Consultative Council on Investment Climate and Private Sector Development under the Prime Minister of Mongolia ANNUAL REPORT. Ulaantaatar, Mongolia

Country Overview Introduction of the Bank Management Report Auditor s Report CapitronBank 1 ANNUAL REPORT 2008 Consultative Council on Investment Climate and Private Sector Development under the Prime Minister of Mongolia Ulaantaatar, Mongolia

C ontents 1. INTRODUCTION 3 1.1. Constitution of the Consultative Council 3 1.2. Functioning of the Consultative Council 3 1.3. Composition of the Consultative Council 4 1.4. Rules of Procedure of the Council 5 1.5. Secretariat of the Consultative Council 5 2. Background and Objectives of the Consultative Council on Investment Climate and Private Sector Development in Mongolia 6 2.1. Background and Objectives 6 2.2. Activity 1 8 2.3. Activity 2 8 3. Conclusion 15 4. List of Annexes 17

Annual Report 2007 Consultative Council on Investment Climate and Private Sector Development in Mongolia H.E.S.Bayar, the Prime Minister of Mongolia and the Chairman of the Consultative Council on Inuestment Climate and Private Sector Development in Mongolia, and the team of the Secretariat. 3 2008

AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 1. Introduction Besides speedy changes and growth of Mongolian economy in recent years, the role of the private sector in Mongolian economy has been steadily increasing. The private sector share in the total economy was over 80 percent as of 2008. Therefore, in order to further support the development of the private sector and enable favorable business environment and investment climate with a view to accelerating the country s social and economic development, the Government of Mongolia with a joint initiative of the European Bank for Reconstruction and Development took a decision to create a platform for dialogue between the state and business. This initiative found expression in the establishment under the Prime Minister of Mongolia of a consultative and advisory body to support private sector and help improve the business environment and investment climate in Mongolia by providing for direct highlevel dialogue with private sector representatives and investors with a view to finding effective solutions for current business and investment problems. On 6 February 2007, the Consultative Council on Investment Climate and Private Sector Development in Mongolia (hereinafter to be referred to as Consultative Council ) was established by the Government Resolution No.40 under the Prime Minister of Mongolia. 1.1. Constitution of the Consultative Council In the process of constituting the Investment Council, the effective participation of representatives of the business community and the international organizations (donors) was ensured by creating a transparent procedure for selecting members of the Council based on parity for the representatives of the state, the business community and the international donor organizations through equal participation in the decision-making. Rotation of the members of the Council from the international organizations and business made it possible to broaden their representation on the Council. 1.2. Functioning of the Consultative Council The Council is a consultative and advisory body under the Prime Minister of Mongolia that develops and prepares recommendations and proposals for the Prime Minister of Mongolia, the Government of Mongolia and other state bodies concerning improvements to the business environment and the climate for investment in Mongolia and their implementation, with a view to accelerating the country s social and economic development. The Council s main task is to assist the Prime Minister of Mongolia, the Government of Mongolia and other state bodies with the preparation and implementation of measures to support private sector through improving the national business environment and enabling investment climate. The Consultative Council may: hear, at its meetings, proposals and initiatives of the business community and investors as well as the heads of government departments on questions related to the improvement of business environment and investment climate; enlist, under the established procedure, the assistance of specialists and academics, domestic and foreign, to obtain expert appraisals of the progress made with measures to support private sector and improve the business environment, attract and utilize foreign investment, reform state administration with a view to improving the regulatory functions of the state, and determine the strategy and priorities for attracting foreign investment; 4

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 adopt and submit recommendations to the Prime Minister of Mongolia, the Government of Mongolia and other state bodies concerning the further development of state policy on supporting private sector through improving the business environment and investment climate; supervise and follow-up the timely implementation of adopted recommendations jointly with private sector and other relevant organizations. 1.3. Composition of the Consultative Council Chairman: Prime Minister of Mongolia; Deputy Chairman: Minister of Finance; Members: Minister for Industry and Trade; 2 representatives of international organizations (external partners); 2 representatives of bilateral partners; 5 representatives of private sector; Head of Secretariat of the Consultative Council. 1.4. Rules of Procedure of the Council The Consultative Council meets when necessary, but not less than once a quarter. A quorum is considered to exist if two thirds of the membership is present. Decisions of the Council are taken by majority voting on the items considered and set out in the form of minutes with proposals and recommendations to the Prime Minister of Mongolia, the Government of Mongolia and other state bodies on supporting private sector through improving the business environment and investment climate. 1.5. Secretariat of the Consultative Council The Secretariat of the Consultative Council, headed by the Head of Secretariat, is responsible for providing organizational and technical support for the work of the Consultative Council. Under the procedure laid down, the Head of Secretariat: may request from the state bodies any information necessary for the work of the Council; monitor the Consultative Council s recommendations; prepare reports for the Consultative Council and keep the Chairman and members of the Council informed with regard to the Consultative Council s recommendations; consolidate the proposals of ministries, government committees and departments as well as business representatives on improving the business environment and investment climate; participate in the preparation and organization of the Consultative Council meetings; lead the expert groups of the Consultative Council; supervise and follow-up the implementation of adopted recommendations. Secretariat regulations concerning the functions, powers, structure and manning of the Secretariat of the Consultative Council were approved by the Head of Secretariat and agreed by the Chairman and Vice Chairman of the Consultative Council. 5

AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 2. Background and Objectives of the Consultative Council on Investment Climate and Private Sector Development in Mongolia 2.1. Background and Objectives T he EBRD gives a strong focus to private sector development in its countries of operations, as the Bank s private sector oriented operational framework can play a pivotal role in unlocking the economic potential in the early transition countries (ETC s) and providing longer-term sustainable solutions to poverty alleviation. Effective public/ private dialogue and communication is vital for private sector development, as it can steer and encourage needed reforms by the government while providing governments in turn with support from the private sector community. As part of the Bank s Revised Approach and Action Plan for the ETCs which launched the ETC Initiative ( ETCI ) and in the subsequent respective country strategies, the Bank highlighted policy dialogue on investment climate as an area of priority, including through investor councils (the Councils ) to supplement and leverage on the Bank s operational work. To date policy dialogue in this area has been conducted largely on an ad hoc basis, mostly in the context of presentation and distribution of selected publications of surveys conducted by the Bank, high level visits, participation in advisory councils in one country, interaction with central banks as part of the Bank s operations in the financial sector, and legal transition work. As part of the ETCI, it was felt that a more systematic approach was needed and a decision was made to establish a mechanism such as permanent secretariats for undertaking dialogue amongst the stakeholders (the Bank, Government, business community and donors). Following extensive consultations over the past year, at senior governmental levels, as well as with the private sector, donors and international financial institutions ( IFIs ) in Mongolia, it was felt that that there was sufficient support needed to launch and support the consultative processes through a council focusing on business climate issues, and involving the government, perhaps also the parliament, the private sector, selected IFIs and donors. As a result of consultations with the Government of Mongolia on 16 May, 2007 the Government of Mongolia issued the Decree No.120 on Approval of the Council (Annex 1) with the aim of establishing a favorable environment for utilization of loan funds provided by the EBRD. However, the status of the Decree did not meet the overall objectives highlighted during the extensive negotiations with the Government of Mongolia. Concretely, the proposed objectives of the Council were to focus on the stronger role in policy dialogue between related stakeholders, particularly, dialogue between government and business community, legislative and institutional reform, donor coordination on the private sector agenda, notably the improvement of investment climate and development of private sector nationwide. According to the Decree No.120, the Council s scope of work was however limited to improvement of investment environment for effective utilization of loans from EBRD. Therefore, it was essential to amend the status of the Decree No.120 of 16 May 2007, and refocus on initial objectives and aims. Consequently, a number of meetings were organized with the senior officials of the new government, during the first half of December 2007, to introduce objectives and functions of the Secretariat. As a result of extensive negotiations and consultations with the newly formed Government of Mongolia, the Protocol of the Government of Mongolia and a Government Degree No.40 was issued on 6 February 2008 (Annex 2 and 3). The changes include revised purpose and objectives of the Council, and change in membership of the Council, including more representatives from business community and international financial institutions and external partners, not only focusing on government officials as it is stated in the earlier signed Decree. Based on the Government Decree and with an assistance of the EBRD RO, the Secretariat of the Consultative Council accelerated its activities by setting up its office and hiring legal, economic and financial consultants. With the staff, the Secretariat started to work on formulation of documents on its structure, procedures, strategy and plans as 6

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 well as preparation of spade work for the first Consultative Council meeting. 2.2. Activity 1 The first meeting (Annex 4) of the Consultative Council was held on 26th June 2008. The Prime Minister as the Chairman of the Consultative Council and representatives of the private sector, multilateral and bilateral cooperation participated in the meeting. The first meeting of the Consultative Council focused on procedural issues, namely the constitution, functions, composition of the Consultative Council, rules of procedure and secretariat of the Consultative Council. Also issues such as investment climate and its future trend, and the ranking of Mongolia compared to other countries according to the "Doing Business" by the World Bank as well as major obstacles to improve the business climate and attract investment in Mongolia were discussed. During the first meeting, H.E.S.Bayar, the Chairman of the Consultative Council highlighted that it would be important to involve more key senior officials from ministries who are relevant to the agenda of the meeting for the next CC meeting, and by doing so increase the importance of the meeting. The Chairman of the Consultative Council and other participants of the meeting stressed that it would be important for the CC to coordinate its activities with other organizations and entities in order to avoid duplication and overlapping. It was also mentioned that the Secretariat of the CC should come up with concrete issues to be discussed during the next meeting. Some of the participants pointed out the significance of establishing the CC in resolving some of the obstacles and hindrances faced by the private sector and investors in undertaking their activities. During the Consultative Council meeting, it was resolved to put as a goal-to improve Mongolia s rating in the Doing Business by the World Bank and raise its position to improve it within top ten countries in Asia and top 30 in the world by 2012. Within this goal it was decided to invite an expert group from the World Bank to assess Mongolia s position in the Doing Business by the World Bank as well as to study and analyze the possibilities for further improvements of the investment and business climate in Mongolia. Documents Prepared: For the purpose of implementing measures discussed during the Consultative Council meetings the following research documents and instruments were developed: Introduction to the Consultative Council on Investment Climate and Private Sector Development and its Secretariat Investment climate and its future trend in Mongolia Reform Recommendations for Mongolia in Doing Business by the World Bank Major Obstacles to Improve the Business Climate and Attract Investment in Mongolia Recommendation of the Consultative Council Meeting: 1. To put a goal to improve Mongolia s rating in the Doing Business by the World Bank and raise its position to include it within top ten in Asia and top 30 in the world by 2012. 2. To invite an expert group from the World Bank to assess Mongolia s position in the Doing Business by the World Bank as well as to study and analyze the possibilities for further improvements of the investment and business climate in Mongolia. 3. Instructions were given to Mr.Kh.Amarsaikhan, the Head of Secretariat, to increase the number of participants to the Council meeting and to come up with concrete issues for discussions for the next meeting. 7

AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia Participants of the First Meeting of the Consultative Council on Investment Cliniate and Private Sector Development in Mongolia. 8

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 Agenda 9.00-9.05 Opening statement H.E.Mr. S.Bayar, the Prime Minister of Mongolia, Chairman 9.05-9.15 Introduction to the Consultative Council on Investment Climate and Private Sector Development and its Secretariat Mr. Kh.Amarsaikhan, Head of Secretariat 9.15-9.25 Investment climate and its future trend in Mongolia. H.E.Mr. Kh.Narankhuu, Minister of Trade and Industry 9.25-9.35 Reform Recommendations for Mongolia in Doing Business by the World Bank Mr. Arshad M.Sayed, Resident Representative, the World Bank 9.35-9.45 Major Obstacles to Improve the Business Climate and Attract Investment in Mongolia Mr. S.Demberel, Director, Mongolian National Chamber of Commerce and Industry 9.45-9.55 Questions, comments and feedback 9.55-10.00 Closing speech-conclusion, decisions and recommendations of the meeting H.E.Mr. S.Bayar, The Prime Minister of Mongolia, Chairman List of Participants 1 H.E.Mr. S.Bayar Prime Minister of Mongolia, Chairman 2 H.E.Mr.Ch.Ulaan Minister of Finance, Vice Chairman 3 H.E.Mr. Kh.Narankhuu Minister of Trade and Industry 4 Mr. John Chomel-Doe Director, Mongolia, the European Bank for Reconstruction and Development 5 Mr. Arshad M.Sayed Country Director, the World Bank 6 Mr.Martin Marschke Country Director, GTZ 7 Mr.Barry Primm USAID Representative 8 Mr. S.Demberel Director, Mongolian National Chamber of Commerce and Industry 9 Mr. Peter Morrow CEO, Khan Bank, & Chairman, Business Council of Mongolia 10 Mr. Ch.Gankhuyag CEO, XacBank & President, CEO Club 11 Mr.Kh.Ganbaatar Executive Director, Mongolian Employer s Federation 12 Mr.G.Tserenpurev Executive Director, Mongolian Bankers Association 13 Mr. Kh.Amarsaikhan Head of Secretariat 9

10 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 2.3. Activity 2 The second meeting (Annex 5) of the Consultative Council on Investment Climate and Private Sector Development in Mongolia (hereinafter referred to as Consultative Council ) convened on 23 October 2008 at the Conference Hall V of the Government House. H.E.S.Bayar, the Prime Minister of Mongolia and Chairman of the Consultative Council, co-chaired the meeting with Mr.Varel Freeman, the First Vice President of the European Bank for Reconstruction and Development, and representatives of the private sector, multilateral and bilateral community participated in the meeting. During the second Consultative Council meeting the following two issues were discussed: 1. The implementation of a Single Electronic Window for foreign trade to reduce the currently heavy transaction costs of processing our imports and exports; and 2. Improvement of logistics infrastructure facilities in Zamiin Uud to expedite the movement of goods. With the purpose to reform and improve transportation and logistics that are the main factors for foreign trade, and to develop a comprehensive sector, and that meet needs of the modern conditions and requirements, in 2008 the Government of Mongolia has approved the Transit Mongolia National Program as well as its implementation plan until 2015. However, the current implementation of this program caused by several factors is not as we have expected. Also there is an urgent need for prior actions to set up the basis and conditions for forthcoming actions. These and other issues were brought up by private sector representatives who vigilantly observed and delivered their voices and comments to us that. Program: the Introduction of the Single Electronic Window to facilitate foreign trade, and the establishment of the Logistics Facility of Zamiin-Uud that will help to eliminate some problems, obstacles and red-tape that are negatively affecting the overall economy, and private sector investment, were discussed. Documents Prepared: For the purpose of implementing measures discussed during the Consultative Council meetings the following research documents and instruments were developed: Introduction on Single Electronic Window on Trade Facilitation Introduction on Logistic Facilities in Zamiin-Uud Institutional and Human Resource Capacity Building in Trade and Transport Facilitation in Mongolia Feasibility Study on Logistic Facilities in Zamiin-Uud Transit Mongolia National Program Transit Mongolia Comprehensive Development Policy Introduction on Doing Business-Mongolia On Existing Situation of Foreign Trade in Mongolia, Need for Trade Facilitation or Introduction of the Single Electronic Window On Requisite for Establishment of Logistic Facilities in Zamiin-Uud Therefore, during the second meeting of the Council, two main issues within the framework of the Transit Mongolia National 10 10

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 11 Recommendation of the Consultative Council: 1. It was advised to assign the Minister of Finance S.Bayartsogt and the Chief of the State Property Committee D.Sugar the task of establishing a state-owned legal entity, approving its initial paid-in capital and directing its activities to implement functions of introducing the Single Electronic Window in Mongolia pursuant to the Resolution of the Government no. 131 of 2007. The legal entity will expand into a business oriented entity with state ownership participation obtaining form of a private-public partnership (PPP). 4. To work closely with the World Bank expert group coming in November to assess Mongolia s position in Doing Business by the World Bank. The Government will put it as its priority to improve the indicators in Doing Business. The meeting is to assign the Minister of Finance S.Bayartsogt responsible for drafting an Action Plan to improve regulations in all ten areas of business environment, to be submitted to the Cabinet. 2. It was advised to assign the Minister of Finance S.Bayartsogt and the Chief of the State Property Committee D.Sugar the task of establishing a state-owned legal entity with state ownership participation, approving its initial paid-in capital and directing its activities to implement functions of establishing a publicprivate partnership Zamiin-Uud Logistics Facility pursuant to the Resolution of the Government no. 183 of 2008. The legal entity will expand into a business oriented entity with state ownership participation obtaining form of a private-public partnership (PPP). 3. With the aim of successful implementation of earlier proposed issues, to propose to involve not only the Government and private sector, but also representatives of bilateral and multilateral external partners to share the ownership. To request the European Bank for Reconstruction and Development and the International Financial Corporation for a support in terms of liability investment to establish the stateowned legal entity. 11 11

12 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 12 Agenda 15.00-15.05 Opening statement h.e.s.bayar, the Prime Minister of Mongolia, Chairman 15.05-15.10 Opening Remarks by Mr.Varel Freeman, First Vice President, EBRD 15.10-15.20 On Existing Situation of Foreign Trade in Mongolia, Need for Trade Facilitation or Introduction of the Single Electronic Window Mr.Fernando Bertoli, Chief of Party, EPRC project, USAID 15.20-15.30 Discussions 15.30-15.34 On Requisite for Establishment of Logistic Facilities in Zamiin-Uud Mr. N.Zorigt, General Director, Tuushin Co., Ltd 15.34-15.40 On Requisite for Establishment of Logistic Facilities in Zamiin-Uud Mr. T.Zanashir, General Secretary, Mongolian Freight Forwarders Association 15.40-15.50 Discussions 15.50-15.55 Doing Business 2009 Mongolia - Issues to be Addressed Mr.David Lawrence, Program Manager, IFC 15.55-16.05 Questions, comments and feedback 16.05-16.08 Wrap-up by h.e.s.bayartsogt, Minister of Finance 16.08-16.10 Closing speech h.e.s.bayar, the Prime Minister of Mongolia, Chairman List of Participants 1 h.e. S.Bayar Prime Minister of Mongolia, Chairman 2 h.e.s. Bayartsogt Minister of Finance, Deputy Chairman 3 Mr. Varel Freeman First Vice President, EBRD, Co-Chair 4 Mr. Ichihashi Yasuyoshi Ambassador Extraordinary and Plenipotentiary of Japan 5 Mr. Nicholas M.hill Deputy Chief of Mission, Embassy of the United States of America 6 Mr. John Chomel-Doe Director, Mongolia, the European Bank for Reconstruction and Development 7 Mr.Adrian h.ruthenberg Country Director, Asian Development Bank 8 Mr. David Lawrence Program Manager, IFC 9 Mr. Fernando Bertoli Chief of Party, EPRC project, USAID 10 Mr. T.Zanashir General Secretary, Mongolian Freight Forwarders Association 11 Mr. N.Zorigt General Director, Tuushin Co., Ltd 12 Mr. Kh.Amarsaikhan head of Secretariat 12 12

Annual Report 2007 Consultative Council on Investment Climate and Private Sector Development in Mongolia 2013 08 Participants of the Second Meeting of the Consultative Council on Investment Climate and Private Sector Development in Mongolia. During his first visit to Mongolia, Mr.Varel Freeman, the First Vice President of the EBRD, co-chaired the second meeting of the Consultative Council. 13 13

14 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 14 3.Conclusion Over the operational reporting period the Secretariat of the Consultative Council has succeeded in creating stable conditions for the work of the Consultative Council on Investment Climate and Private Sector Development in Mongolia. The Council operates on the basis of parity and democratic principles, and the selection and rotation of Council members from business associations and international institutions are carried out openly and on a competitive basis. They are widely represented on the Consultative Council. The Consultative Council is gaining a reputable position within the country s institutional structure. This is largely due to the political will of the Prime Minister of Mongolia, the Chairman of the Consultative Council and the Finance Minister, the Vice Chairman of the Consultative Council. The country s political leaders have gained a clear understanding of the barriers which businesses face and have taken a solid measure to establish a mechanism that allows monitoring of the implementation of their decisions aimed at removing such barriers. The Council has become a well-established operating mechanism which ensures that recommendations of interested parties are taken into account and that Council members can participate actively in the working processes of the Consultative Council. A key feature of the work of the Secretariat and Consultative Council is that the most important issues raised by business associations and private sector representatives are discussed and put onto the agenda of the Consultative Council. This has also helped to raise the profile of the Consultative Council. A mechanism has been established allowing the wide distribution of the ideas, results and achievements of the Consultative Council and the Secretariat. There is a high level of awareness of the work of the Consultative Council and the Secretariat among business associations and Government organizations. The Council has begun to play an important role in improving the business environment and the investment climate. Following the previous recommendations by the Council, important decisions have been taken in respect of the trade facilitation, the optimization of the permit and regulatory system and trade logistics. The efforts of the Council have led to the establishment of the necessary environment for the further implementation of reforms in the priority areas and enabled the establishment of the joint company based on public private partnership referred to in the report. In these priority areas the Consultative Council will track the implementation of reforms using as a yardstick the country s progress in the rating category Doing business. As far as other aspects of improving the business environment are concerned, there still remains much legislative work to do. The Consultative Council has improved the coordination of donor assistance for improving the business environment and the investment climate of our country. To strengthen the Secretariat s capabilities, its staff have attended international conferences, business forums and other events at the request of the Government. To put the Secretariat s activities onto a more robust footing, the following steps should be taken: 1. The Secretariat s efforts to widen the participation of donors in the activities of councils and to cooperate with international bilateral and multilateral institutions, State organizations and the business community must be strengthened; 2. The participation of international bilateral and multilateral institutions in the work of the Secretariat should be expanded. In this context, the EBRD could play a vital role in coordinating activities in this sphere. 3. Participation of the Secretariat in the preparation of national programmes, seminars and other actions initiated by the 14 14

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 15 Prime Minister will help to strengthen the political consensus importance of the Consultative Council. 4. The capabilities of the secretariats of investment councils must be strengthened. This can be achieved through bilateral and multilateral meetings of the staff of the various secretariats, with the participation of EBRD representatives. Efforts must be made to ensure the participation of secretariat officers in international conferences on investment matters, particularly those held of secretariat officers in international conferences on investment matters, particularly those held under the auspices of the EBRD. 5. At the same time, it should be noted that the Secretariat has insufficient staff and equipment to carry out its work since the scope of its activities and responsibility has grown as the work of the Consultative Council has increased. It should be strongly emphasized that, if it is to establish an enduring relationship with the Government, the Secretariat must carry out the specific instructions of the Government: this includes holding investment seminars and participating in the implementation of resolutions issued by the Prime Minister and the Government. To sum up, it should be emphasized that the Consultative Council has now become an important vehicle for dialogue between the Government and the business community and that it has demonstrated its ability to bring to the fore and resolve the essential issues facing business. It requires development and needs support both from the Government and from the international community in order to further promote the private sector in Mongolia. The Secretariat is ready to take all efforts to improve the investment climate and promote the private sector in Mongolia through realistic dialogue between relevant stakeholders and follow-up implementation of resolutions to reduce barriers to private sector development. 15 15

16 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 16 4. List of Annexes 1. Unofficial translation of the Decree No.120 on Approval of the Council 2. Unofficial translation of the Decree No.40 on Re-establishment of Consultative Council 3. Unofficial translation of the Protocol of the Government of Mongolia 4. Minutes of the first meeting of the Consultative Council on Investment Climate and Private Sector Development in Mongolia 5. Minutes of the second meeting of the Consultative Council on Investment Climate and Private Sector Development in Mongolia 16

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 17 Annex 1 Unofficial translation The Government of Mongolia Decree May 16, 2007 No. 120 Ulaanbaatar city Approval of the Council It is hereby resolved by the Cabinet of Mongolia: In order to facilitate a favorable environment for utilization of the loan funds to be provided by the European Bank for Reconstruction and Development to approve the setting up of the Investment Consultative Council with the following composition: Chairman: Deputy Chairman: Members: Secretary: Prime Minister of Mongolia Minister of Finance Minister of Industry and Trade Minister of Nature and Environment Deputy Minister of Foreign Affairs Economic Policy Advisor of the President Advisor to the Speaker of State Great Hural Chairman of the Chamber of Commerce and Industry (by agreement) Chairman of Foreign Investment and Foreign Trade Agency Head of Resident Office of the European Bank for Reconstruction and Development (by agreement) Director of Budget Policy and Coordination Department, Ministry of Finance Prime Minister of Mongolia (signed) M.Enkhbold Minister of Finance (signed) N.Bayartsaikhan 17 17

18 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 18 Annex 2 Unofficial translation The Government of Mongolia Decree February 6, 2008 No 40 Ulaanbaatar city on re-establishment of the Consultative Council the Government of Mongolia is RESOLVING: 1. In order to enhance Mongolian social economic development acceleration by supporting favorable business environment and investment climate development in Mongolia to re-establish the Consultative Council with following members: Chairman: Vice Chairman: Members: Prime Minister Minister for Finance Minister for Industry and Trade 2 representatives of international organizations 2 representatives of external partners 5 representatives of private sector head of Secretariat of CCIC 2. Depending on Council s meeting agenda the Secretariat is to identify representatives names in consultation with Prime Minister of Mongolia, Minister for Finance, Minister for Industry and Trade and to organize Council s meetings. 3. In connection with this Decree endorsement to annul the Government Decree No.120 dated May 20, 2007. Prime Minister of Mongolia (signed) S.Bayar Minister for Finance (signed) Ch.Ulaan 18 18

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 19 Annex 3 Unofficial translation The government of Mongolia PROTOCOL February 6, 2008 DISCUSSED: on re-establishment of Council in order to enhance Mongolian social economic development acceleration by supporting expansion of business environment and favorable investment climate in Mongolia RESOLVED: 1 on re-establishment of Council in order to enhance Mongolian social economic development acceleration by supporting expansion of business environment and favorable investment climate in Mongolia to endorse the Government Decree 2 with the aim to maintain regular activity of Council s Secretariat to receive financial support from the EBRD Signature 19 19

20 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 20 Annex 4 Minutes of the First Meeting of the Consultative Council on Investment Climate and Private Sector Development in Mongolia The first meeting of the Consultative Council on Investment Climate and Private Sector in Mongolia convened on 26 June 2008 at the Conference Hall V of the Government House. The Prime Minister S.Bayar as the Chairman of the Consultative Council on Investment Climate and Private Sector Development in Mongolia (hereinafter referred to as the Council ) delivered an opening speech at the first meeting of the Council. During his opening speech he briefly introduced the Council s structure and topics to be discussed at the Council s meeting. Also he expressed that the Council will be a bridge between the Government of Mongolia, private sector and investors to work out critical issues that are faced by investors. The Prime Minister remarked that the Government of Mongolia is always open to local and foreign investors and will take all efforts to do its best to establish favourable investment climate in Mongolia. Moreover, the Prime Minister expressed his hope that the first meeting shall not be limited to any topics, however the tone of the meeting should be friendly and at the same time official. The Prime Minister proposed to discuss and find together a better ways to solve difficulties faced by private sector and investors. He requested from the representatives who attended the first meeting that the decision of the Council meeting should not be political or a dream decision, but a concrete decision that could be implemented in a real life. The Prime Minister expressed his gratitude to the Management of the European Bank of Reconstruction and Development for the establishment of the Council s Secretariat and permanent support to its operation. After the opening speech the Chairman of the Council invited the Head of Secretariat Mr.Kh.Amarsakhan to introduce the Council s activities and the Secretariat s responsibilities. The head of Secretariat Mr.Kh.Amarsaikhan presented the Council s structure and noted that the aim of the Council is to support activities directed towards creation of the favourable investment climate and development of the private sector, and hence acceleration of the social and economic development in Mongolia. Mr.Amarsaikhan mentioned that one of the broader objectives of the Council is to make Mongolia from a landlocked country to a landlinked one. 20 20

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 21 Furthermore, he stressed that the Secretariat provides methodological, structural and technical supports to the Council s operations, and one of the focal duties of the Secretariat is to analyse and propound ideas initiated by the business sector to the Council meeting level. It will also provide support to the Government agencies to initiate documents and plan to improve investment climate. In addition, the Secretariat will effectively collaborate with private enterprises, multilateral and bilateral organizations, and put its effort to generate necessary methods to implement Council s decision and control to the implementation. Succeeding the presentation of Mr.Kh.Amarsaikhan, the Head of the Secretariat, Mr.D. Khurelbaatar, the State Secretary of the Ministry of Industry and Trade, representing Minister Kh.Narankhuu, gave a speech on investment climate and its further trend in Mongolia. Mr.D. Khurelbaatar, the State Secretary of the Ministry of Industry and Trade, gave a general introduction to the investment climate in Mongolia, and he highlighted the boost of the foreign investment and stated that during 1995-1996 total accounted foreign investment was USD30-40 million, however today this figure has reached USD400 million or above. As of 1June 2008, 97 countries 8577 foreign investment entities have been registered since 1990, of which 76 percent were registered between 2004-2008. Mr.D.Khurelbaatar mentioned that foreign investment flows to Mongolia are not only one of the indicators that support stable growth of the economy, but also they give an opportunity to get involved growing global and regional economic integration. Mr.D.Khurelbaatar furthermore stated that the government of Mongolia pursues a policy to draw attention of the foreign investors to our leading economic sectors such as agriculture, food production, light industry, tourism, infrastructure (power plant, construction, information technology) and mining. Also he informed that within the framework of activities to create favourable investment climate and to establish economic free zone and industrial park, the draft law to make amendments to the Foreign Investment Law of Mongolia was passed through final discussions of the Parliament. Amendments to the above mentioned law were briefly presented as well. Then Mr.Arshad M. Sayed, the World Bank Resident Representative emphasized the need to take into account the state of Mongolia s actions in terms of investments compared to other countries. He expressed his wish first of all to agree with positive measures undertaken and implemented by Mongolia and words of Mr.D.Khurelbaatar. He said it was important to pose a question not on the rating Mongolian business climate but on comparing Mongolian position against the rest of the countries. Unfortunately Mongolia s rating compared against other countries has been deteriorating. If in 2007 Mongolia ranked 46th according to the World Bank Doing Business, its position went down to 52nd in 2008 while in 2006 it was ranked 41st. Also it s essential to compare Mongolia with other countries in order to attract foreign and domestic investors. Therefore, his presentation covered topics including challenges faced by Mongolian business people from the start of their operations throughout its close down as well comparison against Asian and other countries. Though Mongolia enjoys fairly high position in terms of registering property, protecting investors, enforcing contracts which all are included in 10 criteria for Doing Business, the country is in low end on criteria including getting credit, paying tax, closing a business and trading across borders. Therefore, in order to attain improvement in above mentioned criteria it is necessary to take specific measures. For instance, reduce number of documents needed to trade across borders, shift to electronic customs clearance system, and determine ways to overcome the obstacles through developing detailed mapping of steps connected to export and import transactions. 21 21

22 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 22 Mongolia needs to pay special attention to attracting investors in variety of sectors. Because it is critical to pay special attention to not neglect other sectors while the mining sector is expanding and try not to repeat bitter experience of some other countries. S.Bayar: Thank you for extended comparative analysis and conclusions. S.Demberel, Chairman of Mongolian National Chamber of Commerce and Industry shall talk on important topic of obstacles for creating favorable investment and business climate in Mongolia. S.Demberel: This time I will not talk on obstacles since you all familiar with them and the World Bank has also specifically mentioned them. I prefer to tackle several practical issues around the Council activities. The Council is expected to convene on a quarterly basis so how does this correlate to other Council activities? Secondly, I would like to congratulate Head of Secretariat and its staff. The rationale behind this is very confident and intensive start up of their activities so I wish to never see this Council convening with the only purpose to just have a meeting. This February the private sector and donor community jointly organized Conference on the Private Sector Development Strategy. This Conference drafted 30 pages long, though not finalized paper on the private sector long term development strategy. When this document is expected to complete? Also there was an initiative to upgrade Mongolia to Top 10 in Asia and Top 20 in the World measured by the Doing Business. At that time some people did not fully understand it. As for me I have been studying this matter since 2006. Also besides the Doing Business the Heritage Foundation, the Fraser Foundation, Transparency International, and even Human Resource and Happy Planet have their respective ratings that assess business climate. Two major parties have signed Memorandum of Understanding on Cooperation which incorporates consolidated views of Chamber of Commerce and Industry and other business associations. This document envisions four years for the cooperation. This document reflects the vision to upgrade Mongolia by 2012 to Top 10 in Asia and Top 20 in the World in measured by the World Bank Doing Business. It is fair to draw your attention to the fact Mongolia is the first country that incorporated the World Bank research methodology into its policy toolkit. Therefore, I wish our Council to work in this direction in four upcoming years. Mongolia is ranked very low in terms of foreign trade aspect within the Doing Business. In this regard the Government of Mongolia has issued Decree to facilitate single electronic window, unfortunately no agency except the customs office is implementing this Decree. This field needs financial and expert assistance, it requires practical activities. Also there are numerous issues related to the logistics. As Mr.Amarsaikhan, Head of Secretariat mentioned previously, first investments had been made to convert Land-locked Mongolia into Land-linked Mongolia. Therefore I believe the Council needs to cooperate with international organizations on this and other issues. Let me tackle an issue already included in the presentation. There are international mechanisms to settle business disputes. These mechanisms do exist in Mongolia, for instance Law on Arbitration. This law is very progressive one. In this regard we need to pay more attention on balancing disputes, so there is no need to establish new institutions. Next issue is related to the existing Labor Law. Our law protects interests of employees only. Conclusions drawn by organizations involved in studying labor issues have the same opinion. So we have to address this issue in order to balance this relationship. Above mentioned Memorandum of Understanding also includes matters of developing in Mongolia alternative sources of credit and financing, including creation of a credit guarantee system in Mongolia. Finally, impact of General Law on Taxation is not clear yet. However by the end of this year its impact shall be more tangible. I hope this law ensures balance of rights for both parties. Starting 22 22

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 23 from 2009 some functions of state organizations shall be transferred to non-governmental organizations and this is very critical for the business community. We need to consider the quality of foreign investments so I support USD100,000 threshold for the establishment of a foreign invested company. Mongolia has kept its doors open for foreign investors for last 18 years. If at that time we were more concerned with quantitative features, I believe now it is time to put more emphasis on quality. Kh.Ganbaatar: Our institution supports activities of the Council. We believe it is critical to create investment climate and determine proper policies in order to develop Mongolian economy. As far as I see, activities of Minister Ulaan and Chairman Demberel s Council and this Consultative Council are not overlapping because the first Council does not involve foreign investors. We believe it is necessary to consider several issues to create investment climate. I think the Council shall work towards increasing awareness of citizens and general public on investments. Also I hope we shall cooperate on improving capacity of Mongolian business people. I believe it is essential to address issue of developing national consultants who are capable to provide consultancy and assessment services on investment transactions. We are doing now and plan for future certain activities in this regard. Also I believe it is critical to inform and make the general public aware of the Council activities. In addition it is necessary to create mechanism for the implementation of the Council recommendation by appropriate institutions of the Government of Mongolia. Ch.Gankhuyag: As I understand we are discussing matters on how to improve Mongolia competitive edge. We have met on numerous occasions with representatives of EBRD and discussed experience of certain other countries. Depending on issues brought for discussion, ministers and/or agency directors who are in charge of respective issues are invited to the meeting and receive specific instructions with definite deadlines. Respective person is required to report back and becomes accountable for the implementation. On other hand life broadcasts of the meetings via media outlets provide citizens with certain knowledge on the governance. As for technical consultation we have discussed a lot on matters of the Government and the private sector partnership. So I believe the current meeting, when we have an opportunity to meet the Prime Minister directly and share our thoughts, is among new work methods. In my view in order to ensure success for the activities of this Council it is essential to come up with specific and real results from the very first meeting. For instance, there is an issue of credit information database. In our view credit information database located at the Bank of Mongolia is not very effective. It is necessary to change the management of certain agencies. Here I would like to mention Real estate registration agency. This agency has become institution that creates inconvenience for people, causes losses of hundreds of million tugrugs to banks. Therefore, since this agency is directly affiliated to you, I would like to request to address this issue. At the end I would like to call for the need to make success in short run in order to facilitate further successful activities of this Council. John Chomel-Doe: I wish to congratulate on the occasion of the first meeting of the Council. This meeting is introductory one and ought to determine the design for the future meetings. In course of next meeting we shall discuss specific issues on the business climate improvement. I support Mr.Ganbaatar s opinion who believes issues related to the implementation of the Council decisions have been carefully considered during its establishment process. 23 23

24 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 24 Arshad Sayed: We congratulate members of the Council and express our belief in the need for this initiative. The World Bank has its unit dealing with Doing business rating. Hitherto this unit has been providing with assistance on certain issues in over 20 countries in the World including Albania and Poland. Therefore, the World Bank is ready to provide with assistance in 10 above mentioned fields or on general issues if the Council requires assistance. Barry Primn: I am pleased to take part in this Council meeting. It is appropriate for the Council to determine sectors and fields it will be active in. It is also necessary to decide whether the Council shall discuss issues of broader scope or just specific ones. Also I believe it is necessary to address issues related to legal environment besides simply administrative ones. S.Bayar: During today s meeting of the Council its members raised - though in brief - very specific issues. In just few days election results shall be known, however irrelevant of its outcomes issues discussed here and its decisions shall stay in force. Detailed analysis made by Sayed, the World Bank Resident Representative reveals numerous obstacles faced by not only domestic but by foreign investors as well. Chairman of the Chamber Mr.Demberel, Mr.Ganbaatar, CEO of Xacbank Mr.Gankhuyag all urge for specific results from this meeting. The State Great Hural is the institution that generates results. Therefore, I believe we shall convene for next postelection meeting having wider range of participants. On other hand we know that some of our Government organizations are way too bureaucratic, using mechanical terms they work as a marsh for vehicles and create lot of troubles to citizens. Till now we have annulled 1,200 rules and regulations. In other words we have been digging just peak of an iceberg and it is hard to imagine what to expect further. My discussions with Minister of Justice and Internal Affairs in this regard could not give us any hint on the magnitude of the issue. But this is certainly among issues the Government needs to address. Because we will work with both domestic and foreign businesses the Secretariat, in my view, needs to organize next meeting on a specific topic. I consider feasibility to arrange next meeting before the autumn session of the Parliament in the second half of September to cover broader topic. Let s attract attention of the State Great Hural and business community and depending on the meeting topic contact in advance potential invitees to have wider range of participants. 24 24

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 25 Annex 5 Minutes of the Meeting of the Consultative Council on Investment Climate and Private Sector Development in Mongolia The meeting of the Consultative Council on Investment Climate and Private Sector in Mongolia (hereinafter referred to as Consultative Council ) convened on 23 October 2008 at the Conference Hall V of the Government House. H.E.S.Bayar, the Prime Minister of Mongolia and Chairman of the Consultative Council, co-chaired the meeting with Mr.Varel Freeman, the First Vice President of the European Bank for Reconstruction and Development, and representatives of the private sector, multilateral and bilateral community participated in the meeting. S.Bayar: The meeting of the Consultative Council on Investment Climate and Private Sector Development has convened. The handouts for the meeting were distributed earlier. Let me open this meeting with opening remarks. Dear Mr.Freeman, Dear Members of the Consultative Council, Dear Participants, Allow me to open the second meeting of the Consultative Council on Investment Climate and Private Sector Development in Mongolia. One of the main foundations for Mongolia s development depends on strong and sound private and business sectors. Within the framework of activities to develop the private sector and create a favourable environment for investment, the Government of Mongolia has been undertaking a number of actions not only at the policy level, but also practical actions to eliminate problems and obstacles faced by businesses in real life. A vivid example that can be mentioned here is an establishment of the Consultative Council on Investment Climate and Private Sector Development in Mongolia. The goal of this Council is to become a bridge between the Government and private sector, and investors, and to resolve major issues that they are facing. In this respect, I would like to emphasize that the Government of Mongolia welcomes not only local, but also foreign investors for discussions, and is taking all its efforts to create a favourable investment climate. The first meeting of the Consultative Council was held on 26 June. During our first meeting, we discussed the structure, organization and activities of the Council. Moreover, we received detailed information on analysis of the World Bank Doing Business rating in case of Mongolia for required policy and practical actions in order to do business and create more favourable environment for investment. According to this rating Mongolia has slid down from 45th place in 2006, to 54th in 2007, 62nd in 2008 and 58th in 2009, and in particular, according to its foreign trade criteria from 2006 to 2009, Mongolia s rating constantly ranged from 156 to 168th place. Unfortunately, these criteria show that it is not that pleasant to do foreign trade and business activities in Mongolia. 25 25

26 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 26 Therefore, I think it would be right to pay attention, and organize our meeting today on transportation, logistics and infrastructure sector for trade facilitation, which play a crucial role in the economic life of Mongolia. Due to lagging transportation, logistics and infrastructure sectors, it is becoming ever more difficult to trade and do business, and these factors hinder local and foreign investors. With the purpose to reform and improve transportation and logistics that are the main factors for foreign trade, and to develop a comprehensive sector, that meets the needs of modern conditions and requirements, the Government of Mongolia in 2008 has approved the Transit Mongolia National Program as well as its implementation plan until 2015. However, the current implementation of this program, caused by several factors, is not what we have wished. Also there is an urgent need for prior actions to set up the basis and conditions for forthcoming actions. These and other issues were brought up by private sector representatives who vigilantly observed and delivered their voices and comments to us. Therefore, during this meeting of the Council we will discuss two main issues within the framework of the Transit Mongolia National Program: the Introduction of the Single Electronic Window to Facilitate Foreign Trade, and Establishment of the Logistics Facility of Zamiin-Uud that will help us to eliminate some problems, obstacles and red-tape that is negatively affecting the overall economy, investments and private sector. I hope that the Council meeting will not be restricted to any boundaries, and will convene in friendly and working environment, and let us openly discuss and resolve jointly the issues that we are facing. Thank you for your attention. Here, I would like to invite the co-chair of this meeting Mr.Freeman, the First Vice President of the EBRD. V.Freeman: Thank you Mr.Prime Minister, Ministers, Excellencies, Distinguished colleagues. It s my pleasure to be here with you today and participate in this important meeting. Two things strike me. First, as Prime Minister s introduction has indicated, Mongolia takes the investment climate for the private sector very seriously. It is making efforts to improve the conditions for the private sector and for businesses in Mongolia. This is commendable. This is a country, which is had a great deal of engagement between the public and the private sectors, and has witnessed by this council and bodes well for Mongolia to become more competitive and prosperous nation. The second notable fact is that this is the second meeting of this council. The agenda today follows on very closely the conclusion of the first meeting. That s notable, because many times when we come together for this fora we talk, we debate, but we take little action. The commitment to action, which has been shown to the follow through, is very, very important and points which are going to be discussed today are totally in line with the needs and priorities that the council found in its first meeting. Newspapers and press are full of news of recession in the United States, recession in Europe and international difficulties. Mongolia has fortunately avoided most of the effects, but it is becoming more difficult and challenging world economy. And I say this as a word of warning and a word of encouragement. The measures, which may be taken as a result of this council, are important to meet the challenges that this more difficult world economic situation presents to all of the businessmen here in the room today and indeed all of the companies operating in Mongolia. So with that, we have points to discuss that may help us to become more efficient, may develop 26 26

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 27 more robust economy, and may indeed result in closer cooperation between the public and private sectors, and some very interesting business opportunities for the private sector to develop. With that let me thank you for your attention for these brief moments of discussion. I look forward to a very interesting and engaged discussion with each of you on the points to be debated today. Thank you. S.Bayar: Thank you Mr.Freeman. Now Mr.Fernando Bertoli, the Chief of Party of the USAID project, will present the issue on the present situation of foreign trade in Mongolia, requisite for trade facilitation or introduction of the Single Electronic Window. F.Bertoli: Thank you Mr. Prime Minister, Ministers and Distinguished members of the diplomatic core, representatives of international organizations, and distinguished colleagues. I am here speaking on behalf of the hard work of the working group on establishment of the Single Electronic Window. This was an inter-agency working group. Unfortunately, at this point, the working group has finished its tasks and with the new government they have gone to do other things. So I am here to summarize the work of the group. And I will do that in four parts. I will start by describing the situation of foreign trade in terms of the electronic movement of information or generally the red-tape part of it. This session is interesting because it has both the restrictions to the physical movement of goods as envisioned in the situation right now in Zamiin- Uud, and the other one is the restrictions that these red-tape of all these agencies involve in foreign trade and the cost that they bring to trade in Mongolia. Don t worry I am not going to go through all the statistics that we have on subject matter. Just picture a plate of spaghetti which is the slide that you have in front of you. And that gives you an idea. If you are a big trader or a big company, usually it is solved with a quiet phone call, and if you are like a rest of the companies it takes a lot more doing to get your paper work done. In the next slide, we have a comparison of selected products and again I am not going to go through all these products. But if you select a product, you can see the steps and projected time it takes to process all the paper work. Obviously, you could multiply the time, assume an average cost to the time employed, multiply times the number of transactions and you have what our friend-economists would call the aggregate transaction cost. In here, it is so patterned and so evident that it is just not necessary, unless one wants to support the consulting industry. So it is patterned. There is a lot of friction in there. Mongolia, in particular, being an open economy, and relatively simple structure in the economy, is crucially dependent on foreign trade. When Mongolia acceded the WTO about 11 years ago, the margin that was put on terrace was 25 percent, the effective rate about 7.5 percent, so the real friction now comes in the paper work in imports and exports. The other plate of spaghetti we have is in Zamiin-Uud, and I hope that Mr.Zorigt will speak about it. Next few slides talk about specific products and the number of days. The bottom line, as Mr.Prime Minister said, Mongolia is at the bottom of the heap, when it comes to foreign trade facilitation, the trading across borders indicator of Doing Business. We looked at it in detail, we may play with the time and phases in there, but the bottom line is that we could do a lot better. The consequences of the current situation are patterned, but they are very evident. High transactions costs, time consuming and I might also add a crucial element. There is a lack of transparency. Customs as we know in a country after country is a favourite 27 27

28 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 28 beating horse for crisis for transparency and etc. The Single Electronic Window (SEW) comes to solve all that. The SEW is basically a centralized system that provides one time data entry. In its ultimate form it can be accessed from any point, in any place through the internet nowadays. You don t have to walk the papers from spot to spot, basically it s a one-time data entry and all the agencies share one information or fundamentally the same information, that is customs, the metrology and standards, and state inspection agencies, depending on the nature of the information that they require, they can access the same database. These are the advantages: single submission, you don t have to go around too many offices, and waste the time, the processing is very quick. There are different business models to implement the SEW. We have in the United States a state-owned SEW, although in reality the United States does not have a SEW, it is rather a composition of new technologies with border control and it is a real messy thing the way it runs now. In case of public private partnership, you can see successful experiences of Finland, Hong Kong and etc. Privately owned case is in Guatemala, which is an extreme and an interesting case in Central America, and an NGO in Korea. What are the results of implementation of the SEW? The most significant aspect of it to us, besides the reduction of costs and time, was that the customs revenue almost uniformly rose and very significantly. So I think Minister of Finance, you have a vested interest in getting this going as quickly as possible. Customs revenue rose by 30-35 percent. That would itself pay for probably 20 percent of investment. It saves a lot of frustration and time. Reducing the friction, the drag on imports and exports, will become one of helpers in controlling the rates of inflation. Let s summarize, what we have done in Mongolia to implement the SEW? Fundamentally the working group worked on the Government Action Plan, it was approved and has been adopted. What are the main characteristics that the government approved? It stated that the whole operation of the SEW should be business oriented, it should be structured as the model where the state has a participation, but so does the private sector, or in other words PPP. It could be a joint venture with potential foreign strategic investors, who could also put money in bringing technology. Characteristics what the SEW requires and why PPP is desirable? Obviously, with the normal salary of civil servants you can t attract the kind of personnel this system requires on an on-going basis, it s not only an initial investment. Customs here in Mongolia is fairly well advanced and uses the Gamus system, or system which controls all imports and exports; and all customs collections is fairly reasonable, fairly the state of the art. Probably the way the government will have a share in the company is through valuation of what the government brings to the table through the Gamus. It still needs to be adopted and adjusted, but it s really a good start. What we have done? We have done a fair amount of education on the SEW through TV programmes. The most interesting thing for us was whether we can attract the interest of foreign investors. And we managed to attract the interest of Swiss company SGS, which is very large company and has a trade net product. We brought them through the project, the second time they came on their own nickel. They did the prefeasibility analysis. We are testing the waters whether there is an interest from overseas strategic players to come to Mongolia and possibly participate with Mongolians, with a private sector and the government to establish such as company, and the answer was yes. 28 28

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 29 Now that, a working group has finished its work, it is required some kind of legal entity. Starting a PPP from a scratch is still a bit daunting given the framework in Mongolia. As I understand the legal framework does not forbid PPP, and it does not facilitate it. What we suggest is that the company can be started, and it is up to the government to decide through which agency or which directors it excises its share ownership. The most logical way from our perspective would be customs. It has the technology and computer software. It is a revenue issue after all. The other partner is a private sector. The problem here is, who is a private sector. Somebody has to stand in for the private sector. It could be an association of freight forwarders or any such association. My boss would allow me from USAID and are willing to provide a help to the company on the feasibility study and to assist with an issue of an international tender open to everybody, with a bit of luck we hope that by Tsagaan Sar the tender to be open on the streets, and we will work on that real hard. If you have any questions I will be happy to answer them. S.Bayar: Thank you Mr.Bertoli. Are there any questions regarding this brief, although rich in content presentation? Ch.Hill: Thank you very much. First of all, I would like to say that the US Government certainly welcomes the mechanisms that promote dialogue between the government and the Mongolian private sector. I would like to congratulate the organizers of this council meeting today in facilitating this dialogue. Two agenda items today are related to trade facilitation which is extremely important for any country s economic development, so I think that I really welcome seeing them on the agenda. I want to ask very specific question on SEW, which is about how much it would cost to implement and how is it going to be financed? F.Bertoli: We don t have straight costs. A lot of it will depend on how it gets structured, and what the bidding process would be. If I would give you a thumb-suck at initial capitalization I would probably say the total capitalization of 5 million USD to get it up and running, and that would imply the evaluation of Gamus customs system, and it would also include some discounted cash flows to include the Chamber of Commerce. Then there are also an on-going operations and expansion of the system, security and technology, and once the system is put into place it will track more and more things. Probably at the end of the seven or eight years you may have a total investment of ten to twelve million USD at the end of the day. That s rough estimates, and we have not done the full feasibility study. How much it worth, it would be determined by international tender. What the potential strategic investors would like to put in, and how many years they would have as concession and turn it over to a company. There are so many variations; these are indications of magnitude. In terms of financing I don t think the Government needs to put one cent and that s the beauty of it. I think there is a lot of interest overseas. There is for example the SGS. Obviously, for transparency purposes it has to be an open international tender. I hope that the strategic investors and Mongolian investors will come to the table. S.Bayar: There are quite a few issues in Mongolia that are not resolved. One if these bottleneck issues is the issue of Zamiin-Uud. Private sector representatives know very well about difficulties, obstacles and losses that are faced in Zamiin-Uud border point while transshipping loads through trains and roads. In this respect, I would like to invite the General Director of Tuushin company Mr.N.Zorigt to make his presentation. N.Zorigt: I would like to express my greetings of this day to you. This time, I would like to provide with brief information on difficulties faced by transport and logistics sector and what measures are required to take in order to overcome them. 29 29

30 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 30 To formulate simply, the transport and logistics sector can be understood as a channel that connects producers with each other and with customers. If this channel has an obstruction somewhere or is too narrow, sufficient quantity of products and service will not be available to producers and customers and will lead to a market crisis. Therefore, those who develop and implement transport policies are sometimes called coordinators of arterial functions of the economy. Today, I would like to draw your attention to the following issues. Transport and Logistics sector, it s current situation, constraints to the businesses, negative impacts on economy; Importance of Zamiin-Uud port and needs for development; Current situation on policy and measures of the Government of Mongolia, support from international organizations, expected results; Proposed solution on responsibility of entity, private sector needs, participation and readiness. There are a number of issues to be solved in the transport and logistics sector and today I would like to specifically introduce you the issues related to Zamiin-Uud port. Mr. Zanashir, President of the Freight Forwarders Association will present this issue. What level is this sector at today? To be harsh, it can be concluded that the current situation of Zamiin-Uud is holding back the development of Mongolia. The reason is that according to the international practice, it is considered that a business environment is favorable if in international trade the transport and logistics cost is less than 12 percent of the price of goods. But today this share for goods transshipped through Zamiin-Uud is 18-24 percent depending on type. This dependence of goods from transportation costs is too high. In the past years, development of transport and logistics sector of Mongolia has been left out of concern, thus value-added logistics service was almost not developed. This underdevelopment of transport and logistics sector has negatively affected other sectors development, even more the social and economic development of the country. For example, every one is aware that due to lack of facilities to supply construction materials at cheaper price without shortage, caused limitations in construction at reasonable prices. Let me point out several things related to the capacity and legal environment. Currently there are: Insufficient wagons and locomotives, Limited capacity of Zamiin-Uud transshipment facility. The regulatory framework does not encourage the private sector participation and investment, the law is not implemented accurately. Capacity of Zamiin-Uud customs inspection site is limited. All of which certainly require urgent measures to be taken by public and private sectors. 30 30

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 31 Now let me draw few examples what the businesses face due to above hardships. Today, Zamiin Uud transport and logistics facility does not meet current requirements thus causes delay of goods, and according to surveys, the average delay hours of the goods are as follows. 23.5 hours for inspection of lorries with non-uniform loads 28.2 hours for uniform loads to be scanned 34.2 hours for lorries queuing in China waiting to get to the Zamiin Uud border crossing point. 135 hours for non-uniform loads of lorries to be transferred to rail with waiting hours Some negative impacts caused by delay of goods are: As of 2007 year end, total 11 freight forwarding companies have paid demurrage fee (fine for delayed shipment of the empty containers back) around US$900 thousand, i.e. over one billion togrogs. As of July 2007, about 450 wagons carrying cement were delayed in Zamiin Uud for 16-35 days. Consequently the retail price of cement at Ulaanbaatar was increased by 76 percent. In addition, as cement mark decreases by 50 units for each 14 days, the quality of cement supplied to market was 50-100 units lower than the label mark which can be deemed as direct negative impact to the construction quality. Transshipment waiting cost for a loaded lorry estimated to be 70-120 thousand MNT per day, and if we assume that a lorry waited for about 20 days, it can be said that the cost of goods increased by 1,400,000-2,400,000 MNT. In order to have goods transshipped quickly, traders started to pay unofficial fees to purchase the position in the line and to skip the queue. And today it has become a normal phenomenon with unofficial rates. For instance, it costs 50-100 thousand togrogs to obtain a position in the line that allows the shipment on the next day, and 250-360 thousand togrogs to have one wagon loaded. Current situation does not only obstruct our business interests and profits but also negatively impacts the prospects of business and economy of our country. For example, It does not allow the private sector representatives to put their ideas and initiatives into realization. For instance, in 2002 Tuushin Company initiated the Mongolian Vector train. Wagons from Europe are accumulated at the Brest port in Byelorussia, and trains are sent on the 15th and 30th of each month for the past 6 years. This time when Zamiin Uud port is in such difficult conditions, our transportation initiative is of greater importance now. Subsequently, loads from China to Europe may be transported by auto and rail roads, located in Zamiin Uud and shipped on above mentioned train, but there are too many obstacles to realize this idea. We have been planning to have one complete train every 3 months or weekly. UB Railway declares it does not have sufficient quantity of wagons and locomotives. Although there are companies that are willing to bring them in according to applicable regulations, UB Railway is failing to approve the procedure to utilize wagons and tariffs with 31 31

32 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 32 acceptable allowances which led to the current non-compliance with the laws, and this has made a more difficult situation of the transport sector. The decision of the UB Railway to not increase transit loads but instead to seize transportation of transit goods that arrived at Zamiin Uud on auto vehicles and transported to Russia and Europe starting from April 1, 2008, had become the reason for significant decrease of transit goods flow. Such underdevelopment of UB Railway and Zamiin Uud logistics does not only negatively affect home economy but also might serve as the grounds to leave out our country outside the international trade and transport network. For example, some Chinese companies invested in Erlian aiming at Russian market have stopped to make an additional investment in Erlian but are moving their new investments into Manchuria and Alashankoy. Also, on October 6, the Russian Railways opened a modern auto and rail road terminal with capacity to process 200,000 high capacity containers per year in Zabaikalsk (bordered with Manchuria). Yakunin V.I., President of the Russian Railways, personally attended the opening ceremony and said that they were preparing to not only transport 49 million tons of oil from Manchuria to Zabaikalsk but also transship 53.7 million tons of other loads in 2012. Let me draw some examples of impacts on the economy. Zamiin Uud serves as the main transshipment route connecting Russia and China. Ulaanbaatar Railway established the transit transport price according to ETT tariff, and has been covering the loss from earnings of domestic transportation of certain goods. It may be deemed that insufficient transport and logistics infrastructure in Zamiin-Uud caused decrease in transit loads which required increase in domestic tariffs. In 2008 UBRW tariffs increased three times. Briefly, Delay in Zamiin-Uud serving as a potential constrain for supply shortage causes inflation. Income earning from transit transportation has been decreasing due to inaccurate regulatory framework, inefficient international cooperation and lack of activities to strengthen the country s competitiveness in transport and logistics sector. Increase of domestic transport tariff causes inflation as well as decreases the price competition of export products. Due to delay of goods, in order to conduct uninterrupted business activities, businesses need more financial resources, at the same time increasing the prices unreasonably taking the situation of supply shortage. A delay in using the country s geographical advantages and as well as a faster development of competing corridors / Manchuria, Alashankoy/ may create some negative impacts on the country s competitiveness and further more excluding Mongolia from international trade and transport network As mentioned above, the transport and logistics sector is the vein of economy that connects producers with customers. As the first company in the sector, we are interested to participate in the elimination of issues occurred in the sector and implementation of orderly and effective policies and actions in transport and logistics sector with its leading role. Tuushin Company contributed in the establishment of freight forwarding sector in Mongolia and for the past 18 years, it has been making the best efforts for development of transportation in Mongolia with its sustainable operations, tight cooperation with international financial organizations and has sincerely provided them with support to the desired extent. Other representatives of our sector have the same willingness and readiness to cooperate with the Government. Specific proposals will be presented by Mr. Zanashir, President of Freight Forwarders Association. 32 32

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 33 S.Bayar: Thank you to General Director of Tuushin company Mr.Zorigt. Now I would like to invite Mr.T.Zanashir, General Secretary of Mongolia Freight Forwarders Association, to continue the presentation. T.Zanashir: My greetings of this day to you. With following facts I would like to explain the reason for special focus on the Zamiin- Uud port. For landlocked Mongolia, Zamiin-Uud is the short cut to connect Europe with Asia with its geographical location and is of strategic importance for it serves as the northern corridor that connects Europe and Pacific countries through Germany, Poland, Byelorussia, Russia, Kazakhstan, Mongolia and China, one of the four rail road corridors of Trans-Asian railway network for transshipment between Europe and Asia, and as auto road corridor of AH-3, Asian highway network between Ulan-Ude, Russia and Tangu, China to connect Mongolia to the international road transport network. Transshipment of goods from Europe to South Asia through Mongolia is 1135 km and 1600 km shorter than that of South Baikal- Manchuria, Central Asia-South Asia routes respectively. In addition it is estimated that there is a high potential to save time and expenses if above land road corridors are used. Zamiin-Uud port is significant for its transportation infrastructure, and 51.9% of total foreign trade cycle including 72.2% of export and 30.65 of import goods belong to China. In terms of transported load, 90% of import, 75% of export and nearly all transit goods are transported through this port. How should we develop Zamiin-Uud? What do we imply when we talk about establishment of the transport and logistics infrastructure? Long-term strategic importance to develop Zamiin-Uud of Mongolia is to contribute to intensive economic development by using the geographical advantages establish a modern transport and logistics corridor connecting Europe and Asia using the geographical advantages, and to integrate to the international trade and transport network. We present a concept to develop Zamiin-Uud as a regional development center that focused on providing transport and logistics services on the international trade and transport gateway. Components of transport and logistics facility are as follows depending on the international practices and market conditions of Mongolia. Auto to rail transshipment facility Warehouses for temporary storage and whole sale distribution ICT networks Customs inspection sites, bonded warehouses, laboratories and etc. State specialized inspection sites, laboratories etc. Banks, post office, and other business service centers Parking spaces etc. 33 33

34 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 34 We are of the view that strategy for Zamiin-Uud development should be implemented by module-by-module schemes depending on the market demand What are the benefits of establishing the Zamiin-Uud logistics facility? Upon establishment of this facility, Infrastructure that enables continuous operations of Zamiin-Uud transit and domestic transportation at low cost. The improvement of transport and logistics infrastructure will cause increased supply of goods, meet the standards, and share of costs for inefficiency in the price will decrease. The transport logistics facility will enable the customs and state specialized inspectors to conduct warehouse-to-warehouse inspections, widely used in international practices, thereby the efficiency of state services will improve and room for bureaucracy and bribing will decrease. Smoothened transportation flow will open an opportunity to increase the volume of transit transportation as well as earning from transit transportation. Domestic freight forwarding services as well as follow on new businesses and services will develop. Zamiin-Uud logistics development will contribute to the creation of larger markets, and will serve as a basis for implementation a regional development concept in Mongolia. Now I would like to present you some facts on what activities have been carried out for development of Zamiin-Uud and how much we are ready to commence this operation. The Government of Mongolia is of the view that one significant solution of development is to make the transport and logistics sector of Mongolia comply with the international standards and increase its competitiveness, as well as taking advantage of the geographical location, to create stable economic growth. This concept was formulated as the Transit Mongolia national program, and this program was approved with the Resolution of the Government of Mongolia #183 dated May 14, 2008. The issue of establishment of Zamiin Uud logistics facility was reflected in the provision 2.16 of the Program Action Plan and other relevant provisions. We are of the view that this was a reflection of the importance of the issue in the state policy document to establish a transport and logistics facility in Zamiin Uud, the largest international trade port of Mongolia that is located at the intersection of wide and narrow rail roads connecting Mongolia with the PRC, a new industrial and trade center of the world, South East Asia and the nearest sea port. With assistance of the Economic Policy Reform and Competitiveness Project, a preliminary conclusion was made on the current situation of the transport and logistics sector and certain detailed studies were made on the needs to improve Zamiin Uud transportation infrastructure. They are: Pre-Feasibility study on Zamiin-Uud transport and logistics facility 34 34

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 35 General Engineering plan for Zamiin-Uud customs inspection site expansion Business model and business plan on Zamiin-Uud auto-to-rail transshipment facility ADB Construction of ÀH3 Study on Zamiin-Uud and Erlian transport and logistics facility The Government of Japan built the rail-to-rail transshipment facility in 1995. Our major issue is that we need to identify the most urgent actions and determine methods of implementation. We think that the current institutional structure responsible for coordinating the establishment of Zamiin-Uud transport and logistics facility is weak and consequently the program implementation is slow and not well concerted. Therefore, in order to improve this situation, it is necessary to establish an institutional structure to be in charge of implementation that ensures equal rights and participation of the Government and private sector representatives. We present our proposal that this issue may be solved by establishment of an economic entity based on the public and private sector partnership. In other words, in order to solve the issue of establishing the Zamiin-Uud logistics center and bringing the border, customs and specialized inspection facilities and services to the international level, an entity that combines needs and interests of both the public and private sectors needs to be established that will bear a responsibility to manage, monitor and assess implementation of the Government Program. We are of the view that we need to solve the issue by establishing a for profit legal company based on the public and private sector partnership. This company shall perform following daily activities required for implementation of the program. They are: 1. Have detailed feasibility study and engineering plan done, 2. Develop tender document, 3. Determine the state participation, 4. Provide advice to businesses and take actions to minimize their risks, 5. Attract foreign investors and undertake other actions needed for implementation in concerted manner. 35 35

36 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 36 There is an actual necessity for private sector to get involved in above activities and our freight forwarding companies are expressing their willingness to be involved. In establishing a public and private sector partnership, first of all, we need to: Create favorable regulatory environment Assure fair market competition Facilitate to decrease the investment risks and costs Create a sustainable business environment In order to establish above entity, freight forwarding companies have Experiences in the freight forwarding sector Current position in the international trade and transport and existing business network Experiences in management and human resources Investment opportunities S.Bayar: Thank you. Are there any questions with respect to this presentation? A.Ruthenberg: Thank you for inviting. Just to demonstrate the importance of reducing trade and logistics cost, ADB did a study in 2004 for Kyrgyzstan. Here, we did a general equilibrium model, which showed that reducing by half of the transportation and logistics cost would result in doubling of GDP within 10 years and most surprisingly 60 percent of benefits are pro-poor. So this is just an example of the study which shows how important is logistics and transports costs in the economy. As far as ADB is concerned, we have plans for Zamiin-Uud, we have allocated 25 million for the next year for improving the transhipment facility. On top of that we have allocated 20 million USD to improve border towns and urban infrastructure in South Gobi. On top of that, as you may know we are rehabilitating the road from Choir to Zamiin-Uud. Thank you Mr. Chairman. S.Bayar: Thank you. Any questions? I think it is right to establish logistics facility in Zamiin-Uud within the framework of Transit Mongolia program. However, what kind of action are undertaken to ensure liaison between the local administration and free trade zone? It seems that parties are working on different sides for one goal. What is the opinion of Mr.Zorigt and Mr.Zanashir on this point? Have you done any studies and exchanged your opinions with relevant agencies on these points? N.Zorigt: With regard to Zamiin-Uud, probably everyone has done certain things and has developed projects, for example on different parallel railroads. In general, I believe the Zamiin-Uud development should be linked to the border town development path. Instead of targeting the establishment of free economic zone, Zamiin-Uud should become an international logistic center and facilitate services for shipment of goods not only for Mongolia, but also for international community, and help Mongolia to get its own factual niche in the international transportation market. Therefore, the transshipment center built up by Japanese Government assistance has been performing its duties, though it is necessary for us to expand it. Ulaanbaatar Railways does its investments, however some private 36 36

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 37 companies have proposed to build small roads or small scale complexes. I believe we need to find solution based on nationwide arrangement under joint coordination. It is necessary to establish a business entity with investments coming from both the state and the private sector. We need to target the creation of complex center with a capacity to arrange railway to truck, truck to railway, and truck to truck transfer, which is an appropriate solution. These activities desperately need state coordination. I do not support any selfish and short sighted solutions. In any case, the state should take appropriate measures to build public private partnership, and ensure the participation of both the state and private sector. The government management should be sustainable and on an on-going basis. I believe it shall be the best solution. I believe Zamiin-Uud should become large international transport and logistics center rather than a free economic zone. T.Zanashir: The logistics center should develop in parallel with the Zamiin-Uud free trade zone. I believe the logistic center should coordinate shipments both coming to Mongolia and transit shipments via Zamiin-Uud. Therefore my personal view is that this issue should go on without direct connection to Zamiin-Uud free zone development. S.Bayar: The presentation on the World Bank Doing Business 2009 preliminary assessment results and issues to be addressed in this framework has been prepared. I would like to open floor to Mr. David Lawrence, Program Manager, International Finance Corporation to make presentation on this topic. D.Lawrence: Your Excellency, Minister, Distinguished Colleagues and Guests. It s a great honour to be here today. And I would like to thank Mr.Amarsaikhan for inviting me to speak today. For the next few minutes I would like to talk about Mongolia s business environment as shown through the Doing Business Report for 2009 and draw the link with topics of today. For those of you who are unfamiliar with the Doing Business, it is essentially a survey conducted annually in 181 countries, which compares 10 indicators across countries. This allows any country to see how it does compared to others and also to measure its own progress towards reform. Ten topics or ten indicators are shown on the left of the slide. They basically represent the lifecycle of the business from start to finish. The overall goal is to give policy makers or development organizations a clear picture of what needs to be addressed, so that reforms are more easily implemented. In 2009 Mongolia scored 58 out of 181 economies, small slip from last year. It s actually a very good score. If you look at this comparison with neighbouring countries, you will see that Mongolia outperforms almost every former Soviet country, outperforms China, and outperforms Russia. The only countries in the former Soviet Union that have done better are countries in Caucasus and counties in Baltic. Mongolia outperforms the Europe and Central Asia which has an average ranking of 76, outperforms East Asia with average ranking of 83 and significantly outperforms landlocked economies with average ranking 107. This slide shows ten indicators with Mongolia s ranking and comparison with its nearest neighbours. In some ways, Mongolia has done very well, like registering property is excellent, protecting investors is excellent. However, as we heard earlier trading across borders is 156 that is an improvement from last year s rating of 168, but it still shows that there is much room for improvement. Closing a business and dealing with construction permits are also poorly scored. So we have already heard number of ways to streamline trade logistics, basically anything that will reduce the number of documents, increase the speed will help, electronic submission of documents will help, of course, this is the subject of Bertoli s speech, and also the studies showing the map out, process and identify the blockages. It says how to reform trade logistics? It is quite clear to me today that these steps are already taken and I commend to the government of Mongolia for doing this. Very briefly, closing a business, Mongolia 37 37

38 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 38 has improved slightly, but still has a very low score. It takes about four years to close a business, when the recovery rate is increased a little bit, but remains at twenty-two cents on the dollar. And dealing with construction permits, which I wouldn t think would be a problem given how much construction under way, is also very low. The procedures and the days required to get the permit remain unchanged in the last few years, although costs have decreased. Next steps, priorities for the Mongolian government for reform have to be clearly identified, I think this cross border trade issue is clearly the one. There needs to be further analysis, I know much has been done already, but to help to figure out what needs to be done in each of the problem areas and continue support from the World Bank, ADB, EBRD, EPRC and other institutions for promoting this reform. That was very brief, I could not go into details of Mongolia s performance, but you are able to go to this web-site. You will find as much details as you want on how the scores were calculated, you will see a tool which allows you to experiment with how reforms will change the rating Mongolia has. You are also welcome to send an e-mail to me with questions. S.Bayar: Thank you Mr. David Lawrence. Since we have your email address people may get additional information on issues of their interest. I welcome Ambassador Ichihashi to give a speech. I.Yasuyoshia: First of all, I would like to express my thanks for being invited to this important meeting. This is my first time to be present for this important meeting. On this subject of trade and investment environment, I have also submitted my own papers, for instance at the time of the World Bank and Mongolian Government sponsored technical meeting, we provided papers on ten areas, which we, from foreign investor side, wish to see improvements in Mongolia. There have been a lot of talks on this matter. We firmly believe that the Government of Mongolia is taking steps to improve the investment and trade environment, and I fully appreciate these efforts. What I am going to do today is to present two concrete examples of foreign companies, in this case Japanese firms, what they are facing in Mongolia. Here I don t get into details of the cases, but two cases are basically what was approved or licensed about four to five years ago, those approvals, license terms, commitments, promises were not honoured later, because of various reasons, maybe when the parliament starts to discuss the revisions of the law, the bureaucracy will stop taking actions in accordance with earlier approvals or people may change, as the government changes the bureaucracy also changes; and previous commitments cannot be honored. These are two examples, but this is the environment foreign companies are operating in Mongolia. The most serious issue as I see it no one is taking responsibility. I mean we have raised this issue in a bilateral Government and private sector joint meeting, which was held two weeks ago, but there were not clear answers or even a hint or a suggestion for solution of these issues, so I think since this is the highest fora with the presence of the Prime Minister and Finance Minister and with important participants. Since it is my first time of presence here it might be not quite appropriate for me to raise concrete example. I thought I should be here to submit such cases and seek solutions. Because the Ministries and agencies talk differently, for instance FIFTA in favour of companies, but they have no rights, the relevant Ministries say no which is a clear answer, sometimes they don t give any answers without any explanations. So I hope these matters will be also tackled I think it s one of the elements to be looked at in context of doing business in Mongolia. Thank you very much. S.Bayar: Thank you Mr. Ambassador for very business minded and critical proposal. I would like mention that this year was a 38 38

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 39 very interesting year for Mongolia. There were Olympic Games held, and each Olympic Games year is accompanied by long lasting elections in Mongolia. This meeting is our second one, the previous meeting was held just before the elections. You may consider last four months as a transitional period. Thank you all for sharing your proposals, comments and asking questions. I would like to stress that the Government of Mongolia shall take into consideration these issues. I would like to welcome S.Bayartsogt, Minister of Finance, to share his views on this meeting and conclusions he reached. S.Bayartsogt: Thank you Prime Minister. I would like to thank three main presenters and all who shared their comments and views. Today s meeting on investment climate in Mongolia is a special one since it takes place just after one month after the new Cabinet was formed. It coincides with the period when guidelines for the new Government have been worked out and currently undergo last discussions before its submission. I would like to inform that two issues on the agenda of today s meeting are being incorporated into the Government Guidelines. The first issue is a component of an initiative, which the Prime Minister proposed during his previous term in the office and was related to streamlining of information and registration systems. In addition to the improvement of foreign trade turnover, this program also aimed to support the creation of more favorable environment for entrepreneurs and fighting problems of non-tariff nature, corruption and bribes. In terms of the second issue, I appreciate earlier activities undertaken with the assistance from Japan. Also I support proposals and initiatives to develop it into a major logistic center which connects Asia with Europe through a business entity based on public and private partnership or joint venture. As for the Mongolian government participation, there are special administrative unit in Zamiin-Uud and state institution which has a status of Zamiin-Uud free trade zone. Therefore the state has a responsibility to provide these institutions with coordinating efforts. Though this logistic center in institutional terms is separate from the Zamiin-Uud free zone, I believe the state has a responsibility to ensure appropriate coordination of their operations. S.Bayar: Thank you to Minister of Finance S.Bayartsogt. Our meeting is almost finishing. Are there any opinions on general topic, structure and content of the next meeting besides the two issues that we have discussed? N.Zorigt: I have a few words to say. In case of Zamiin-Uud logistic facility, it shall be established with state and private participation, and on behalf of the private sector I would like to say that with the purpose to ensure sustainable performance of this facility, it would be appropriate to have the private sector participation with a majority share. Although the government should own a certain amount of the share, the private sector should own the control package of shares. I am saying this to avoid political influence and ensure sustainable performance of this facility. S.Bayar: Mr.Baatar, the Government Plenipotentiary Representative in Zamiin-Uud, is participating in our meeting today. I would like to give a floor to Mr.Baatar to express his opinion. 39 39

40 AnnualReport Consultative Council on Investment Climate and Private Sector Development in Mongolia 40 Baatar: Mr. Prime Minister, Ladies and Gentlemen. I am happy to participate in this meeting and would like to say that very important issues were discussed here today. Nevertheless, I find it important to present you the real situation, because many issues are discussed at the same time, some of them are duplicated, some of them go along with each other, and at the end we have very little outcome. At the present three transshipment facilities are operating in Zamiin-Uud, and another facility will be in operation soon. The AirTrans company has almost completed two lanes of railway and auto transport road with two ways. Overall, four companies are operating in this field. Moreover, the General Customs Agency completed its paper work for ownership of 400 hectares of land to start the establishment of logistics facility. If the economic free zone will be set up, it shall also have a logistics facility as well. In that case, we should take into account the amount of shipments. Today the narrow and broad train tracks in Zamiin-Uud are overloaded. The narrow tracks are old, manual and non-automatic ones. If we can improve the present situation, the speed of transshipments will increase. With the initiative of Vinswei company from Chinese side, the 15 lane train track is going to be built soon, although the work and roads from our side have not been started. Today, a highway with 5 lanes is bordering with Mongolia. Therefore, it is vital to pay attention to the logistics such as border stations and railway junctions. Our work has to be in line with the Government policy on planning and policy matters. It is not right to develop logistics and free trade zone separately. This project will be successful if every action is planned under one policy. I am in position to implement the results of this conference. Thank you. S. Bayar: Thank you. Prior to this conference, the council members have discussed and the Secretariat prepared and brought up above mentioned issues for discussions. Following the issues that we have discussed, Council has come up with a recommendation consisting of four points. Within the framework of PPP, right now it is difficult to say whether the public-private business entity should be a liability company. Therefore, I would like to assign the Cabinet, in particular the Minister of Finance S.Bayartsogt and the Chief of the State Property Committee D.Sugar the task of establishing a state-owned legal entity, approving its initial paid-in capital and directing its activities to implement functions of introducing the Single Electronic Window, and secondly, under the Transit Mongolia project, a logistics facility in Zamiin Uud. However, it is worthwhile note that establishment of logistics facility should be in line with the establishment of free trade zone and other local projects. I believe that you have same opinion on this matter. Thirdly, it is important to invite delegates of bilateral and multilateral cooperation apart from the Government of Mongolia and private sector. I would like to request the EBRD and IFC if they would be interested to invest in the new state-owned firms that will be established. Fourth, it is advisable to collaborate with the working group of the World Bank Doing Business visiting to Mongolia in November 2008 to assess Mongolia s business environment. It is advisable to the Cabinet to include into its list of priorities the issue of improving the indicators of Doing Business. For the moment, the Cabinet is working toward to finalize its Action Plan and will make every effort to include this issue in the Action Plan. It is necessary to prepare a plan and formulate a guidance and project in order to improve each and every 10 indicators of Doing Business. The most suitable agency for undertaking this work is the Ministry of Finance or Minister Bayartsogt. Based on earlier mentioned issues that we have discussed today, the draft recommendation to assign these responsibilities to Mr. Bayartsogt has been formulated. Are there any comments on this draft? No. As I understand everyone agrees with this draft. The meeting of the Consultative Council on Investment Climate and Private Sector Development has convened for the second time. These two meetings helped us to streamline our activities. I have noted earlier that the first meeting took place just before elections. In my opinion it would be more competent to invite more delegates for the third meeting. Moreover, it is advisable to inform discussion topics of the meeting to participants one month ahead, get the feedback and depending on the issues to be discussed invite not only 40 40

Consultative Council on Investment Climate and Private Sector Development in Mongolia Annual Report 2007 2008 41 the Prime Minister and Finance Minister, but also other Ministers. The Finance Minister has always participated in the meeting and I think he will do so in the future as well. Depending on the issue to be discussed for the next meeting it would be right to invite Cabinet member in charge of specific issue or sector as well as heads of relevant agencies. Would it be possible to organize next meeting within this year? Kh.Amarsaikhan: It is possible in January 2009. S.Bayar: It is essential to organize the third meeting in January 2009. By that time, the Government Action Plan, 2009 Budget and Government priorities will be approved. I would like to inform that we made changes in general methodology for formulation of the budget and Government priorities. From now on, the Government priorities will be discussed not in autumn, but in spring. Therefore, I anticipate that the Minister of Finance will give a briefing in advance on issues that will be incorporated in the Government priorities, and I think that relevant organizations and representatives of organizations that are present here will have an opportunity to actively participate in discussions. We have high expectations from the Council s work. We believe that Mongolia has a bright future and high growth if we can improve the investment climate and support private sectors that produce 80% of national wealth. I would like to note that I and Minister of Finance will pay attention to transform into actions the ideas and issues as well as the Government policy that were discussed during these meetings. I wish that the consultative council will become a good practical mechanism for both bilateral and multilateral cooperation that will support Mongolia s development. I would like to state to all of you that your ideas are very valuable. In particular, I would like to express my appreciation to Mr. Varel Freeman, First Vice President of the EBRD. Further on, I would like to make a suggestion to discuss major issues of importance with a support of other banking and international organizations, Embassy of Japan, Embassy of the USA and other relevant organizations during these meetings. I hope by January next year, during the third meeting of the Consultative Council we will give a briefing on mining sector issues, policies implemented by the Government regarding these issues, success stories and mistakes. One month and one week has passed since the establishment of the new Cabinet. Therefore, there are many issues that need to be resolved. According to procedures at first we are going to submit for discussion the amendments to the budget and actual budget of the last year, and then inevitably we have to submit the budget for 2009 and Government Action Plan. Moreover, Government is making all effort to pass the mining law within this year or within November of next year. It appears to me that if we have agreed in advance we would discuss issues such as impact of global banking and financial crises on cooperation and investment, its influence on economy of Mongolia. However we could not do so as the meeting was planned and topics for discussion were prepared in advance. I would like to express my appreciation to all of you. In this respect I would like to say that we are expecting specific proposals and comments from all of you, who have a profound experience to make this meeting more efficient. Thank you for your attention. 41 41

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