VZCZCXRO2568
RR RUEHLMC
DE RUEHUM #0790/01 2910910
ZNR UUUUU ZZH
R 180910Z OCT 06
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 0479
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RUEHBJ/AMEMBASSY BEIJING 5281
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BUEHBS/USMISSION USEU BRUSSELS 0001
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UNCLAS SECTION 01 OF 05 ULAANBAATAR 000790 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/CM, EB/IFD AND EB/TPP 
AID FOR ANE/ESA FORD/WINSTON 
USDOC FOR ZHEN-GONG CROSS 
TREASURY FOR T.T. YANG;PASS USEDS TO IMF, WORLD BANK 
MANILA FOR USED TO ADB 
LONDON FOR USED TO EBRD 
 
E.O. 12958: N/A 
TAGS: EAID EFIN PREL PGOV MG
SUBJECT: Mongolian Government, Donors Discuss Progress, Coordinate 
Development Efforts At Second Bi-annual Technical Meeting 
 
Ref:  Ulaanbaatar 0187 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. 
 
¶1. (U) SUMMARY AND INTRODUCTION:  Government of Mongolia 
(GOM)officials and external partners (donors) convened the second 
bi-annual technical meeting October 9-10 to discuss progress in key 
areas since their first meeting in February 2006 (reftel), as well 
as to discuss plans for key sectors such as transport, 
infrastructure, education and the environment.  World Bank's 
Mongolia Country Director David Dollar and Mongolian Minister of 
Finance Bayartsaikhan presided over the meeting, which consisted of 
presentations on the sectors listed above by the relevant GOM 
ministries, followed by discussions led by a lead discussant from 
the donor side. 
 
¶2.  Among those represented at the meeting were a) IFIs and 
Multilaterals including the World Bank, UNDP, UNFPA and IMF; b) key 
Embassies from the U.S., Germany, Japan, Korea, Turkey and 
Netherlands; and c) bilateral assistance agencies including USAID, 
JICA, Swiss Development Organization (SDC), GTZ, and others. 
Representatives from the Mongolian side included Prime Minister 
Enkhbold, the Ministers of Health, Roads, Transport and Tourism, 
Education, Construction, Agriculture, numerous MPS, and dozens of 
officials from relevant ministries.  Private sector representatives 
and journalists also observed the meeting. 
 
¶3.  Cross-cutting themes of the discussion included the need to 
consider regional cooperation and engagement (in transport, 
environment, and energy), the importance of creating a sound 
environment for private sector investment (particularly in transport 
and energy), and the need for greater prioritization by the GOM of 
its development goals across all sectors discussed.  One other theme 
that emerged from the discussion, which is a cause for concern among 
many external partners, is the Government's reluctance to adjust 
tariffs for infrastructure (energy and transport especially) in 
order to attract the massive private investment required to meet 
their development goals.  The GOM also previewed its much-awaited 
but not yet finalized national development strategy.  END SUMMARY 
AND INTRODUCTION. 
 
 
National Development Strategy (NDS) 
----------------------------------- 
 
¶4.  External partners welcomed the government's initiative to draft 
and preview its  NDS, while stressing the need for broad-based 
consultation, realism in setting goals, a set of measurable targets 
and indicators to gauge progress in implementing the NDS, and the 
need for the NDS to link to other government planning documents, 
including sectoral strategies, the Millennium Development Goals, and 
the state budget.  External partners also noted that the 
government's role in the development of the NDS should be carefully 
considered and crafted since the private sector will be the primary 
driver of economic growth and job creation. 
 
Education 
--------- 
 
¶5.  Since the February  technical meeting, the main accomplishment 
in the education sector was the finalization of a Master Plan 
through 2015.  Lead discussant Japan praised this achievement, as 
well as Mongolia's newly established eligibility for the World 
Bank's Fast Track Initiative, which gives it access to up to US$29.5 
million in grant funding.  Several speakers pointed to challenges 
remaining in the sector, including high drop-out rates, rural-urban 
 
ULAANBAATA 00000790  002 OF 005 
 
 
disparities, low pre-school enrollment, a mismatch between labor 
market requirements (particularly vocational skills) and the current 
curriculum, and the incomplete transition to a 12-year primary and 
secondary school system.  Institutional reforms, including improved 
management of resources and budget transparency, a review of quality 
standards - especially at private institutions - and improved 
monitoring and evaluation systems were also said to be essential to 
achieving sectoral goals. 
 
Private Sector Development 
-------------------------- 
 
¶6.  Both the government and other participants noted several 
significant improvements to the private sector investment 
environment since the last meeting.  Not least among these is the 
passage of anti-corruption and anti-money laundering laws in the 
spring session of Parliament.  The GOM also announced that two of 
the main recommendations of the February technical meetings have 
already been implemented: a one-stop shop for business approvals has 
been initiated and copies of materials about all licensing and 
permit procedures are now available on a Ministry of Industry and 
Trade website.  The private sector working group - led by lead 
discussant GTZ - praised this progress, while noting that work 
remains to be done in tax administration, bankruptcy, collateral 
registration, and increasing the courts' capacity to resolve 
commercial matters.  Some speakers also noted the mixed messages 
from the government on tax and mining policy and emphasized the need 
for a clear statement of the GOM's plans in these areas. The DCM 
(then Charge') weighed in to seek the GOM's recommitment to market 
economics and reform and the centrality of private sector 
development.  Minister of Finance Bayartsaikhan reassured 
participants that the GOM was indeed committed to becoming a market 
economy and did "not want to go back." On October 10, the Prime 
Minister made similar points (see para  below). 
 
Environmental Worries and Challenges 
------------------------------------ 
 
¶7.   The Ministry of Nature and Environment led with a presentation 
highlighting the many environmental challenges facing Mongolia, 
including land degradation, desertification, deforestation, a 
decline in water resources, loss of biodiversity, increasing urban 
air pollution, solid waste management, and frequent natural 
disasters.  The Ministry's main objectives in the near and medium 
term includes land restoration at mining sites, reforestation and 
desertification prevention, reducing environmental pollution, better 
water resource management, and improved biodiversity conservation. 
 
 
¶8. In response, the representative from SDC stressed the need for a 
new vision for the management of Mongolia's environment.  According 
to this vision, environmental protection would be considered in the 
context of promoting the country's economic development.  He said 
Mongolia could become a leader in eco-tourism or even "eco-mining". 
He noted that many of Mongolia's environmental problems are examples 
of "tragedies of the commons".  Land degradation and overgrazing, 
for example, could be addressed by granting land use rights so that 
land users have an interest in protecting the resources they use. 
Likewise, he suggested that moving from a conservation to a managed 
profit-making mentality in forestry could improve forest 
conservation, while increasing revenues, some of which could be used 
in the environmental sector.  Other speakers agreed with the 
importance of taking a cross-sectoral view of environmental problems 
and how they might be resolved. 
 
¶9. The representative from the Dutch Embassy in Beijing emphasized 
 
ULAANBAATA 00000790  003 OF 005 
 
 
the importance of fostering an NGO community and public-private 
partnerships that can contribute to the Ministry's efforts.  Such 
partnerships would prove especially vital, given the very limited 
resources of the Ministry and the inherent interest of some NGOs and 
many private companies in protecting the environment.  GOM officials 
pointed to poverty as being a main cause of environmental 
degradation, saying that poor people have more urgent concerns than 
protecting the environment.  They also pointed to the decline in 
state monitoring and enforcement of regulations and acknowledged 
that the ministry lacks the resources to adequately manage protected 
areas. 
 
Infrastructure 
-------------- 
 
¶10.   The infrastructure discussion focused primarily on energy and 
transport, with USAID and the World Bank being the lead discussants. 
 Speakers repeatedly returned to the central theme of Mongolia's 
massive needs for infrastructure investments and the corresponding 
need to prioritize given resource restraints.  The World Bank's 
energy advisor underlined the complex of factors that makes 
Mongolia's infrastructure problems so challenging: 1) the high cost 
incurred by high population dispersion and climate; 2) the high 
poverty rate and its impact on cost recovery; and, 3). the 
importance of heat, both for basic survival and as a political 
issue. 
 
Energy:  Pivotal to Mongolia's 
Development and Survival 
------------------------------ 
 
¶11.  The presentation by the Ministry of Fuel and Energy highlighted 
the various challenges facing the sector, including insufficient 
capacity (demand for power will outstrip existing supply beginning 
in 2008), the inefficiency of existing infrastructure, and balancing 
cost recovery with accessibility. 
 
¶12. USAID, as the lead discussant, joined other donors in 
emphasizing the importance of a financially self-sustaining and 
environmentally sound energy sector.  USAID urged the Ministry to 
build a consensus with relevant stakeholders - including GOM, IFIs, 
other donors and private investors - on the importance of the sector 
for Mongolia's development and investment needs and likely sources 
of funding.  USAID further urged the Government to prioritize, 
sequence, and synchronize the tasks that need to be accomplished to 
create a financially self-sustaining energy sector.  Several GOM 
officials - including the Finance Minister and Deputy Energy 
Minister - made clear that two priority tasks in the near to medium 
term are: 1) the construction of a 220 kilovolt power line from 
Ulaanbaatar to the Oyu Tolgoi copper mine site (despite the 
expressed desire of the current mining license holder to build a 
mine-mouth power plant), and, 2) a hydropower plant on the Egiin 
River, which is to be funded by a $300 million concessional loan 
from China (despite environmental concerns voiced by donors). 
 
¶13. The question of energy tariffs was raised several times during 
the discussion.  According to the Finance Minister, energy tariffs 
in Mongolia have not been raised in five years and will not be 
raised until after the winter of 2007.  This policy increasingly 
undermines the already poor financial health of the energy sector 
and sends a strong message to potential private investors that the 
Mongolian energy sector is not worth investing in.  USAID 
highlighted the need to correct these pricing distortions in order 
to be able to attract the private sector investment that will be 
necessary to meet Mongolia' future energy needs. USAID also pointed 
to the importance of clearly defining the respective roles of the 
 
ULAANBAATA 00000790  004 OF 005 
 
 
Ministry as an energy policy maker in contrast to the Energy 
Regulatory Authority, which has the legal right to review and 
approve increases in tariff rates, while balancing the need for cost 
recovery with the need for not overburdening customers. 
 
¶14. The ADB and the World Bank Country Directors also stressed the 
need for Mongolia to address energy tariffs sooner rather than 
later, if the Government's stated goal of increasing access to 
energy supplies is to be achieved and if much needed private sector 
investment is to be attracted.  The ADB emphasized the importance of 
regional cooperation - both in terms of energy imports from Russia 
and coal or energy exports to China - and expressed its interest in 
providing support on international best practice in this area.  The 
Deputy Minister of Fuel and Energy expressed support for encouraging 
private sector investment in energy, but he cautioned that energy 
tariffs are a political consideration. 
 
Transport 
--------- 
 
¶15. A presentation by the Ministry of Roads, Transport and Tourism 
underscored the massive investment needs of Mongolia's roads, 
railways and airports.  The ADB Country Director, however, 
criticized the presentation for failing to cover the key issues, 
including questions about financing, creating an enabling 
environment for private investment, maintenance requirements for 
transport infrastructure, and cost recovery strategies.  Several 
speakers expressed agreement that the Government must set priorities 
for investment, given the large needs and the very limited 
resources, and must maintain existing transport assets.  As with 
energy, the government expressed reluctance to adjust tariffs, 
despite their stated interest in private sector investment. 
 
CLOSING COMMENTS OF PRIME MINSTER 
--------------------------------- 
 
 
¶16. Prime Minister Enkhbold unexpectedly attended the closing 
session of the technical meeting on October 10.  The Prime 
Minister's speech acknowledged the central importance of a strong 
private sector to the country's future economic growth and said the 
government would continue to pay close attention to creating a 
favorable environment for investment.  He stressed that Mongolia 
needs more donor grants to improve governance and to support the 
education, science, health, and environmental sectors.  He said the 
government would rely on soft loans to expand energy, transport, 
information technology and tourism infrastructure, while working to 
attract foreign investment in mining and other export-oriented 
industries.  Finally, PM Enkhbold said that only through good 
economic policy and the efficient use of mining revenues would 
Mongolians benefit from the country's vast mineral wealth.  To this 
end, he said the Government will support initiatives to increase 
transparency in the mining sector. 
 
SHAPING NEXT STEPS AND THE NEXT MEETING 
--------------------------------------- 
 
¶17. In the closing session of the meeting, all participants agreed 
to meet again in six months.  In the intervening time, working 
groups on private sector development, the environment, and education 
will continue to function with participation from relevant 
ministries.  (USAID is part of the Private Sector Working Group, 
together with GTZ, ADB, the World Bank, and the Ministry of Industry 
and Trade.)  During final comments, the head of the new European 
Union office in Mongolia suggested that the agricultural sector 
should be discussed at the next meeting.  However, no final 
 
ULAANBAATA 00000790  005 OF 005 
 
 
decisions were made about the subjects to be addressed six months 
hence.  Some participants expressed support for having break-out 
sessions at the next meeting, but this idea was rejected due to the 
limited time available.  USAID suggested that at least half of one 
day be devoted to the energy sector at the next meeting.  An 
official from the Ministry of Industry and Trade said that the 
progress of future meetings should be measured against a list of 
criteria.  Moreover, he said that the meetings should involve some 
kind of pledging exercise and should not be simply an opportunity 
"for donors to express their opinions" but also to support this 
process with needed resources. 
 
MINTON