VZCZCXRO4874
RR RUEHLMC
DE RUEHUM #0809/01 3040842
ZNR UUUUU ZZH
R 310842Z OCT 06
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 0512
INFO RUEHMO/AMEMBASSY MOSCOW 1615
RUEHBJ/AMEMBASSY BEIJING 5294
RUEHUL/AMEMBASSY SEOUL 2522
RUEHKO/AMEMBASSY TOKYO 2282
RUEHML/AMEMBASSY MANILA 1258
RUEHLO/AMEMBASSY LONDON 0058
RUEATRS/DEPT OF TREASURY WASHDC
RUCPODC/USDOC WASHDC 1118
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0387
RUEKJCS/SECDEF WASHDC
RUCNDT/USMISSION USUN NEW YORK 0456
RUEHGV/USMISSION GENEVA 0270

UNCLAS SECTION 01 OF 04 ULAANBAATAR 000809 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR E, EB, EAP/CM, AND EAP/RSP 
STATE PASS NSC FOR WILDER 
MCC FOR F. REID AND J. HALLMARK 
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: PREL EAID KMCC ECON MG
SUBJECT: Mongolia's MCA Compact Nears Critical Juncture 
 
REF:  Ulaanbaatar 0790 
 
Sensitive But Unclassified -- Not for Internet distribution. 
 
¶1. (SBU) SUMMARY: Mongolia has submitted a rough draft of a program 
memo which -- with substantial hard work by both Mongolian and U.S. 
counterparts over coming months -- may enable a Millennium Challenge 
Account (MCA) Compact to be signed in early Spring 2007.  A Compact 
will likely involve a significant expansion of bilateral aid 
(perhaps as much as 30 times our annual non-military assistance 
levels spread over five years), provide a boost to Mongolia's 
economic growth in coming years, and be a tangible, significant 
symbol of U.S. support for this friendly nation transforming from a 
single party, state-led economy to a multi-party democracy with a 
market-driven economy.  However, it's been a long, bumpy ride since 
Mongolia was in the first group of MCA eligible countries announced 
in May 2004.  Mongolians are feeling a little road weary, and any 
further delay in achieving a Compact will become a serious political 
problem for bilateral relations.  Assuming Mongolia makes a good 
faith effort to bring the Compact to closure -- which they give 
every indication of doing -- it will be in our own interest, in 
post's view, to make a maximum effort to ensure a Compact can be 
signed next Spring.  END SUMMARY. 
 
Where We Are 
------------ 
 
¶2.  (U) On October 20 (Washington time), Mongolia's MCA National 
Council submitted the elements of a draft program memo, drawing from 
its submission, and retained many of the requisite professional 
experts outlined in the most recent MCC Aide Memoire.  (Note:  While 
MCC asked for a consolidated program memo, the GOM submitted four 
separate documents on each of the major projects.  MCC then combined 
these into the draft program memo, albeit one without an overall 
Executive Summary.)  MCC set the October 20 date as part of a 
timeline which could realistically enable signing a Compact in early 
spring 2007. 
 
¶3. (U) Mongolia's proposal, after much winnowing and due diligence, 
now consists of four major projects: 
-- A Health Project to build a national diagnostic and treatment 
center (DTC) linked to a network of global, national and upgraded 
rural health centers. 
-- An Education Project to build a demand-driven, national 
vocational education system focused initially on up to seven growth 
industries or sectors.  Vocational training programs would help 
prepare Mongolian workers for jobs in such industries as mining, 
which is attracting more interest from U.S. investors. 
-- An Information & Communication technology (ICT) Project, to 
improve the capacity, reliability and accessibility of Mongolia's 
ICT network, as well as lower access costs; and -- A Railway Project 
to improve the capacity and efficiency of Mongolia's main railway 
artery to secure critical shipments. 
-- The ICT, Health and Vocational Education proposals are 
interlocked and reinforce each other: the development of Mongolia's 
communication technology will help schools and hospitals upgrade 
their facilities and will permit distance learning and remote 
diagnosis for those who live in the country's vast rural areas. 
 
¶4. (U) While the GOM did not submit updated materials by October 20, 
it has indicated that it wants to include two smaller projects in 
its proposed Compact.  Both are an outgrowth of Mongolia's original 
proposal for the Compact, which included a major housing project, an 
idea which fell aside during MCC due diligence over the last year. 
A Housing Finance Project would focus on affordable housing finance 
for low income ger area residents and strengthen competition in the 
financial sector with the objective of reducing interest rates.  A 
Property Rights Project would strengthen property rights and improve 
land management to enable development in ger settlements and 
surrounding areas. 
 
 
ULAANBAATA 00000809  002 OF 004 
 
 
A Tangible Demonstration of U.S. Support 
---------------------------------------- 
 
¶5.  (SBU) While there are many unknowns pending completion of due 
diligence and the finalization of the Compact, the projects now on 
the table could involve MCC investments of US$250-300 million over a 
five year period.  This is about six times what the United States 
otherwise has spent annually on non-military aid to Mongolia -- 
through USAID,  the proceeds of agricultural commodities donated 
under PL-480, and regionally and centrally administered aid 
programs.  The five-year total is roughly equal to one year's total 
of all forms of aid, loans, assistance provided by all donors.  The 
Compact number is also substantial by comparison to Mongolia's $2 
billion a year economy, and the projects could provide a significant 
boost to Mongolian economic growth in future years.  In short, a 
Compact will be a very large and tangible demonstration of U.S. 
support for a country which has made many right choices since its 
peaceful democratic revolution in 1990 and its transformation toward 
a market economy. 
 
A Long, Bumpy Ride 
------------------ 
 
¶6.  (SBU) Mongolia was among the first batch of 16 countries 
announced as eligible in May 2004.  Since then, it has watched as 
ten of its "MCC cohort class" signed compacts, while Mongolia 
remained mired in the preliminary stage.  Even if the current 
timeline is met, MCC disbursements will not be immediate -- and, in 
Mongolia's harsh climate, any projects requiring external 
construction may well not get started until Spring 2008 (the 
construction season runs from May to October).  In Mongolian 
political terms, that will mean the MCC process will have taken one 
full, four-year parliamentary election cycle -- with the 
announcement of Mongolia's eligibility coming just before the June 
2004 election, and the start of implementation occurring just prior 
to the June 2008 elections.  For politicians eager to show 
accomplishments to voters, that seems like an eternity.  GOM 
officials had hoped to sign an agreement in 2006 as part of 
Mongolia's 800th anniversary celebrations. 
 
¶7.  (SBU) Mongolian frustration with this lengthy process is not far 
beneath the surface.  The last grueling year of waves of due 
deliberation teams has been particularly dyspeptic, with the 
penciled in date for a Compact signing receding from Fall 2006 to 
Spring 2007.  In August, while discussing Mongolia's deliberations 
on the size of its 7th six-month troop rotation to Iraq, Foreign 
Minister Enkhbold asserted that the public perceived a link between 
the Iraq deployments and MCC, and was increasingly dismayed that the 
MCC Compact remained only on the distant horizon.  In October, 
explaining why Mongolia was exploring issuing $300-500 million of 
high yield sovereign debt (Mongolia's first-ever such bond 
issuance), a central bank official attributed it in part to the 
delay in receiving MCC funds. 
 
Mistakes Were Made 
------------------ 
 
¶8.  (SBU) The frustration and disillusionment is partially a 
reflection of unrealistic expectations and euphoria after Mongolia 
was announced as MCC eligible in May 2004.  With no precedents to 
inform them on the new MCA process, Mongolian officials assumed they 
could whip together a proposal and a large check from the MCC would 
soon be sent their way to be deposited into the GOM's coffers. They 
opined that the forthcoming quick MCC cash would allow them to 
ignore IMF recommendations. 
 
¶9.  (SBU) Once disabused of these notions, Mongolia then began its 
long struggle to prepare a sound MCA proposal, but labored under 
several major handicaps.  First, after the June 2004 elections 
resulted in a hung parliament, the  weak and distracted government 
made decision making problematic.  This was true under both the 
 
ULAANBAATA 00000809  003 OF 004 
 
 
'grand coalition' government -- which had 16 troubled months of 
existence between September 2004 and January 2006 -- and by the 
'government of national unity' which succeeded it.  Not a day has 
passed in the last two years without plausible rumors of the 
government's imminent demise. Cabinets have suffered from poor 
discipline, and the governments (and the MCC process) have had been 
forced to rely on multi-party coalitions, something new for 
Mongolia's young democracy.  In short, while "grand coalition" PM 
Elbegdorj provided personal support during his term, there has been 
no strong, well-backed leader or political force which could ensure 
a taut, disciplined MCA Compact preparation process. 
 
¶10.  (SBU) Second, as a government, Mongolia has a notably poor 
planning capacity.  Since 1990, Mongolia has enjoyed one of the 
highest per capita aid totals in the world -- a cumulative US$1,000 
per capita through 2004.  However, the prioritization and project 
planning has been done by donors. Fortunately, the donors talk and 
coordinate amongst themselves, reducing overlap.  Only this month, 
after sustained cajoling by donors, has democratic Mongolia unveiled 
its first attempt at a national development strategy (see reftel). 
MCC's requirements thus were novel ones for Mongolia's government: 
conduct a broad-based consultative process about possible projects; 
prioritize and narrow these down; and submit a detailed, 
economically and financially defensible investment justification. 
 
¶11.  (SBU) Mongolia's initial proposal in November 2004 was 
considered too large and ill-defined; it was returned and Mongolia 
was advised to rethink and narrow its proposal.  Mongolia submitted 
its revised official MCA proposal in  October 2005.  At that 
juncture, six of the original 15 country members of the MCC class of 
May 2004 had actually signed Compacts, and only Bolivia had yet to 
submit a proposal.  Mongolian officials had spent the previous year 
running informal proposals by MCC-USA for reaction; unfortunately, 
these proposals often appeared to be laundry lists of the pet 
projects of a few influential members on Mongolia's MCA National 
Council.  Behind the scenes, the Council had vicious internal 
battles and personality splits.  The official proposal put forward 
in October 2005 was improved but still flawed.  This meant that 
MCC-Mongolia started the due diligence phase with a complex proposal 
which needed substantial work to shape into a viable Compact. 
 
¶12.  (SBU) While acknowledging that the process has been a learning 
experience for them, Mongolian officials have been increasingly 
assertive in rebutting what they believe are mistaken impressions. 
First, they reject the notion that Mongolia has devoted few 
resources to the preparation process.  Council members state 
Mongolia has spent over US$200,000 on its proposal since 2004, which 
excludes the time spent by government officials on the working 
groups in each sector.  This has represented a substantial 
investment of manpower and money for a country with tiny ministries 
with official salaries ranging between US$100-$300 a month.  Second, 
officials complain that the MCC-USA due diligence experts sent by 
MCC over the last year were "parachuted" into Mongolia for brief 
periods, that it can be difficult to later obtain feedback on their 
findings, and the guidance they provide is often conflicting and 
confusing.  The due diligence visits have stretched Mongolia 
National Council's resources, the officials comment, without 
necessarily moving the Compact much forward.  More than one member 
of the Council has stated some version of the sentiment that, "if 
MCC were serious about completing the compact, they would send all 
the experts out to Mongolia in unison to collaborate with the 
working groups for an extended period of, say, two or three months. 
Only that way could we hope to hash out a final plan acceptable to 
all." 
 
¶13.  (SBU) Third, officials have visibly begun to tire of homilies 
on Mongolia's need to take action to ensure the country stays 
eligible for MCA assistance.  One official recently noted, for 
example, that Mongolian indeed had taken action to combat corruption 
through major legislation passed by Parliament in July.  He then 
commented acerbically that he had recently looked through 
 
ULAANBAATA 00000809  004 OF 004 
 
 
Transparency International corruption perception tables, and noted 
that Georgia, which signed an MCA Compact a year ago, had sharply 
lower scores than Mongolia.  Why, he asked rhetorically, was 
Mongolia being held to a higher standard? 
 
Comment:  Too Important to Fail 
------------------------------- 
 
¶14.  (SBU) In post's view, signing a Compact next year will be a 
major advance forward for bilateral ties, a fitting achievement for 
the 20th anniversary year for U.S.-Mongolia diplomatic relations. 
If a Compact is concluded on time and money soon thereafter 
disbursed, Mongolia's angst and tribulations of the last two years 
will be forgotten as the benefits of projects begin to be felt. 
Rep. Kolbe's visit in early September underlined to the Mongolians 
that Congress will not tolerate any shortcuts, and will insist that 
Compacts be well justified.  Nevertheless, if Mongolia makes a good 
faith effort to bring the Compact to closure -- and we believe that 
the GOM is for the most part doing just that -- it will be 
imperative that the U.S. also make maximum effort to assist the 
Mongolians to prepare a satisfactory Compact.  Mongolia is a low 
income country barely a decade and a half away from effective 
colonial rule by the Soviet Union. If the proposed projects are 
fundamentally sound, we will be far better served by helping the 
Mongolians get the project justifications right.  Arguing that the 
Mongolians have not made enough efforts on their own would fall on 
deaf Mongolian ears and sound self-justifying.  It will also be a 
fundamentally unfair characterization of the high degree of 
political commitment here to a long-term partnership with the U.S., 
and of the real effort being made by a large number of harried 
Mongolian officials to meet our requirements. 
 
¶15.  (SBU) As a success or as a lingering failure, the Compact will 
be a major landmark in bilateral diplomatic relations.  Exaggerating 
a bit, one council member told us, "If the Compact does not come 
through, America will be finished here."  That is hyperbole, but the 
stakes for the relationship are now very high.  Both sides will have 
to display a firm commitment, and provide the time and personnel for 
the closest collaboration, to complete this joint endeavor on 
schedule. 
 
Minton