In order to ensure proper quality of construction works, trainings for local engineers and workers are a must.

China offers many internationally-recognized types of high quality products that STP produces. STP can compete only with favorable prices and transfer of know-hows since Mongolia lacks qualified workers in this sector. A road map for energy sector is included in Government’s vision of 2020 which is available on the website of the Ministry of Energy as well as is being regularly updated and expected to be published in about two months.

10) English News.

http://english.news.mn/con

tent/168445.shtml

11) Info Mongolia.


m/ct/ci/5826

2. Technologies Park

59



It is preferable to cooperate or partner with local contractors in general. But particularly, LLC is the best option of foreign company formulation in Mongolia. IFC and IMA are the best options in terms of being oriented and assisted to manage investment in Mongolia. Nomin Trading Co.,Ltd (especially its subsidiary; Nomin Energy & It) can be a better option since it is the main trading/retail company in Mongolia with its huge selling capacity through its country-wide shop networks. Cables and wires are mostly bought from Russia. NOMIN Group also deals with construction, energy (with 1 plant in UB and another in Erdenet), carpet manufacturing, plastic factory, bus assembly and gas distribution in Mongolia. Nomin is planning to set up a products showroom in its huge company building, which will showcase arrays of the products from fashion to construction. Therefore, this is a good opportunity for STP to have its own stand in that showroom. The company is very interested in cooperating with Azerbaijani companies especially STP and is ready assist in setting up joint businesses or partnerships in Mongolia with Azerbaijani companies. In general, Nomin Group is ready to assist the foreign investors in establishing the relations with local authorities and also support them in the local market. Although this group is big enough for Mongolian market, it does not have foreign investment shares and it is purely domestic family company. Being family company implies that, this group has strong support and connections with the government and they have good relations with officials. So entering the market via this group might be very facilitating factor.

OPPORTUNITIES FOR CONSTRUCTION SECTOR

During the last years, Mongolia saw a significant growth of construction industry together with the demand for construction materials. Stricter construction standards were introduced for building and structures, which increased the demand for high performance and inexpensive construction material meeting all functional, economic, and ecological requirements.1 Although the contribution of the construction sector to the GDP is only 2 %, it is rapidly expanding. The construction output in the first half of 2013 was accounted for 129 % more than in the same period of the previous year, which occurred due to supportive fiscal and monetary measures. The growth of the construction sector created 11.3 % of the overall GDP growth.1

Source:

Investment Guide by Invest

Mongolia Agency, 2014

1) Insight Alpha 2014. http://insightalpha.com/news_details.php?cid=206&sid=75&nid=243

3. Construction Sector

60

Highlights

The construction industry together with the demand for construction materials has been expanding during the past years generating 11.3 % of the GDP growth.

The government has been supportive with its fiscal and monetary measures and planned investment to infrastructure, housing and overall development of the Oyu Tolgoin mine area.

Construction work in Mongolia is limited by its short construction season between late April and early November and the necessity of advanced technologies, such as using frost-proof concrete.

As a result of demand exceeding supply, the prices of construction materials are steadily rising year-to-year as well as seasonally fluctuating

which occurred due to supportive fiscal and monetary measures. The growth of the construction sector created 11.3 % of the overall GDP growth.

Figure 11.

Figure 12.

2) World Bank: Mongolia

Economic Update 2013, p.

11-12.

http://www.worldbank.org/e

n/news/feature/2013/11/06

/mongolia-economic-

update-november-2013

Source: The Mongolian

Real Estate Report 2013.

http://mad-

research.com/mongolian-

real-estate-

market/construction-sector/

Source: The Mongolian

Real Estate Report 2013.

http://mad-


real-estate-


61

http://www.worldbank.org/en/news/feature/2013/11/06/mongolia-economic-update-november-2013




See Stabilization

Certificate requirements

and terms in Annex 8

See list of tenders in

Annex 9

3) Insight Alpha 2014.

http://insightalpha.com/new

s_details.php?cid=206&sid

=75&nid=243

4) Ibid.

5) For details, see http://prophecycoal.com/projects/chandgana-power-plant-project/ 6) For details, see http://www.lottecon.co.kr/eng/Medias/notice_view 7) The construction works

of the new international

airport in Mongolia have

started.


m/ct/ci/6127

8) Mongolia: Why and How

to Invest in Real Estate

2011. http://www.mad-

mongolia.com/news/mongo

lia-news/mongolia-why-

and-how-to-invest-in-real-

estate-7710/

9) The Mongolian Real

Estate Report. August

2013. http://mad-


real-estate-


10) Mongolia’s construction

sector busy – and

stretched. 2013.

http://www.oxfordbusiness

group.com/economic_upda

tes/mongolia%E2%80%99

s-construction-sector-busy-

%E2%80%93-and-

stretched

Opportunity 1: Infrastructure Construction

The government is planning to spend 800 billion MNT (602.6 million US dollars) on the development of infrastructure: 32 billion MNT on railways, 330 billion MNT on roads and 447 billion MNT for general construction and infrastructure. The expectation is also that foreign and domestic investment would generate 22.9 billion MNT (17.5 million US dollars). Only five percent of licensed domestic road construction companies are currently capable of large construction projects. Thus, the government is trying to bring foreign investors.3

Examples of foreign investments in Mongolia:

Furthermore, Ulaanbaatar has some of its streets being sponsored by different countries: Korea (Seoul Street), Japan (the airport road and Millenium Street), India (Gandhi Street), and the U.S. (Denver Street), which creates an interesting opportunity to enhance a country’s visibility in Mongolia.8

Opportunity 2: Housing Construction

The construction sector in Mongolia has started to improve with the development of the “40,000 Homes Construction Program”. This initiative by the Mongolian government which aimed at providing low-cost housing to the people living in ger districts of urban centers was launched in 2000. As a result of this initiative, the approximate number of new construction companies in Mongolia reached 2,500.9 Such an increase has revealed a problem of unskilled labor force and lack of the material input. In order to help to solve some of these problems the government provided loans of 86.3 million USD in working capital to 60 companies that are involved in the supply of construction materials, i.e. gravel, sand, steel, cement and lime.10

The Development Bank of Mongolia, a state-owned policy bank, also took initiative in providing some needs of the country that lacked infrastructural resources. Within this initiative DBM funded 100,000 Homes project (6.2 billion USD) and


62

FL Smidth from USA has won a contract worth 112 million USD to supply a greenfield cement plant with a 3,000-tonnes-per-day supply capacity 330 km from Ulaanbaatar.4

Canadian Prophecy Coal Corp engaged in coal mining in Mongolia has entered into a Cooperation Covenant with Energy Authority of Mongolia to be a provider of support for the construction and operation of the Chandgana 600 MW mine-mouth power plant 300 km east of Ulaanbaatar. The power plant is planned to start operating by 2016.5

Following a 3 billion preliminary rail deal with Mongolian Railway, South Korea’s consortium Lotte E&C will help transport coal out of Tava Tolgoi coal mine.6

One of the most important construction projects is the “New Genghis Khan International Airport” where Japanese Mitsubishi-Chiyoda Alliance has been investing. Mongolian government and Japan Bank for International Cooperation signed a soft loan agreement of 28.8 billion JPY with annual 0.2% interest rate for 40 years in 2008. However, due to currency rate differences additional 17.1 billion JPY was invested into the project in 2013. The construction of the new airport is expected to finish in 2016.7

http://insightalpha.com/news_details.php?cid=206&sid=75&nid=243



http://prophecycoal.com/projects/chandgana-power-plant-project/



http://www.lottecon.co.kr/eng/Medias/notice_view

http://www.lottecon.co.kr/eng/Medias/notice_view

http://www.infomongolia.com/ct/ci/6127

http://www.infomongolia.com/ct/ci/6127

http://www.mad-mongolia.com/news/mongolia-news/mongolia-why-and-how-to-invest-in-real-estate-7710/





http://mad-research.com/mongolian-real-estate-market/construction-sector/




http://www.oxfordbusinessgroup.com/economic_updates/mongolia%E2%80%99s-construction-sector-busy-%E2%80%93-and-stretched






The Development Bank of Mongolia, a state-owned policy bank, also took initiative in providing some needs of the country that lacked infrastructural resources. Within this initiative DBM funded 100,000 Homes project (6.2 billion USD) and Sainshand Industrial Complex (10-14 billion USD).11

In April 2011, one of the luxury 120-storey buildings in UB, the Trump Tower Ulaanbaatar was launched in cooperation with the local partner Green Land Development. Being the most expensive residential building in Mongolia, the price of the apartments ranges from 4.8 billion MNT (4,000,000 USD) to 10.9 billion MNT (9,000,000 USD).12

Opportunity 3: Development of the Oyu Tolgoi mine area

In January 2012 Mongolian government announced that the construction of the 3,000 apartments, roads, a school and a kindergarten, a hospital, hotel, and shopping centers, is expected near the OT mining site. The total value of these projects equals to USD 73.26 million, being financed by Turquoise Hill Resources, Rio Tinto and the state-run Erdenes Mongol Tavan Tolgoi mine.13

Limitation 1: Seasonal Impact on construction work

Resulting from Mongolia’s climate, the construction period lasts only six to seven months between April and early November. Rapid construction made it necessary to apply new technologies to make the construction season longer. An example of such a technology is frost-proof concrete produced by AIZAWA Concrete Corporation from Japan.14

The government is making efforts to introduce systems such as “KEIZER” and “HYBRID” which increase the effectiveness of the construction through combination of cast-in-place and prefabricated construction methods. Second, the government seeks to increase the production of prefabricated reinforced concrete and metal structural elements, and to establish construction material whole sale centers. Purchasing and storing the domestically supplied materials would ensure uninterrupted operations of building material producers.15

Limitation 2: High Prices of Construction Materials

Mongolian companies supply cement to the domestic market together with a limited range of iron products. Still, most construction materials are imported from China, Russia, Germany and Korea. Year-to-year exceeding demand and insufficient supply are driving the prices of construction materials up. In the past, the cement plants in Mongolia’s Erdenet were supplying 50 % of the demand. Today, 80 % of demanded cement has to be imported from China. The rise of demand for construction materials has been significantly driven by the expanding mining sector. Since the supplies are limited, the major mining and construction companies are willing to pay a premium price, thus driving the price level up. Year-to-year more visible seasonal fluctuations of prices represent another important factor leading to soaring prices during the construction season in summer. For example in summer 2012, the prices on average rose by 70 %. As a matter of fact, the domestic produced construction materials, such as wooden materials, concrete, cement, brick, paint and vacuum windows, suffer from bigger price fluctuations than materials imported from China.1 During the past five years, cement became three times more expensive. In 2011, a 50-kg bag of cement (M500) cost 6,925 MNT (4.85 USD)

11) Mongolia’s

construction sector busy –

and stretched. 2013.

http://www.oxfordbusiness

group.com/economic_upda

tes/mongolia%E2%80%99

s-construction-sector-busy-

%E2%80%93-and-

stretched

12) Mongolia's housing

market recovering 2011.

http://www.globalpropertyg

uide.com/Asia/Mongolia/Pr

ice-History

13) 1 Doing Business in

Mongolia 2013 Country

Commercial Guide for U.S.

Companies.

http://mongoliainvestments

ummit.com/hongkong/wp-

content/uploads/2013/10/D

oing-business-in-Mongolia-

report_US-Embassy.pdf

14) http://mad-


real-estate-

market/construction-

sector/materials/

15) Ministry of

Construction and Urban

Development 2013.

http://www.paiz.gov.pl/files/

?id_plik=19416

63







http://www.globalpropertyguide.com/Asia/Mongolia/Price-History



http://mongoliainvestmentsummit.com/hongkong/wp-content/uploads/2013/10/Doing-business-in-Mongolia-report_US-Embassy.pdf





http://mad-research.com/mongolian-real-estate-market/construction-sector/materials/





http://www.paiz.gov.pl/files/?id_plik=19416

http://www.paiz.gov.pl/files/?id_plik=19416

16) http://mad-research.com/mongolian-real-estate-market/construction-sector/materials/ 17) Oxford Business Group 2013. http://www.oxfordbusinessgroup.com/news/high-consumption-huge-demand-cement-large-projects-get-under-way

14) Managing for

development results.

http://www.mfdr.org/source

book/2ndEdition/5-

1MongoliaCivilSociety.pdf


64

the domestic produced construction materials, such as wooden materials, concrete, cement, brick, paint and vacuum windows, suffer from bigger price fluctuations than materials imported from China.16 During the past five years, cement became three times more expensive. In 2011, a 50-kg bag of cement (M500) cost 6,925 MNT (4.85 USD) compared to 5,800 MNT (4.06 USD) in 2010.17

Origins of Selected Basket of Construction Materials

Wall material Domestic

Glass Entirely imported

Window frames and doors Domestic

Roofing materials Majority imported

Water pipes

Majority of fixtures imported, some piping produced by Korean/Chineses operated plant in Mongolia

Paint Entirely imported

Concrete and Brick Domestic

Electric Cabling Limited Domestic Production

Source: M.A.D and Barilga publications

Figure 13.

Source: The Mongolian Real Estate Report. August 2013. http://mad-research.com/mongolian-real-estate-market/construction-sector/materials/






http://www.oxfordbusinessgroup.com/news/high-consumption-huge-demand-cement-large-projects-get-under-way







Source: http://mad-


real-estate-

market/construction-

sector/materials/

4. Energy Construction Sector

Figure 14.

ENERGY CONSTRUCTION SECTOR

Future power plant construction tenders in Mongolia

Mongolian government announced tender for approved projects via an Electronic Procurement System which manages tenders trough web page (on government’s web page or on www.unitender.com). Almost all the upcoming projects to be implemented so far are based on the approval from the Parliament. Mongolia has an upcoming parliamentary election in 2016, so by that time almost all respective projects and development plans proposed by entities are left aside until elections time.

Nevertheless the government announced potential projects intended to be implemented under the PPP forms. Additionally, there are several tenders (both for products and services) are announced online during the Oyu Tolgoi (OT) project on website http://ot.mn/en/procurement/active-tenders.

Majority of tenders are supposed to be announced in the second half of year 2014.

The Only CHP#5 out of 12 projects is ongoing project. The plant will commence operation in 2017. Now, the consortium comprises GDF SUEZ (French/30%), Sojitz Corp (Japanese/30%), POSCO ENERGY (Korean/ 30%) and Newcom LLC (Mongolian/10%). The implementation history of this project can be the best example how the tendering and bidding mechanism operate in Mongolia. Thus, in February 2012 the State Property Committee (SPC) issued a request for proposal of CHP#5 and received bids from two consortia: Samsung C&T and Korea Southern Power Co; and France’s GDF Suez, Korea’s POSCO Energy, Japan’s Sojitz Corp and Mongolia’s Newcom (with a planned 30:30:30:10 split). The Asian Development Bank

65






http://www.unitender.com/

http://ot.mn/en/procurement/active-tenders

No Project Name Type of PPP

Power generation projects

1 700 MW Baganuur power plant build-operate-transfer 2 270 MW Shivee-Ovoo power plant build-own-operate-

transfer 3 Nariinsukhait-Shiveekhuren 110kW electric power

transmission line and substation build-transfer

4 Outolgoi-Tsagaan suvarga 220kW electric power transmission line and substation

build-transfer

5 600 MW Chandgana power plant and construction of Baganuur-Undurkhaan electric power transmission line

build-own-operate, build-transfer

6 Undurkhaan-Coibalsan 220kW electric power transmission line and substation

build-transfer

7 600 MW Tevshiin Gobi power plant in Saintsagaan soum of Dundgovi aimag

build-own-operate

8 Extension and renovation of Choir substation build-transfer

9 450 MW CHP number 5 build-operate-transfer

10 100 MW Dornod Thermal Power plant build-operate-transfer

11 Tuul-Songino hydro charged power plant complex build-own-operate

12 100 MW Telmen thermal power plant build-operate-transfer

and France’s GDF Suez, Korea’s POSCO Energy, Japan’s Sojitz Corp and Mongolia’s Newcom (with a planned 30:30:30:10 split). The Asian Development Bank came on board as an advisor to the government in June 2011, and in July SPC announced GDF Suez as preferred bidder. Meanwhile, in June 2012, elections were held, and coalition government was formed in August. After that, tendering was removed from the SPC to the Ministry of Economic Development, a new ministry. A joint working group was also formed between the Ministry of Economic Development (MED) and the Ministry of Energy (ME). In October, the proposed location for CPH#5 was moved from the CPH#3 site to the east part of Ulaanbaatar. It was change again in December to another location. So, this example shows that, the political changes play important role in tendering and bidding. Besides, it can also jeopardize the whole investment and implementation process of particular project.

Lobbing for tenders is important and corruption during the tendering sometimes inevitable. Generally, the smaller the tender the more bribery will be involved. The bigger the projects do not involve bribes because they are more serious eyes looking on it. As it was delivered by MED representative, special committee (SPC) is formed consisting of different state authority representatives in it, as was in CPH#5 both MED and ME. This committee is the one delivering final decision on project wins and thereof project winning company. Besides there are some geopolitical considerations for tenders, for instance, sometimes Japanese or American companies are considering preferable during biddings. On the other hand, there are some institutions as Business Council of Mongolia, Invest Mongolia, and Mongolian National Chamber of Commerce and Industry that can help in lobbying during tenders.

Source: Invest Mongolia

Agency

4. Energy Construction

66

Business Council of Mongolia (BCM) -all major foreign investment are members. BCM has good contacts with economic, trade, commercial authorities. Its working groups (Capital Markets, Environmental, Education, Risk Management, Legislative, Tax) assist in analyzing business practice concerns and in formulating advocacy strategies.

Invest Mongolia provides before and after tender consulting service. It also gives stabilization certificate which protect foreign companies from any negative change in law of the country. Nevertheless, the company owned this certificate can benefit from positive changes in law (see requirements and terms for certificate in Appendix 1). By becoming the member of IM companies can be guided before tender sessions (in bidding period as well) as well as before the company win tender. It also can Advice on government approvals required for your business and help to streamline the relevant processes.

Mongolian National Chamber of Commerce and Industry (MNCCI)- is one of the powerful institutions that have close relations with governmental bodies and also has strong influence on them. The MNCCI signed a Memorandum of Cooperation with the Government of Mongolia and established a Public-Private Sector Consultative Committee. A representative sits on the Economic Council of the Prime Minister of Mongolia, the National Committee on Sustainable Development and the State Auditing Committee. MNCCI can also provide office for members in its building.

AGRICULTURE

5. Agriculture

67

Highlights

Agricultural sector plays a significant role in Mongolia’s economy contributing 16 % to GDP, employing 32 % of labor force and driving the economic growth.

Traditional grazing represents a major economic activity, while cultivation of crops is limited by harsh climate condition and the fact that only 1 % of land is suitable for cultivation.

The major problems of Mongolia’s agriculture are inadequate input systems and insufficient rural infrastructure, low quality seeds, a lack of markets and storage facilities, all resulting in low productivity.

Opportunities for cooperation can be found in the development of agricultural markets, particularly supply chains and marketing structures, and in improving agricultural management and expertise, such as developing processing technologies, food safety and certification systems and storage and transport infrastructure.

Agriculture plays an important role in Mongolia generating 16 % of GDP and employing 32 % of labor force. After the devastating winters of 2010 and 2011, the agricultural sector has recovered and has been growing by 20 %. Creating a quarter of total economic growth, agriculture together with construction are the major drivers of Mongolia’s economic growth. While traditional grazing is one of the major economic activities, cultivation of crops is highly limited by the climate and natural zones.15

Map 2.

Source:

http://nmnh.typepad.com/.a/6a01156e4c2c3d970c017ee946a0de970d-800wi

Mongolia has a population of 45 million heads of cattle, horses, yaks, goats, camels, which represents approximately 15 animals per person. Most herding households are self-sufficient in meat and milk products and earn an income from selling live animals, milk, meat, skins and hides, wool and cashmere. 16

Only 1 % of the country is cultivable. Arable farmers located in the northern river valleys where irrigation is possible). The yields are low and the growing season is short with about 100 days. Main crops include wheat, barley, potato, cabbage, carrots in central provinces and some fruits (watermelons, berry) on a small scale in urban areas. There is a small-scale fishing industry and deforestation is becoming a problem but these are minor issues.17

Challenges and opportunities

The agriculture is heavily impacted by the harsh climate. The temperature fluctuates from minus 50°C in the steppe in winter, to 40°C in the Gobi desert in summer. Dzud is a term for severe weather conditions, including summer droughts and exceptionally cold winters, that can prevent access to, or destroy, pasture causing significant loss of animal life and devastating the livelihood of herding families. The consecutive dzuds in 1999-2002 killed about ¼ of the livestock, forcing many people to migrate to urban areas. The herd numbers have recovered since then but the increase in numbers of goats for cashmere has resulted in widespread

15) World Bank: Mongolia Economic Update 2013, p. 11-12. (http://www.worldbank.org/en/news/feature/2013/11/06/mongolia-economic-update-november-2013); ABARES 2014, p. 3.

(http://data.daff.gov.au/data

/warehouse/9aah/2014/Pot

AgCoopMongoliaAust/PotA

gCoopMongoliaAust20140

306_v2.0.0.pdf).

16) Hunger, Nutrition,

Climate Justice 2013.

(http://www.mrfcj.org/pdf/ca

se-studies/2013-04-16-

Mongolia.pdf)

17) New Agriculturist 2009.

(http://www.new-

ag.info/en/country/profile.p

hp?a=732)

5. Agriculture

68

http://data.daff.gov.au/data/warehouse/9aah/2014/PotAgCoopMongoliaAust/PotAgCoopMongoliaAust20140306_v2.0.0.pdf





http://www.mrfcj.org/pdf/case-studies/2013-04-16-Mongolia.pdf



families. The consecutive dzuds in 1999-2002 killed about ¼ of the livestock, forcing many people to migrate to urban areas. The herd numbers have recovered since then but the increase in numbers of goats for cashmere has resulted in widespread overgrazing.18

During communism, Mongolia had collective farming but after the collapse of the USSR, people returned to nomadic pasture. Lack of pasture management, dzuds, inadequate input systems, low quality seeds, inadequate rural infrastructure, a lack of markets and storage facilities are some of the negative factors affecting crop production. The country saw an 80 % fall in overall productivity. Wheat yields have been slowly recovering but are still low.19

Herding families are vulnerable because of natural disasters and over-reliance on livestock. 100 head of livestock minimum to cover the basic requirements of food and income. However, one quarter of herders have fewer than 30 and are vulnerable especially in spring when milk and meat supplies are exhausted and pastured is not regenerated yet.20

Therefore, what Mongolia needs is assistance in the development of its agricultural markets, particularly supply chains, organization of processing and marketing structures. Further examples of opportunities for cooperation lie in building processing technologies, food safety systems, storage and transport infrastructure, and management systems including certification. Both grazing and cropping areas need improvements in management and expertise in order to increase the low productivity.

18) New Agriculturist 2009.

(http://www.new-

ag.info/en/country/profile.ph

p?a=732)

19) Ibid.

20) Hunger, Nutrition,

Climate Justice 2013.

(http://www.mrfcj.org/pdf/ca

se-studies/2013-04-16-

Mongolia.pdf)

6. Other Opportunities

69

ALTERNATIVE POTENTIAL INVESTMENT OPPORTUNITIES IN MONGOLIA

Following four investment sectors have been identified carrying large potential. An

elaboration and overview of potential specific suggestions have been provided

accordingly.

1. MINING and its related infrastructure development

Mongolia ranks as one of the world’s most resource – coal, copper, coking coal, gold, uranium – rich country, with increasing number of proven reserves of the respective resources, nevertheless, the quality and the quantity is also estimated to be growing, due to more advanced exploration methods and capacities reaching to larger depths.

Among possible opportunities there: o Tenders for exploration, feasibility studies, infrastructural mine

surrounding area development – maintenance, roads, sewage systems.

o Mine license (thus resource) acquisitions and possible engagement in the extraction process and / or selling of the respective resources.

http://www.new-ag.info/en/country/profile.php?a=732



6. Other Opportunities

70

2. REAL ESTATE

Real estate at the current development stage, is considered to be conservative, safe, undervalued investment.

Regards type of real estate and property development, it is argue that: 1) retail real estate development / rent is a safer and expected quicker return on investment rather than industrial real estate, which sees significant potential in the future, however is dependent on macroeconomic policies and growth drivers of the country.

Residential building property development and grade A office sector of real estate industry is struggling, as most developers are facing liquidity issues.

Liquidity and shortage of short term demand are two main reason that lead us to believe that real estate at the current stage in Mongolia is becoming more and more undervalued thus presents good future acquisition opportunities, in view overall economic improvement of mining sector, who is to be believed the main demand driver in the long run.

A number of projects international financial institutions are being implemented aimed at urbanizing the ger districts and raising overall living conditions of the population.

3. TRADEABLE GOODS: cashmere

Mongolia is world’s top cashmere exporter- ensuring about 40% of global supply for a fabric that has been always in stable global demand.

GOBI (www.gobi.mn) is country’s largest producer of cashmere and cashmere goods and clothing. The exceptional fine quality of their products is competing with world’s largest fashion houses at the cost of 1/3 of that in Europe and the U.S. Thus, the company is seen as heavily undervalued and attracts investor attention for all over the world as company is seeking its way to expand and establish its global presence throughout joint ventures and franchise deals. o The company itself has expressed interest in joint venture opportunities with Azerbaijan, and is currently conducting market research.

http://www.gobi.mn/

Major

Transportation-Logistics

Appendix

PRICE OF FUEL AND KEY TRANSPORTATION INDICATORS

As of April 2014, the price of diesel in Mongolia is 1.34 US Dollar. The average price

of diesel in the world is 1.32 US Dollar.

Previous Last

Pump price for diesel fuel (US dollar per liter) in Mongolia 1.4

Pump price for gasoline (US dollar per liter) in Mongolia 1.4

Burden of customs procedure; WEF (1=extremely inefficient to 7=extremely efficient) in Mongolia

2.6 2.8

Quality of port infrastructure; WEF (1=extremely underdeveloped to 7=well developed and efficient by international standards) in Mongolia

2.5 2.4

Air transport; registered carrier departures worldwide in Mongolia 6158.0 5592.0

Air transport; freight (million ton-km) in Mongolia 5.4 5.9

Air transport; passengers carried in Mongolia 380708.0 364470.0

Road sector diesel fuel consumption (kt of oil equivalent) in Mongolia 19.0 116.0

Road sector diesel fuel consumption per capita (kt of oil equivalent) in Mongolia

7.2 43.5

Road density (km of road per sq. km of land area) in Mongolia

Source: http://www.tradingeconomics.com/mongolia/pump-price-for-diesel-fuel-us-

dollar-per-liter-wb-data.html,

http://www.globalpetrolprices.com/Mongolia/diesel_prices/

MAJOR OBSTACLES

Logistics

• Costs

• China and Russia

• Road network underdeveloped

Climate

• Construction Period: March - September

• Harsher winters

• Scarce Water Resources

Labor

• Uneducated labor force

• Small labor force

Political-Legal

• Laws change rapidly

• Political pressure – populist governments & xenophobia

• Courts not independent •

RECOMMENDATIONS

1) Establish a representative office in UB (3-4 months)

Learn the construction climate

2) Find a local partner & establish links with politicians

Double tax treaties: Azerbaijan should establish LLC

3) Join Mongolia Business Council (MBC) for lobbying/law

Amendment to tax law this year; monitor the news

Possible Turco-Mongolian Business Council?

4) Links to Invest Mongolia for dispute resolution and tax certificates

5) Partner with local NGOs for CSR (Zorig Foundation)

Education is important (English language, technical schools)

6) Keep an eye on tenders, start small (State Procurement Agency)

CHP-5, Tavan Tolgoi, Chandgana, Solar & Wind

7) Draft strong contracts with an impeccable arbitration clause

8) STP should reference Chinese products

9) Contact Nomin Group showroom booth

71

http://www.tradingeconomics.com/mongolia/pump-price-for-diesel-fuel-us-dollar-per-liter-wb-data.html

http://www.tradingeconomics.com/mongolia/pump-price-for-gasoline-us-dollar-per-liter-wb-data.html

http://www.tradingeconomics.com/mongolia/burden-of-customs-procedure-wef-1-extremely-inefficient-to-7-extremely-efficient-wb-data.html


http://www.tradingeconomics.com/mongolia/quality-of-port-infrastructure-wef-1-extremely-underdeveloped-to-7-well-developed-and-efficient-by-international-standards-wb-data.html


http://www.tradingeconomics.com/mongolia/air-transport-registered-carrier-departures-worldwide-wb-data.html

http://www.tradingeconomics.com/mongolia/air-transport-freight-million-ton-km-wb-data.html

http://www.tradingeconomics.com/mongolia/air-transport-passengers-carried-wb-data.html

http://www.tradingeconomics.com/mongolia/road-sector-diesel-fuel-consumption-kt-of-oil-equivalent-wb-data.html

http://www.tradingeconomics.com/mongolia/road-sector-diesel-fuel-consumption-per-capita-kt-of-oil-equivalent-wb-data.html


http://www.tradingeconomics.com/mongolia/road-density-km-of-road-per-sq-km-of-land-area-wb-data.html




APPENDICES

Annex 1. Declaration of Undertaking

Annex 2. Project Assessment criteria

Annex 3. Project References

Annex 4. Transportation-Logistics

PRICE OF FUEL AND KEY TRANSPORTATION INDICATORS

As of April 2014, the price of diesel in Mongolia is 1.34 US Dollar. The average price

of diesel in the world is 1.32 US Dollar.

Previous Last

Pump price for diesel fuel (US dollar per liter) in Mongolia 1.4

Pump price for gasoline (US dollar per liter) in Mongolia 1.4

Burden of customs procedure; WEF (1=extremely inefficient to 7=extremely

efficient) in Mongolia

2.6 2.8

Quality of port infrastructure; WEF (1=extremely underdeveloped to 7=well

developed and efficient by international standards) in Mongolia

2.5 2.4

Air transport; registered carrier departures worldwide in Mongolia 6158.0 5592.0

Air transport; freight (million ton-km) in Mongolia 5.4 5.9

Air transport; passengers carried in Mongolia 380708.0 364470.0

Road sector diesel fuel consumption (kt of oil equivalent) in Mongolia 19.0 116.0

Road sector diesel fuel consumption per capita (kt of oil

equivalent) in Mongolia

7.2 43.5

Road density (km of road per sq. km of land area) in Mongolia

Source: http://www.tradingeconomics.com/mongolia/pump-price-for-diesel-fuel-us-

dollar-per-liter-wb-data.html,



http://www.tradingeconomics.com/mongolia/pump-price-for-gasoline-us-dollar-per-liter-wb-data.html





http://www.tradingeconomics.com/mongolia/air-transport-registered-carrier-departures-worldwide-wb-data.html

http://www.tradingeconomics.com/mongolia/air-transport-freight-million-ton-km-wb-data.html

http://www.tradingeconomics.com/mongolia/air-transport-passengers-carried-wb-data.html

http://www.tradingeconomics.com/mongolia/road-sector-diesel-fuel-consumption-kt-of-oil-equivalent-wb-data.html



http://www.tradingeconomics.com/mongolia/road-density-km-of-road-per-sq-km-of-land-area-wb-data.html




ANNEX 5: Different exhibits related to Mongolia’s power markets capacities

and its structure

Economics of Energy Technology

Electricity Market Outlook

Annex 6.

Diurnal Net Power Production (200MW Wind)

Annex 7

CENTRAL ENERGY SYSTEM ELECTRICITY PRIME COST PER UNIT

/Performance by 2012/

Production cost

48.22 MNT/kWh

Transmission

cost

5.22 MNT/kWh

Distribution cost

21.34 MNT/kWh

Transmission

loss

1.76 MNT/kWh

Distribution loss

8.03 MNT/kWh

1.

3.

1.2.

4.

5.

Cost per unit 84.56 MNT/kWh

Households

Mining

consumers

Industry and enterprises

Central Region Licensees' heat cost structure (performance by 2012)

48,22

7,08 5,22 1,76

21,34 8,03 91,64

0

10

20

30

40

50

60

70

80

90

100

Electricity cost per unit (performance by 2012), MNT/kW.h

Annex 8

CONSTRUCTION

Issue of Stabilization Certificate requirements and terms The Stabilization Certificate will be assessed subject to the provision of the following information from the investing company:

A copy of the business plan and feasibility study

Evidence that the total investment amount and investment completion period meet the minimum requirements under the INVESTMENT LAW

Environmental impact assessment

Details of how the investment will contribute to creating new jobs

Details of how the investment will utilize advanced technology and techniques

The Stabilization Certificate will be issued to the following sectors for the durations stated below:

1. Mining, Heavy industry, and Infrastructure:

Investment

Amount (billion tugriks)

Duration of Stabilization Certificate (by years)

Investment

Completion

Period (by

years)

Ulaanbaatar Area

Central Area(Gobisu

mber Dornogobi, Dundgobi,

Darkhan-Uul, Umnugobi,

Selenge, Tuv provinces)

Khangai Area(Arkha

ngai, Bayankhongor, Bulgan,

Orkhon Uvurkhangai, Khuvsgul provinces)

Eastern area(Dorn

od, Sukhbaatar, Khentii Provinces

)

Western Area (Bay

an-Ulgii, Gobi-Altai, Zavkhan,

Uvs, Khovd

Provinces)

30-100 5 6 6 7 8 2

100-300 8 9 9 10 11 3

300-500 10 11 11 12 13 4

500 and above 15 16 16 17 18 5

2. All other sectors (except Mining, Heavy industry, and Infrastructure):

Investment amount

(billion tugriks)

Stabilization period

(by years)

Investment Completion Period (by

http://investmongolia.com/en/wp-content/uploads/2014/02/Unofficial-translation.pdf

years)

Ulaanbaatar Area

Central Area(Gobisumber

Dornogobi, Dundgobi,

Darkhan-Uul, Umnugobi,

Selenge, Tuv provinces)

Khangai Area(Arkhangai, Bayankhongor, Bulgan, Orkhon Uvurkhangai,

Khuvsgul provinces)

Eastern area(Dornod, Sukhbaatar,

Khentii Provinces)

Western Area (Bayan-

Ulgii, Gobi-Altai,

Zavkhan, Uvs, Khovd Provinces)

10-30 5-15 4-12 3-10 2-8 5 2

30-100 15 -50 12-40 10-30 8-25 8 3

100-200 50 -100 40-80 30-60 25-50 10 4

200 and above 100 and above 80 and above

60 and above 50 and above 15 5

Source: Invest Mongolia Agency

Annex 9

List of other type tenders that might be interesting for Azerbaijani

entrepreneurs

Source: Invest Mongolia Agency

Infrastructure and Construction sector

1 Center for Transportation and logistics in western part of Ulaanbaatar city

Design-build

Own-operate

2 Center for Transportation and logistics in eastern part of Ulaanbaatar city

Design-build

Own-operate

3 Renovation of soum center infrastructure Build-own-operate

4 Dormitory for 500 students of the Defense University of Mongolia

Design-build

Lease-transfer

5 Establishment of the Mining and metal processing complex

Renovate-build-operate- transfer,

Build-transfer

6 Human Development Center build-operate-transfer

7 Ulaanbaatar city Conference and Convention center

Build-own-operate

Airport projects

1 Nalaikh Civilian and Special purpose airport Renovate/equip-lease-operate-transfer

2 Renovation and retrofitting of Dalanzadgad airport into international airport

Design-build-operate-transfer

Education projects

1 72 elementary school, kinder garden complex

Build-transfer

2 Construction and renovation of 7 secondary schools, 3 kinder garden

Design-demolition-buil-transfer

Environmental projects

1 Hazardous waste disposal processing plant


2 Tuul river cascade reservoirs Design-build-transfer,


3 Renovation of Central waste treatment facility of Ulaanbaatar city

Design-renovate-operate-transfer,

Design- operate-transfer

4 Waste to electricity plant

Build-own-operate

Pipeline transport projects

1 Baganuur-Ulanbataar coal transportation pipeline

Build-own-operate

2 Tavantolgoi-Gashuun-sukhait coal transportation pipeline

Build-own-operate

Road projects

1 Tosontsengel-Uliastai 114 km paved road

Build-transfer

2 Bayankhongor-Altai 256.1 km paved road and bridge

Build-transfer

3 Dashinchiler-Orkhon bridge and Murun-tarialan 232 km paved road

Build-transfer

4 Dalanzadgad-Tsogttset-sii/ Tavantolgoi/ 94.8 km paved road

Build-transfer

5 Khujirt-Tuvkhun temple – Ulaantsutgalan 90.1 km paved road

Build-transfer

6 Dashinchilen-Ugiinnuur-Khushuu Tsaidam 30 km paved road

Build-transfer

7 Renovation of “Onon” bridge in Binder soum of Khentii aimag

Build-transfer

8 Mandal soum- Zuun Kharaa 15.8 km paved road Build-transfer

9 Choir- Bur Undur 50 km paved road

Build-transfer

10 Tavangolgoi – Khanbogd – Khangi paved road Build-operate-transfer

11 Nariinsukhait- Shiveekhuren road

Build-operate-transfer

12 Bayanzurkh toll station – Nalaikh- Choir interconnection road

Build-transfer

13 Highway connecting Ulaanaatar city with new Airport

Build-transfer

14 Altanbulag- Ulaanbaatar- Zamyn Uud highway Build-operate-transfer

Sport, tourism sector projects

1 International film studio

Build-own-operate

2 International horse racing center

Build-own-operate

3 Chingiis Khan memorial complex

Build-own-operate

Note: “soum” means city

Date post:	03-Feb-2018
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