VZCZCXRO0454
PP RUEHLMC
DE RUEHUM #0160/01 0680342
ZNR UUUUU ZZH
P 090342Z MAR 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 0893
INFO RUEHMO/AMEMBASSY MOSCOW 1712
RUEHBJ/AMEMBASSY BEIJING 5454
RUEHUL/AMEMBASSY SEOUL 2663
RUEHKO/AMEMBASSY TOKYO 2403
RUEHOT/AMEMBASSY OTTAWA 0403
RUEHML/AMEMBASSY MANILA 1321
RUEHLO/AMEMBASSY LONDON 0103
RUEATRS/DEPT OF TREASURY WASHDC
RUCPODC/USDOC WASHDC 1213
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0498

UNCLAS SECTION 01 OF 04 ULAANBAATAR 000160 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS DOC/ITA, USTR, USTDA, OPIC, EXIMBANK 
STATE FOR EAP/CM AND EB/IFD/OIA 
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: Mongolian State Procurement: New Law Bars Most 
International Bidders and Cuts Competition Requirements 
 
 
Sensitive But Unclassified - Not for Internet Distribution 
 
Ref: Ulaanbaatar 125 
 
¶1. (SBU) SUMMARY AND COMMENT: In a candid recent conversation, a 
senior official of Mongolian Ministry of Finance told us that 
Mongolia's government procurement process has been problematic for 
years, due to the limited staff of the Ministry's Procurement 
Office, and the tendency of State Great Hural Members to load 
budgets up with pork barrel projects they push officials to award to 
their political and business cronies.  However, things are set to 
get worse, just as Mongolia launches a major expansion of 
infrastructure projects using funds from the Windfall Profits Tax on 
copper and gold.  In the final hours of its latest session, and 
without any public notice or S-Q~s! ects from competitive procedures if they are under the 
$10 million threshold.  End Summary. 
 
Best Practice Procurement Comes to Mongolia 
------------------------------------------- 
 
¶2. (SBU) Following the events involved in the disputed solar power 
tender (reftel), the Ministry of Finance's Director General of the 
Procurement Policy and Coordination Department, Ms. Kh. Mart 
(strictly protect), explained to Commoff how Mongolia's government 
procurement system had evolved over the last 15 years and the 
current problems that threaten that system.  For the last decade, 
Mart has worked in MinFin's procurement division, assisting with all 
aspects of reforming old and implementing new regulations. 
Specifically, she served as the GOM liaison with the Asian 
Development Bank as it provided extensive technical assistance on 
drafting the last major revision to the state procurement law from 
1999-2000.  (Note: Ms. Mart spoke candidly, noting that she is about 
to leave her position for other employment because of 
disillusionment.) 
 
¶3. (SBU) Mart bluntly explained her willingness to discuss problems 
with state procurement.  Having working so hard over the last 15 
years to try to make Mongolia's state procurement system among the 
best in Asia and globally, Mart was extremely disappointed by the 
State Great Hural's (SGH) recent amendments to Mongolia's excellent 
Asian Development Bank (ADB)-sponsored procurement law.  Mart saw 
these changes as clearly reversing the GOM's commitment to an open 
and equitable system and a return to an inefficient, corrupt system. 
 Commoff noted to Mart that SGH had done the same with the 
amendments to the minerals law, imposing a system that allowed too 
much government intrusion and discretion into areas best served by 
commercial interests.  Mart agreed that the trend seemed to be away 
from clear procedures and market forces to some sort of socialist, 
free-market hybrid that combined the worst aspects of both. 
 
Paradise Found 
-------------- 
 
¶4. (SBU) Prior to 1991, Mart noted, Mongolia employed a 
Soviet-inspired and imposed system of government procurement, 
covered under the Budget Law of Mongolia. There was no need for a 
procurement law as the government was simply allocating resources it 
already owned and controlled through a socialist system that on 
paper yielded the most efficient, lowest cost results.  The only 
matters to determine were development priorities and if sufficient 
resources were available for these needs.  Based on the concept of 
five-year planning, projects were sent down from on high, money and 
material were allocated from the center, and projects were 
implemented.  While not praising the socialist era's elaborate 
bureaucratic oversight apparatus, Mart noted that projects were 
completed, if not perfectly so. 
 
¶5. (SBU) From 1991-2000, the GOM unsystematically abandoned aspects 
of the socialist procurement system. The ministries and the State 
Great Hural (SGH) would determine projects and budgets according to 
the law, but left implementation to respective ministries and agency 
 
ULAANBAATA 00000160  002 OF 004 
 
 
heads. Constrained only by the amount budgeted, the reigning 
bureaucrats controlled all other aspects of planning and execution 
with little or no oversight to prevent conflicts of interest, waste, 
fraud, and abuse, because oversight had collapsed in the early years 
of the transition.  Mart stated that both budget and corruption 
levels raced up as the players had no check on their appetites. 
More importantly, vital development projects were not being 
completed at all. 
 
¶6.  (SBU) Recognizing that these institutional weaknesses were 
harming the state, elements within the GOM, supported by the donor 
community, pushed through key reforms in the late 90's, at first 
only for the large projects and then an ABD-led reform for the 
entire procurement system.  Selecting from the best practices 
recommended by the UN, WB, and ADB, Mongolia passed procurement 
reform in the waning days of the Democratic Party's control over the 
GOM, leaving implementation to the MPRP government that followed. 
First, the new law embedded the legal concept of "procurement" into 
Mongolian law.  Mongolian legal practice requires such legislating 
because, if a concept is not formally enacted into law, there is no 
legal obligation for anyone to follow any specific practice.  Thus, 
prior to 2000, MinFin admonishments to officials about waste, fraud, 
and abuse in procurement had no legal force whatsoever.  However, 
the 2000 Procurement Law enacted a legal concept and system against 
which the actions of GOM officials could be assessed and held 
accountable.  Second, the new law divided procurement into three 
separate areas of responsibility: planning, oversight, and 
execution. These "Chinese walls" among the planning, oversight, and 
execution, were meant to preempt conflicts of interests in that had 
plagued state procurement in the 90's. 
 
¶7. (SBU) The GOM proposes budgets and projects to the SGH for 
approval, but the SGH can and does add items to the budget.   Mart 
noted that the SGH often has little or no solid planning on the 
initiatives it sends to the GOM.  In an effort to mediate 
differences between the ministries and the SGH, an inter-ministerial 
council was established to meet on projects over US$150,000.  It was 
abolished in 2005, because ministries and members of the SGH simply 
used it as a means to tack on all sorts of extras to any procurement 
that came their way, busting budgets and making projects 
un-implementable. 
 
¶8. (SBU) Once a project leaves initial planning, the individual 
ministries and agencies -- some 6000 entities -- fine tune their 
respective plans for procurement.  Separate evaluation committees 
within each entity, charged with executing particular projects, 
submit the technical specifications for each project for 
intra-ministerial review by the relevant departments, including the 
ministry's budget officers. These documents will become the tender 
package or request for proposals to follow. These evaluation 
committees then execute the procurement 
 
¶9. (SBU) MinFin has the right and responsibility to review documents 
and processes to ensure consistency with the Procurement Law at all 
stages.  As a practical matter, Ms. Mart and her staff of seven 
cannot possibility review all procurements conducted by Mongolia's 
6000+ public entities.  MinFin leaves most investigation to the 
State Audit Authority.  Of the some 600 new projects over US$150,000 
executed in 2006, Mart noted that her team could only review 30 
thoroughly, given the complexity of the projects. Thorough review 
will only occur on projects that exceed US$3 million.  Mart said she 
would look to increase that financial threshold because more and 
larger projects are coming down the pike, and she expects no 
increase in human resources to examine these projects. 
 
¶10. (SBU) In assessing the procurement apparatus, Mart argues that 
she and her team are as professional and effective as possible given 
the circumstances faced. She is, however, less generous in assessing 
ministerial and SGH responses to the law.  Regarding training of the 
SGH, Mart observed that its members seemed largely indifferent to 
MinFin's training in procurement techniques and issues.  Regarding 
bureaucrats, in the early years of implementation the initial 
problem was that ministerial officers did not understand how to 
implement the legal requirements, especially how to draft project 
and tender specifications.  Mart assisted with trainings she called 
 
ULAANBAATA 00000160  003 OF 004 
 
 
basically successful, but noted that excessive employee attrition in 
the ministries that do most of the tendering (the Ministry of 
Health, for instance) lowers the value of such training.  However, 
Mart believes that training efforts have still delivered a workable 
level of expertise but that more training is certainly needed. 
(Comment: Mart was obliquely criticizing a civil service system that 
provides no tenure or protection for its employees.  In the case of 
the Ministry of Health, former Minister Gundalai fired most of the 
existing employees and experts, replacing them with his own 
nominees.  Such wholesale firings left no one to train new employees 
in procurement methods.) 
 
¶11. (SBU) Mart complained that poor planning and violations of the 
regulations have consistently plagued implementation of the 
procurement law.  As most projects are proposed by SGH members, 
ministers and their respective political and business associates -- 
often one and the same, and none experts in the fields under 
consideration -- projects all too often lack details needed for 
budgets and specifications, slowing down execution of the project 
before it event gets to MinFin.  Also, Mart often must send projects 
back for further planning because they routinely fail to comply with 
the law, causing further delays.  Delays often cause cancellation as 
budgeted funds cannot be committed within the fiscal year. 
 
¶12. (SBU) MinFin's refusal to sign off on poorly conceived and 
legally dubious projects has generated the most heat between Mart's 
department and other parts of the GOM: Ministers, department heads, 
SGH members and their associates angrily threaten her (sometimes 
with bodily harm) unless she relents, she said.  She mentioned that 
the solar power tender that had generated post's initial interest in 
procurement (see reftel) had spurred much abuse from Minister of 
Fuel and Energy Erdenebat and his people at MFE against her and her 
team: demands that the MinFin accept MFE tender concepts and 
processes, even though neither followed the law.  Mart asserted such 
complaints about delays proved the law was doing its job. 
 
Paradise Lost: Parliament Amends the Procurement Law 
--------------------------------------------- ------- 
 
¶13. (SBU) According to Mart, the SGH responded to GOM complaints of 
too many project delays and cancellations by amending the 
procurement law in the last hours of its recently ended fall/winter 
session. Rather than accept MinFin's explanation that delays and 
cancellations argued that the law protected state interests and 
finances by slowing down illegal and poorly conceived projects (most 
of which Mart attributed to the SGH), SGH members opined that the 
law held back essential programs, frustrating the will of the 
people, harming the nation.  Since the state had already budgeted 
some US$350 million for projects in 2007 (mostly road and power 
projects funded by the Windfall Profits Tax on copper and gold), MPs 
argued that it was essential to ensure these projects were funded 
and executed within the 2007 fiscal year. 
 
¶14. (SBU) The newly amended procurement law has two provisions that 
disturb Mart.  First, the amended law specifically exempts power and 
transport projects from competitive procedures.  In these two 
sectors, ministries may procure the services for the GOM by direct 
contracting for projects under US$10 million and where local 
capacity is lacking, which covers 999 out the 1,000 projects 
budgeted for fiscal year 2007. Mart explained how this new system 
would work.  Let's say that Ministry of Roads, Transport and Tourism 
(MRTT) will fund five road projects for US$5 million each.  If there 
are four Mongolian firms that can satisfy the technical 
specifications, then these four will each receive a contract.  Even 
if one firm stands head and shoulders above the rest in its 
technical capacities and ability to deliver quality goods and 
services at the lowest cost, the SGH aims to spread the bounty among 
all "capable" local firms.  However, the MRTT minister will have 
prerogative of directing the fifth contract to whomever he thinks 
capable because local capacity (Mongolia's four firms) is 
insufficient to meet state procurement needs.  Mart also thought the 
amendments might allow a minister to award all contracts according 
to his dictate if he determined that no local capacity exists 
whatsoever.  Mart commented that this new provision sets Mongolia's 
procurement system back to the corrupt days of the 90's. 
 
ULAANBAATA 00000160  004 OF 004 
 
 
 
¶15. (SBU) Mart also bluntly criticized provisions barring 
international competitors from participating in government 
procurements US$10 million and under.  According to Mart, the SGH 
enacted this amendment because it felt that the current law unfairly 
helped foreigners.  The SGH based this judgment on the fact that 
Mongolians often did not win or compete on many of the large 
procurements.  Mart argues the failure here was not the old 
procurement law but that Mongolian firms lack the capacity to 
compete.  That the amendments will not change this fundamental 
situation was ignored by the SGH.  Mart also stated that there was 
nothing in the law that prevented a winning Mongolian bidder from 
subcontracting out his rights to third party capable of delivering 
the service.  In fact, the winner bidders would have to do if they 
could not deliver the project on their own steam, adding extra 
opportunities for corruption and waste. 
 
¶16. (SBU) Mart was also concerned that the US$10 million ceiling 
might violate Mongolia's WTO commitments under the plurilateral and 
optional General Procurement Agreement (GPA). Mart noted that only 
one out of the thousand projects budgeted for 2007 would break the 
US$10 million exclusion set in the amended law.  (Note:  Mongolia is 
not a member but an observer to the agreement. The WTO GPA allows 
signatories to limit international competition in government 
procurement only on projects less than or equal to Euro 6 million, 
about US$7.9 million.  Although GPA disciplines aren't required of 
Mongolia, the high bar to international competition seems at 
variance with Mongolia's stated policy to have free trade with the 
U.S. and its other third neighbors.) 
 
¶17. (SBU) Mart also criticized the legislative process that produced 
the amendments.  She noted that review of the bill took only thirty 
days and involved absolutely no public notification or discussion of 
the amendments with any of the stakeholders.  There was no mention 
in any of the media.  She took her concerns to the SGH, her 
minister, and to the Ministry of Industry and Trade but got no 
traction on her concerns.   Neither the World Bank nor the ADB was 
informed or learned of the proposals until the last minute and post 
only learned of the law after the fact. 
 
Minton