VZCZCXRO2508
PP RUEHLMC
DE RUEHUM #0089/01 0392347
ZNR UUUUU ZZH
P 082347Z FEB 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 0777
INFO RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC PRIORITY 0461
RUEHUL/AMEMBASSY SEOUL 2617
RUEHBJ/AMEMBASSY BEIJING 5391
RUEHKO/AMEMBASSY TOKYO 2346
RUEHMO/AMEMBASSY MOSCOW 1678
RUEHLO/AMEMBASSY LONDON 0080
RUEHML/AMEMBASSY MANILA 1295
RUCPODC/USDOC WASHDC 1164
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEKJCS/SECDEF WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 04 ULAANBAATAR 000089 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EB/IFD AND EB/TPP 
USDOC FOR ZHEN-GONG CROSS 
TREASURY PASS USEDS TO IMF AND WORLD BANK 
MANILA FOR USED TO ADB 
LONDON FOR USED TO EBRD 
 
E.O. 12958: N/A 
TAGS: EAID PREL EINV ECON PGOV MG
SUBJECT: MCC Official Briefs on Hope for Late 2007 Compact 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. 
 
¶1. (SBU) SUMMARY AND COMMENT: Millennium Challenge Corporation (MCC) 
Europe, Asia, and Pacific Managing Director Frances Reid visited 
Ulaanbaatar January 31 to February 3.  During her meetings with 
Prime Minister Enkhbold, Finance Minister Bayarsaikhan, and MCC 
Mongolia's National Council (NC) and its leader, Financial Secretary 
Khurlbaatar, Reid:  1) reaffirmed MCC's commitment to do everything 
possible to complete a compact with Mongolia in 2007, 2) described 
two Government of Mongolia (GOM) decision options (a few 
well-developed projects with a compact in 2007 OR further 
development of more complex projects (the medical diagnostic and 
treatment center or DTC and vocational education) with a compact in 
2008, and, 3)overviewed on-going USG budget realities which 
suggested funding may not become available until FY-08. She reviewed 
the status of Mongolia's current project proposals (valued at about 
US$200 million) in light of the NC's preference for a compact in 
¶2007.  Reid said the railroad project appears to be generally in 
good shape with a few key requirements to be met; ditto the property 
rights.  A narrower vocational education project may be possible, 
but Mongolia's DTC proposal would require extensive additional 
development which risked delaying a compact until 2008, and MCC 
declined to fund the information communications technology project, 
which is complex and appears capable of attracting private funding 
and development. Reid hoped that due diligence on the remaining 
Compact elements could be finalized by the end of April, enabling 
MCC's investment committee and board to review and approve the 
proposals and, if approved, to submit the compact for Congressional 
review by late this summer. Although MCC funding in FY07 appears 
unlikely, the objective is to position Mongolia for signing as soon 
as funding is available, probably at the beginning of FY08.  END 
SUMMARY. 
 
¶2. (SBU)  COMMENT:  Perhaps reflecting low expectations conveyed by 
MCC last December, Reid's message that Mongolia had some proposals 
worthy of pursuing as part of a Compact was generally received with 
relief and even some joy by those working on or familiar with its 
long and difficult progress.  Some on the NC had feared MCC might 
totally reject Mongolia's proposals, which represented three years 
of hard and sometimes politically difficult work. Some remorse is 
natural given the Mongolians' investment of time and political 
capital and the demise of some project elements.  But for the most 
part, the GOM and the NC seem eager to press forward to finish the 
work remaining and conclude its Compact this year. END COMMENT. 
 
VISIT MEETING OVERVIEW 
----------------------- 
 
¶3. (U)  MCC Europe, Asia, and Pacific Managing Director Frances Reid 
visited Mongolia January 31 to February 3.  During her visit, she 
met with the Ambassador and Embassy staff and briefed visiting EAP 
DAS Christensen on the status of Mongolia's proposals and MCC's 
thinking regarding achieving a compact.  In separate sessions, she 
also met with Ministry of Finance State Secretary Khurelbaatar, who 
also chairs Mongolia's NC, and NC Secretariat Chief Enkhtuya, a 
dozen NC members, NC working group chairs, the EBRD's local 
representative, the Minister of Finance, and the Prime Minister (the 
latter two meetings are summarized in paras 4 to 9 and 10 to 14 
below). 
 
FINANCE MINISTER BRIEFED ON PROGRAM MEMO STATUS AND PROSPECTS, USG 
BUDGET CONCERNS, AND NEXT STEPS 
--------------------------------------------- ------ 
 
¶4. (SBU) Minister of Finance Bayartsaikhan told Managing Director 
Reid and the Ambassador February 2 that many Mongolians attached 
great importance to MCC funding.  He stated, for example, that the 
head of a major local firm was planning to finance the building of a 
Diagnostic Treatment Center (DTC) but was waiting for information on 
MCC's health project, which included a DTC, before deciding how to 
proceed.  Bayartsaikhan hoped that an MCC Compact would entice more 
U.S. firms to come to Mongolia, adding that his Ministry was ready 
to cooperate with MCC and the Mongolian NC to achieve a Compact in 
¶2007.  He said he was concerned about the U.S. Congress's failure to 
 
ULAANBAATA 00000089  002 OF 004 
 
 
pass a budget this year and how it might affect Mongolia's chances 
for a Compact. 
 
¶5. (SBU)  Director Reid said that she had traveled to Mongolia to 
update government officials on where Mongolia currently stood 
vis-`-vis a Compact and the Compact's future direction as well as to 
discuss next steps on how to come to closure on the Compact.  She 
praised the work of FinSec Khurelbaatar, the NC's Chairman, and Ms. 
Enkhtuya, noting somewhat diplomatically that she had been impressed 
with the hard work and effort coming from the NC and the working 
groups in relation to Compact development.  Reid gave a brief 
explanation of the budgetary situation in the U.S., said that MCC 
could not say how much funding it might receive this year given the 
Continuing Resolution situation, and that it was unlikely Mongolia 
would be able to receive any money that could be put to a Compact in 
FY07.  But she was hopeful that FY08 (explaining FY08 begins in 
October 2007) would see a significant allocation of funds from 
Congress that could allow MCC to fund a Compact with Mongolia.  She 
stressed that although MCC was a Bush Administration initiative, it 
had enjoyed broad bipartisan support in Congress. 
 
¶6. (SBU) Mongolia's Compact development, Reid went on to say, was 
more advanced than roughly half of the 11 countries currently 
competing for Compact monies, and was on par or slightly behind the 
rest.  Reid said she hoped to see Mongolia's Compact proposal 
receive MCC Board approval this summer, placing it "towards the 
front of the line" when MCC funding finally opened up with the start 
of the new fiscal year on October 1st.  She and the NC, she said, 
had agreed during their February 1 meeting that the best way to move 
forward would be to look at which projects were best developed now 
and could be ready (i.e., have primary due diligence and structuring 
completed) by the end of April, the latest date possible for a 
summer approval deadline.  She said that both sides had agreed to 
focus on the railway project, property rights (possibly with a 
peri-urban leasing component), some aspects of the health proposal 
(mainly centered on prevention) and a much-reduced version of the 
Vocational Education project that could build on, but not copy, a 
similar program currently being implemented through the ADB.  She 
stressed that MCC fully understood Mongolia's need for a DTC and 
considered it to be a worthy project, but that experiences in other 
countries showed that it did not make sense given the current state 
of Mongolia's health system without substantial additional work and 
integration into a much broader health initiative.  She told the 
Minister that MCC had recently submitted legislation that would 
allow for the implementation of a simultaneous, second Compact with 
one country, although she emphasized that it was not clear that such 
a possibility would be approved by Congress, and suggested - with no 
promises - that perhaps a more fully developed health project could 
be the basis for such a second Compact.  She sought the Minister's 
assistance in ensuring that development of the current Compact 
proposal would continue, that adequate funding for experts would be 
maintained, and that government organizations would be encouraged to 
allow their employees to continue devoting time to the development 
of proposals. 
 
¶7. (SBU) Reid concluded that she and FinSec Khurlbaatar were "riding 
on the same horse towards a successful Compact with Mongolia."  She 
would work closely with him, through email, telephone and digital 
video conferencing, over the next few months to keep Compact 
development on course.  Reid estimated Mongolia's final Compact, as 
currently envisioned, could come to about US$200 million, although 
she could not give an exact figure just yet. 
 
¶8. (SBU) Minister Bayartsaikhan said he was ready to support her and 
the NC's efforts with funding.  He questioned the development of 
what he understood to be new projects at this stage 
(health-prevention and vocational education).  Reid clarified that 
these were not really new projects but rather aspects of current 
projects upon which most work had already been done.  The Minister 
said he was comfortable with MCC's strategy, but felt talk of a 
second Compact now was premature. The Ambassador expressed 
appreciation to all those who had participated in this new and 
complicated process, stressing that political commitment to the MCC 
project had remained constant.  He pointed out that MCC's 
 
ULAANBAATA 00000089  003 OF 004 
 
 
Chairperson, Secretary of State Rice, had stated in a letter to 
Mongolia's Foreign Minister just the previous week, that she was 
"looking forward to completing a Compact with Mongolia in 2007"  The 
commitment from the U.S. side, the Ambassador emphasized, was very 
strong. 
 
¶9. (SBU) The Minister of Finance concluded the meeting stating that 
completion of an MCC Compact was not about how much money Mongolia 
would receive.  He said that failure to achieve the Compact could 
damage the reputation of the Government of Mongolia and that 
completion of a Compact would represent the expansion of the U.S. - 
Mongolia relationship. 
 
NEED TO FINISH THE COMPACT, PM SAYS 
----------------------------------- 
 
¶10. (SBU) Managing Director Reid, accompanied by the Ambassador, 
called on Prime Minister Enkhbold late on the afternoon of Feb 2 to 
provide with an update on Mongolia's progress towards an MCC 
Compact.  Her briefing paralleled that provided to the Finance 
Minister (see para's 4-9 above).  She explained the current budget 
situation in the U.S., saying that Congress's implementation of a 
continuing resolution throughout FY07 meant MCC's funding was in 
question.  She expected that sufficient funding for MCC would be 
allocated in October 2007, the beginning of FY08, and said her 
objective in working with Mongolia was to ensure that Mongolia would 
have a Compact already approved by end summer 2007 and ready for 
signing once funds become available in October.  She said many 
countries were working towards a Compact with MCC but that she hoped 
Mongolia would arrive at  the "front of the line."  To do this, MCC 
and Mongolia's NC would have to focus on those projects that could 
be made ready by the end of April, the latest deadline for a summer 
2007 approval target date. 
 
¶11. (SBU) Reid explained that MCC and the National Council had 
decided to pursue the railway project, property rights project, some 
aspects of the health project, a revamped version of the vocational 
education project, and (subject to viability) possibly a peri-urban 
leasing and agribusiness project.  She explained that a Compact 
could not be signed until MCC had in hand all funds required for the 
entirety of Mongolia's proposal.  Most due diligence and design work 
had been completed on the various projects but some work remained. 
She stated that she was committed to working with the NC to see that 
every effort was made to complete all work required for Compact 
presentation by the end of April.  Reid asked the PM for his 
government's assistance in wrapping up these loose ends, noting 
particularly that "we need to make sure that all parties involved in 
the anchor rail project are aware of the project and are willing to 
support it"  (Note:  This refers to the GOM's need  to gain Russian 
cooperation as part of the joint Mongolian-Russian rail company.) 
Reid praised the NC's work. 
 
¶12. (SBU) Prime Minister Enkhbold welcomed Reid back to Mongolia, 
saying he hoped she would bring good news.  He said understood the 
political shift in Washington but hoped that MCC's budget would be 
approved soon.  He went on to say that Mongolia had worked on a 
Compact since 2004 and that meetings with the Ambassador upon his 
arrival at post last September had lead him to believe that a 
Compact could be reached in early 2007.  Now, the PM said, Mongolia 
would have to wait until the end of 2007.  He said he recognized 
that this delay was not Mongolia's fault, stressing that for him the 
most important point was to complete the Compact and get the MCC 
investment process started. 
 
¶13. (SBU) PM Enkhbold said that the Mongolian people had placed 
great hope in the MCC and were waiting eagerly for it to begin lest 
the Mongolian people start to lose confidence.  But if the Compact 
could be implemented in good time, it would signify a deepening of 
U.S. - Mongolian relations, he said. It was also important for 
Mongolia's relations with its neighbors in the region.  In 2005 
President Bush had called Mongolia its "third neighbor" and, as a 
symbol of this neighborly relationship, implementation of the MCC 
Compact would help Mongolia improve its relations with its 
geographic neighbors. 
 
ULAANBAATA 00000089  004 OF 004 
 
 
 
¶14. (SBU) The Ambassador noted that MCC was a completely new way to 
do things, and political commitment to the project had remained 
constant.  He referred to Secretary and MCC Chairperson Rice's 
letter to the Foreign Minister in which she stated she was "looking 
forward to completing a Compact with Mongolia in 2007"  The 
commitment from the U.S. side, the Ambassador emphasized, was very 
strong.  The U.S. budget has been frozen for everything, he said, 
including MCC, something PM Enkhbold, as head of government, could 
certainly understand and empathize with. 
 
MINTON