VZCZCXRO7425
PP RUEHLMC
DE RUEHUM #0125/01 0570939
ZNR UUUUU ZZH
P 260939Z FEB 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 0850
INFO RUEHMO/AMEMBASSY MOSCOW 1702
RUEHBJ/AMEMBASSY BEIJING 5435
RUEHUL/AMEMBASSY SEOUL 2644
RUEHKO/AMEMBASSY TOKYO 2388
RUEHOT/AMEMBASSY OTTAWA 0393
RUEHML/AMEMBASSY MANILA 1312
RUEHLO/AMEMBASSY LONDON 0095
RUEATRS/DEPT OF TREASURY WASHDC
RUCPODC/USDOC WASHDC 1201
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0482

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000125 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS DOC/ITA, USTR, USTDA, OPIC, EXIMBANK 
USAID FOR ANE FOR D. WINSTON 
MANILA AND LONDON FOR ADB, EBRD USEDS 
TREASURY FOR USEDS TO IMF, WORLD BANK 
 
E.O. 12958: N/A 
TAGS: EINV PREL ETRD EMIN ENRG MG
SUBJECT: U.S.-Involved Tender Dispute: Winning Twice Is Not Enough 
 
 
Sensitive But Unclassified - Not for Internet Distribution. Contains 
proprietary and confidential business information 
 
¶1. (SBU) SUMMARY AND COMMENT: L-Systech, a Mongolian-South Korean 
JVC, supported by an American consultant and vending U.S.-produced 
solar power equipment, saw its winning of an US$8 million Government 
of Mongolia solar-power equipment tender frustrated by the improper 
and perhaps illegal behavior of the Mongolian Minister of Fuel and 
Energy B. Erdenebat.  Concerted efforts by the JVC, post, and 
sympathetic individuals in the Ministry of Finance helped the JVC 
win a smaller tender for US$6.5 million, but the Ministry of Fuel 
and Energy continues to stall on the contract and the issuance of 
funds.  Post recommends that the upcoming TIFA talks be used to push 
the Mongolian government to resolve this dispute and to review the 
wider question of weakness in the Mongolian procurement system. 
Septel notes that ongoing efforts to resolve this specific dispute 
have uncovered problems with the GOM procurement system that may 
threaten its financial stability and ability to deliver quality 
projects on time and on budget. End Summary. 
 
A Bright and Shiny Tender 
------------------------- 
 
¶2. (SBU) Just before the 2006 Thanksgiving Holiday, Ms. Grace 
Roberts, one of Mongolia's Honorary Consuls in California, met with 
CommOff regarding a troubled a solar power tender announced and 
administered by the Mongolian Ministry of Fuel and Energy (MFE). 
She and a consortium of three South Korean firms and their Mongolian 
partners, L-Systech, had participated in and in early November 
ostensibly won the US$8 million contract to provision some 50,000 
rural herder families in Mongolia solar power equipment.  The 
government of Mongolia (GOM) was to pay for half of the cost and the 
herders were to cover the remaining 50%, making the total value of 
the program some US$16 million. According to Ms. Roberts, U.S.-based 
solar power equipment manufacture Morningstar would sell the 
equipment to L-Systech, and Ms. Roberts would receive a consultant's 
fee for successfully assisting with the tender. 
 
¶3. (SBU) So far so good, but upon the MFE Evaluation Committee's 
(EC) announcement of contract award to L-Systech, MFE Minister B. 
Erdenebat immediately annulled the result and urged the EC to award 
the contract to a South Korean firm although its bid was 
substantially more costly to the GOM than L-Systech's.  Roberts 
claimed that the Minister Erdenebat had some sort of improper 
financial arrangement with the losing firm, but could not document a 
precise relationship.  Ms. Roberts and her Mongolian colleagues 
attempted to resolve dispute on their own and, failing in that 
effort, decided to ask for post's advice and support to move MFE to 
reconsider its annulment.  (Note: Minister Erdenebat is the head of 
the Motherland Party, a small-time player offered three ministerial 
seats in return for supporting the current Enkhbold government.  The 
party is often termed the "Erel Party," because of its close 
affiliation with the Erel company, a gold mining, banking and 
insurance firm headed by Eredenbat.  Like recently-dismissed 
ministers Jargalsaikhan and Gundalai, Erdenebat's tenure at his 
ministry has been embroiled in charges of corruption and conflict of 
interest, regarding proposed power plants and coal deposits, 
hydro-electric projects being built by his firms, and environmental 
degradation at his company's placer gold mines.) 
 
Ministerial Mischief Surprises No One 
------------------------------------- 
 
¶4. (SBU) Commoff brought Ms. Robert's concerns to contacts at MFE 
and the Ministry of Finance (MinFin). The MFE contact, a 
long-serving staffer, did not disagree with claims that the current 
minister might have acted improperly in this specific case.  The 
official opined that some problems were beyond his capacity to 
solve.  At MinFin, Ms. Kh. Mart (Director General of the Procurement 
Policy and Coordination Department) was less circumspect, stating, 
without elaborating, that she found Ms. Roberts's claims of 
Erdenebat's improprieties completely credible.  In the meantime, 
Minister Erdenebat himself had gone public with his decision, 
announcing in print and on TV that he had to cancel the results 
because L-Systech was too small, that the firm's technology was 
ill-suited to the task at hand, and that the firm was too recently 
founded to be allowed to compete.  Of course, Roberts and company 
 
ULAANBAATA 00000125  002 OF 003 
 
 
rejected each of these points, noting that the EC had not only 
approved their technical qualifications but had awarded them the 
contract. 
 
¶5. (SBU) Commoff then advised L-Systech to resolve the dispute 
through MinFin's newly established Dispute Resolution System, in 
which a panel of three professional evaluators selected by MinFin 
and each of the disputants would attempt to arbitrate the dispute. 
The results of the arbitration are not binding, as any of the 
parties (except MinFin) may opt for judicial review at any time. 
Mart welcomed our use of the new arbitration system and offered 
frank assessments of the solar procurement issue.  She disputed each 
of Minister Erdenebat's claims that L-Systech was unsuitable, noting 
that her division agreed with the EC's initial judgment that 
L-Systech had satisfied all technical and financial requirements and 
that Minister Erdenebat had no basis for his annulment. She stated 
and showed us the official order in which Minister of Finance 
Bayartsaikhan had directed MFE to honor the initial award, which 
Minister Erdenebat had bluntly refused to do in direct contravention 
of the procurement rules and law of Mongolia. 
 
¶6. (SBU) On post's advice, Roberts contacted the Mongolian Embassy 
in Washington, D.C., the Minister of Finance, the Prime Minister's 
office, and the Ministry of Industry and Trade.  Ms. Roberts told 
Commoffs that the Mongolian Embassy had criticized her actions, 
urging her avoid publicizing her troubles and not to tell the U.S. 
Embassy anything about the event.  The other GOM ministries murmured 
sympathetically about MFE's irregularities, but the Enkhbold 
government did nothing, as it has done in the face of most 
ministerial misbehavior. 
 
Try, Try Again 
-------------- 
 
¶7. (SBU) In late November, Minister Bayartsaikhan announced that the 
GOM would uphold the annulment on budgetary grounds.  MFE had stated 
that the budget available for the solar project was insufficient to 
fund US$8 million in equipment, and MFE would re-tender the project 
for US$6.5 million.  Bayartsaikhan then officially informed 
L-Systech that he concurred with MFE's assessment of its budgetary 
woes and was forced to annul the results of the first tender and 
support a second tender in line with available funds.  He concluded 
his letter by inviting L-Systech to join in the second tender. 
 
¶8. (SBU) Commoff met with Mart on December 1, concerning the GOM's 
decision.  Mart confirmed that MFE had in fact seriously 
miscalculated its budget and was within its rights to re-tender the 
contract in line with actual funds on hand.  However, she was 
extremely critical of Erdenebat and his staff for not monitoring 
their budget properly in the first place, stating without providing 
examples that MFE had done this a great deal over the last year, as 
had other unnamed ministries and agencies.  She further added that 
this sort of ministerial "incompetence" and rule breaking had led to 
over thirty law suits in over as many tenders in 2006 alone, 
involving tens of millions of dollars in disputed contracts. 
 
¶9. (SBU) On December 11, L-Systech reluctantly agreed decided to 
compete in Tender #2 and won again on December 13.  Again, Minister 
Erdenebat attempted to annul the results and transfer the contract 
to the same higher-cost South Korean firm.  He again cited 
L-Systech's recent formation and "inappropriate" technology as 
reasons for his decision.  This time, however, MinFin bluntly 
ordered MFE to honor the results of Tender #2, noting that the EC 
had yet again ruled in favor of L-Systech on all counts and that the 
Minister had absolutely no legal basis to cancel the results. 
According to sources in MFE and Mart, several EC members had 
remonstrated with Erdenebat, noting that he had his bite at the 
apple, had failed, and should let this one pass because the 
Americans and their Embassy were complaining too much. 
 
¶10. (SBU) Since mid-December, problems have continued to plague the 
contract, which presently is at an impasse.  First, two losing 
companies sued MFE, emphasizing Mart's claim that MFE's poor process 
gives rise to law suits and frustrating, costly delays.  MFE asserts 
that it had to revise the contract, but has refused to give 
L-Systech the revised contract.  MFE demanded instead that the firm 
supply the solar systems without a corrected, binding contract. 
 
ULAANBAATA 00000125  003 OF 003 
 
 
L-Systech won't manufacture and vend any system without a valid 
contract in hand. 
 
¶10. (SBU) With half a loaf, L-Systech grumpily accepts that we have 
collectively salvaged something out of the debacle.  Post will 
continue to press the GOM to honor its obligations in this matter, 
using the upcoming March TIFA talks to emphasize our concerns. We 
also recommend that this dispute be used by USG TIFA participants to 
make a wider, frank critique about how general weaknesses in the 
GOM's procurement system are negatively affecting Mongolia's 
reputation and business climate.  Finally, Ms. Mart expressed 
embarrassment and disappointment that a procurement system that she 
had worked so hard to improve and had taken pride in had failed. 
She offered to take Commoff through the evolution of procurement law 
in Mongolia with an eye to alerting post to problems on the horizon 
for GOM procurement.  Results of these discussions are detailed in 
septel. 
 
Goldbeck