Economic Policy Reform and Competitiveness Project (EPRC) Update
Chemonics
www.eprc-chemonics.biz

SO1: PRIVATE SECTOR-LED ECONOMIC GROWTH
posted by Skip Waskin on Monday, March 27, 2005, 2:39AM

ECONOMIC, FINANCIAL, AND TRADE POLICY SUPPORT
Tax Reform
Tax reform. EPRC has begun collecting tax data for 2005. Further work is being done in the area of comparative fiscal analysis in order to provide the Parliamentary Tax Working Group (PTWG) with information requested about tax systems and tax reforms in other countries.

The project team also continued work on draft model VAT and excise laws as requested by the PTWG when Parliament was in session last December. EPRC will supply English and Mongolian drafts to the Ministry of Finance (MoF), and Parliament Standing Committees on Economic Policy and on the Budget.

Tax reform facilitation. Project staff began a series of meetings with new GOM counterparts who will be key actors in the enactment of tax reform measures. EPRC met with the new Minister of Finance and with the Chairs of the Standing Parliamentary Committees on Economic Policy and on the Budget.

National accounts and informal/shadow economy. Project staff continued working on the shadow economy data using data from the 2004 household survey in order to incorporate them into the national accounts and reconcile with other data that the National Statistics Office (NSO) collects as well as with the SAM (social accounts matrix). This work will result in corrections and adjustments to all of Mongolia’s main macroeconomic indicators. The results of EPRC’s analysis suggest that in 2004, the Gross National Income (GNI) of Mongolia grew faster than the official Gross Domestic Product (GDP) because of a large increase in the inflow of remittances of income earned abroad. Also, in 2004, real household expenditures in the formal (monetized) economy shrunk while consumption generated by the informal (subsistence) economy grew by about 20 percent.

Other work with the NSO. The basis for EPRC’s work with the NSO is a formal Memorandum of Understanding (MOU) signed between the NSO and EPRC in October 2005. At the request of the NSO the EPRC team has begun elaborating concepts for revising the GDP figures and all other major economic indicators for Mongolia for the period 2000-2005. The incorporation of different kinds of the “shadow”, including both the “formal” and “informal” shadow, will lead to an upwards revision of all main economic aggregates. This work involves a number of joint subprojects, including internal reconciliations of national statistics and improvements in their publication in the annual “Mongolian Statistical Yearbook”. One important correction worth mentioning concerns the publication of annual inflation figures. The officially published indexes for 2004 and 2005 (11.0 percent and 9.5 percent) express the December-to-December changes. The annual consumer price indexes (CPIs) for these two years were in fact 8.3 percent and 12.8 percent.

CLUSTER AND BUSINESS DEVELOPMENT SUPPORT
Tourism
Tourism Training/Professional Development. Indraa Bold, EPRC tourism specialist, held two workshops on recent trends in the global tourism industry. Twenty–four companies attended the workshops which highlighted the increasing importance of the internet in travel marketing, and how Mongolia can take advantage of the developing trend for the fifty-plus group (‘baby boomers’) to travel extensively in their early retirement. Ms. Bold also participated in an EGAT USAID training program, “Implementing Sustainable Tourism Projects”, held in Tanzania on 20–24 February.

Tourism Survey Results Published. The project has published the results of the 2005 tourism survey in Mongolian. Hard copies are being distributed and the results are also available on the EPRC website.

Natural Fibers
Cashmere linkages with US. The project, working through the Fibermark Society and the Business Development Fund, organized and accompanied a cashmere trade mission to the USA. The mission, which took place on February 18-24, comprised four cashmere companies, Altai Cashmere, Eermel, Gobi Corp. and the Mongolian Cashmere and Camel Wool Company. The group participated in the ASAP Global Sourcing Show, the US’ foremost sourcing exhibition, and met buyers from major brand holders and cashmere merchants. Two companies went on to New York to follow up leads generated in Las Vegas. George Segal, the EPRC intermediary based in New York, will follow up on leads over the next month.

Cashmere linkages with UK and Europe. EPRC continues to generate interest in cashmere in the UK and Europe through its London-based intermediary. Apart from the orders reported in last month’s Monitor, three household brands have placed further requests for samples.

Business Development Fund. The Business Development Fund is currently supporting two cashmere companies to install new plants and upgrade existing equipment to meet the challenges accruing from the growing interest in Mongolian cashmere. Since September 2005, $2.5 million has been invested in the industry.

Meat
Chicken processing. The project team will advise a leading poultry producer on the development of a chicken meat processing and packing plant; the estimated investment is approximately US$ 500,000. The company is already Mongolia’s largest egg producer, supplying about one third of domestic demand. Nearly all chicken meat consumed in Mongolia is imported from Russia. Depending on the results of a feasibility analysis done with project assistance, EPRC may consider additional support through the Business Development Fund (BDF).

FINANCE
SME Private Equity Fund. EPRC assisted Mongolia International Capital Corporation (MICC) in its negotiations with Aureous Capital. Aureous manages over 40 SME funds in developing countries, including several in Asia in which the Asian Development Bank is the lead investor. In February the major terms of Aureous’ participation in the proposed Mongolian fund management company were agreed. Aureous will now generate a Memorandum of Understanding, and together with ADB, will come to Mongolia in March to commence due diligence on a proposed $25 million fund to invest in Mongolian SMEs.

Housing Finance. Working with a number of banks, the Millennium Challenge Corporation and the Mission, the project team explored the possibility of using USAID Development Credit Authority (DCA) guarantees to facilitate small incremental loans to ger area families to upgrade their properties, in particular for basic electricity, water and sewage connections and installation of environmentally friendly heating appliances. While the banks would welcome the prospect of the guarantees, several banks have already started to make such loans and are expanding this activity. In consultation with the Mission and MCC, EPRC concluded that the provision of the guarantees would not contribute significantly to the development of the housing finance market. Project resources will focus instead on working with private banks interested in establishing a proposed Housing Finance Corporation to facilitate the development of the primary and, eventually, secondary mortgage markets.

ENERGY SECTOR SUPPORT
Energy regulatory reform, market and tariff design advisor. On February 13, Mr. Russel C. Brown joined EPRC as a short–term expert. Consistent with the recommendations of the mid-term project evaluation of November 2005, EPRC is recruiting a long-term advisor with expertise in regulatory reform, market and tariff design, and energy sector planning.

Market rules. With the assistance of Mr. Michael Bekker, the EPRC team prepared a preliminary draft of market rules for a bilateral market system to replace the current single-buyer market system. Mr. Bekker will assist EPRC again in March to develop the model further and hold meetings with key energy counterparts. To complement this work on proposed rules for a bilateral market system, EPRC will also engage additional international short–term technical expertise in March to study the technical capabilities of the National Dispatch Center to manage the envisioned market structure.

Concession Law. The Ministry of Justice appointed a new lead contact to complete the drafting of the stand alone concession law. The project team will work with him after he becomes familiar with the concession framework and past activities.

PUBLIC EDUCATION/NATIONAL DIALOGUE SUPPORT
Progress report on the second edition of Essential Business Laws: Project staff completed work on producing for the first time electronic versions of sixty investment and taxation treaties that Mongolia has signed. Under the internship program with the National Legal Center (NLC) the project now has fifty-four laws updated with all amendments in English and Mongolian. During March these translations will be reviewed for consistency and legal accuracy.

Economic Policy Reform and Competitiveness Project (EPRC) Update
Chemonics
www.eprc-chemonics.biz

SO1: PRIVATE SECTOR-LED ECONOMIC GROWTH
posted by Skip Waskin on Wednesday, March 1, 2005, 8:10PM

ECONOMIC, FINANCIAL, AND TRADE POLICY SUPPORT
Tax Reform
Tax reform facilitation: EPRC fulfilled its commitments to draft model tax laws for the Parliamentary Tax Working Group (PTWG) with completion of a draft law on value-added tax. This model law incorporates commonly accepted international best practices, suitably modified for the Mongolian economic environment.

As planned, the Parliamentary tax retreats were suspended for the month of January; the model VAT law will be presented to the PTWG and other MPs for discussion and demonstration of the concepts contained therein. Passage of a law similar in form and content to the model law would ease the administration of VAT, including obviating the need for the extensive number (approximately 27) of supporting laws governing VAT and Customs exemptions.

Project personnel monitored the Parliamentary sessions continuously throughout the month to ensure that we were available to provide information and support on an ongoing basis.

Shadow Economy: EPRC continues to evaluate the results of the Shadow Economy Survey to reconcile national statistics generated by NSO and Mongol Bank with tax data and with household income data generated by the survey. The main results to date indicate;
• The total GDP of Mongolia is between 5-9% larger than the official GDP; in 2004 it amounted to 2.05 trillion Tg (almost US$700 per capita).
• The total disposable income was $800 per capita.
• 53% of GDP is generated by the formal economy; 47% by informal economy, including about 25% of shadow economy activities (involving tax evasion).

National Statistics Office: Based on the MOU between USAID and NSO, EPRC is working on the following issues:
• Building the capacity within the NSO to collect and process shadow economy/informal sector data,
• Methodologies for the documentation of national accounts, and
• Assisting the NSO to recalculate its national accounts for 2000-2005.

Mining licenses: EPRC is processing the data on licenses for exploration and exploitation of natural resources, as issued by the Minerals Authority. This work is prompted by the need to improve the current data system, as well as to reconsider the rates of licenses and procedures of their granting and cancellation. A new draft mining law addresses some of these issues.

CLUSTER AND BUSINESS DEVELOPMENT SUPPORT
Tourism
Tourism portal to be launched: PXL, a local IT company, have been commissioned to complete the Tourism Portal design and content. The portal will be a commercial enterprise, owned jointly by the Tourist Information Center, PXL (the operators of the portal), and by investors drawn from the Mongolian tourism industry. The portal is scheduled to be launched on March 3rd.

Tourism Survey, results to be published: Evaluation of the results of the 2005 tourism survey was completed in January. Of those surveyed, 1.6% were victims of major crime and 11.6% of minor crime.

Natural Fibers
Cashmere linkages with UK and Europe bear fruit: The chief buyer of a leading menswear chain in UK visited Mongolian cashmere companies in January. The visit was facilitated by EPRC and its intermediary in the UK. As a result, the buyer wrote orders valued at around US$ 1.75 million, programmed over one year. Orders included sweaters, scarves and other accessories. EPRC will work with the companies to ensure consignments match with samples and are delivered on time. The total vale of orders since the linkages program started in November 2005 is in excess of US $3 million.

Spinning Capacity: EPRC has agreed to provide technical assistance under the BDF program to a leading Mongolian cashmere company to commission new spinning and dyeing plants. The investment in machinery is approximately US$ 400,000. Commissioning will take around four months and yarns should be available in summer 2006. The investment was prompted by the EPRC report on Mongolian spinning capacity.

FINANCE
Local private equity fund. EPRC has continued to provide guidance to the new local investment bank, MICC, as it continue efforts to raise a private equity fund for Mongolia. Aureous Capital, a major SME fund manager, has agreed in principle to provide technical assistance to MICC to establish the fund, train staff, and participate in the investment committee. Based upon this commitment the Asian Development Bank will now commence due diligence on a possible investment in the first private equity fund for Mongolia

Housing Finance. Based upon the recommendations of EPRC’s housing finance expert, a group of Mongolian banks led by Trade and Development Bank and Xac Bank are working to establish the Housing Finance Corporation. This will be an important step towards standardizing mortgage underwriting and documentation criteria and the eventual development of a secondary market in securitized mortgage instruments.

Technical Innovation Credit and Savings Cooperative. Utilizing the Business Development Fund, EPRC co-financed a business plan for this new Savings and Credit Cooperative to roll out a unique equipment financing and savings product it has developed. The consultant engaged to develop the business plan has also sourced an investor who will provide the necessary investment for expansion of the product.

ENERGY SECTOR SUPPORT
Energy Law: Activities on drafting an energy law came to a halt with the change of the government in January. We are waiting to discuss potential changes in government policy and approach with the new minister.

Regulatory Transparency: EPRC and the ERA are currently reviewing proposed policies and procedures to further improve transparency and fair treatment of customers in the regulatory process to determine which ones can be implemented immediately and to prepare a strategy for those additional ones to be implemented in 2006. Under consideration are: Customer Service, Consumer Protection, Disconnection Rules, Public communications Procedures, and others.

Energy Regulatory Authority Training: Two members of the Mongolian Energy Regulatory Authority participated in ERRA trainings in January. The tariff department head traveled to Almaty where she presented the Uniform System of Accounts implemented in the energy sector. The attendees recognized the value in such a system in the absence of price cap regulation methods. The Authority’s public affairs officer attended a practical training session in Budapest, where she received materials on dealing with the public, particularly focusing on the need for two-way communications.

Energy Sector Financial Filings: EPRC has prepared formats for documenting the revenue requirements of the energy sector entities for use in tariff determination. The formats will also serve to implement a two-part tariff system on the part of generating entities. The formats will be reviewed with the ERA regulators and tariff personnel to ensure proper understanding. Training must be provided to sector entities upon approval of the formats.

Market Rules: EPRC initiated activities for establishment of market rules to govern the planned open competitive wholesale power market. Upon completion of an initial research visit, an international expert brought in for this purpose presented information on international best practices to approximately forty stakeholders in the energy sector. This process will be completed in March with drafting of actual rules providing instruction on energy sourcing, dispatch, metering, and payment procedures. As part of his assignment, the expert prepared an evaluation of the technical capabilities of the National Dispatch Center to determine the feasibility of establishing a market with competitive elements in Mongolia at the current time.

PUBLIC EDUCATION/NATIONAL DIALOGUE SUPPORT
Essential Business Laws CD: Substantial effort has gone into locating the source information and amendments for the second release of the CD, currently planned for April. EPRC decided to include the text of Mongolia’s international treaties on taxation and investment, rather than a list of the treaties in place. As there were no electronic versions of the treaties available, it was necessary to digitally photograph the documents page by page and convert the files to a format suitable for the CD. In addition to the treaties, the second release will include the amendments to the original twenty laws and a substantial number of additional laws.

Economic Policy Reform and Competitiveness Project (EPRC) Update
Chemonics
www.eprc-chemonics.biz

SO1: PRIVATE SECTOR-LED ECONOMIC GROWTH
posted by Skip Waskin on Thursday, January 26, 2005, 4:17AM

ECONOMIC, FINANCIAL, AND TRADE POLICY SUPPORT
Tax Reform
Tax reform facilitation. With tax reform remaining a priority for Parliament, the project is supporting a variety of entities: the Parliamentary Tax Working Group (PTWG), the Budget Standing Committee, and individual MPs. In December, this process included numerous meetings to help Parliament Members develop presentations for Parliamentary tax retreats, plus performing data analyses and other preparatory work in anticipation of the initial readings of the tax package currently before Parliament. EPRC intends to continue this support as long as is necessary to accomplish the desired results.

Another element of this support is the development of model tax laws. At the request of the PTWG, the project had already developed and presented corporate and personal income tax laws reflecting international best practices. While Parliament is prohibited by Mongolian law from considering any tax proposals other than those submitted by Government, the MPs wanted examples to use in modifying the submitted proposals. In December, EPRC completed the initial draft of a value-added tax law; this draft will be completed and presented, in both English and Mongolian, to the PTWG in January.

Parliamentary Tax Retreats. Two additional Parliamentary Tax Retreats were staged in December. Attendance continued to be strong, particularly from the leadership. The chairs of both the Budget and Economic Standing Committees were present at both, along with the members of the PTWG and the head of the MPRP caucus. It is a positive sign that Parliament members have transitioned into taking the lead on the retreats, both in terms of scheduling them and in making the actual presentations.

Meeting of Saturday, 3 December: Held at Ikh Tenger, the primary objectives of this fourth retreat included:

• Modern value-added tax regimes and implications for Mongolia
• The Mongolian cashmere chain and its implications for tax policy
• Housing finance for lower income families and fiscal policy implications

The latter two topics were included at the specific request of PTWG members at the previous retreat.

Meeting of Monday, 19 December: The fifth and last retreat of 2005 was the first held during the workweek and the first held at Government House. The intent of this retreat was to prepare Parliament members to discuss the VAT system and the general competitiveness of Mongolian in the international markets. Specific topics included:

• Recommendations for the Mongolian value-added tax law and system, including potential revenue balancing with import taxes
• Country competitiveness and taxes on labor, presented by MP Zandanshatar

It is anticipated the retreats will continue in February. Parliament will initiate discussions in January, and additional effort will be expended during the recess. Parliament is currently scheduled to reconvene in April for the spring session.

Analytic work in support of the tax reform package:

• Foreign trade in 2005: The share of raw materials in export continues to shrink. During the first ten months of 2005, export of minerals and metals increased by 30% while export of other goods increased by 2% (i.e., declined in real terms).
• Shadow economy and national accounts: 29% of gross domestic monetary household income is declared for taxation; 12% of total private sector income is declared for taxation; 50% of Mongolia’s economy belongs to an “economic shadow”; 33% of persons employed are pay personal income tax (PIT).
• Performance of textile industry in 2005 (“post-MFA”): during the first ten months of 2005 gross manufacturing output declined by 26% compared with the same period of 2004. Output of textiles declined by 41%. Output of wearing apparel declined by 69%.
• PIT: The introduction of a new PIT regime, recommended by the Parliamentary Tax Working Group (flat 10% rate and monthly tax credit of 7,000 MNT, or approximately $6), would benefit all employees who currently do not receive allowances.
• CIT: The PTWG is considering various possibilities for changes to the Corporate Income Tax (CIT), which now consists of two brackets, 15% and 30%. One possibility is to increase the threshold for application of the 30% bracket from 100 million MNT ($82,000) to 3 billion MNT ($245 million). Had this change been in effect 2004, EPRC’s analysis concludes that this measure would have cost the Mongolian government only 1.6% of its revenue.
• Value added tax (VAT): The PTWG intends to support a cut in VAT from the current 15% for most goods to a flat 10%, while increasing the customs (import tax) from 5% to 10%. According to our analysis, if this change is accompanied by the abolishment of most exemptions, it should be fiscally neutral.
• Immovable property tax (IPT): The PTWG has been considering introducing a 0.6% IPT on residential housing. This tax would have a number of positive effects, including neutralizing the regressiveness of a flat PIT and flat VAT. Additional revenue from this tax would be about 1% of the budget.
• Customs (import tax): PTWG is considering increasing the customs rate from the current 5% to 10%. EPRC has done a study of 2004 customs revenue and calculated that the cost of exemptions currently granted to different importers and categories of goods amounts to about one-third of customs revenue. PTWG is considering abolishing some of these exemptions, which would increase budget revenue by 2%.

CLUSTER AND BUSINESS DEVELOPMENT SUPPORT
Tourism
Tourism portal. In December, short-term expert Christopher Seek assessed the tourism portal’s progress to date and developed a draft business plan for the portal company. The assessment concluded that the portal, as designed, is feasible and commercially viable. The business plan considers the structure and ownership of the company, the range of products offered, operating systems, site content, and marketing strategies. EPRC will now commission phase two of the site development to commence January, with the site planned to be on-line by mid February. The business plan is available in draft form; the final version will be published by January 20.

Khentii Chinggis Trail Community Conference. The conference, coordinated by EPRC and held in Onderkhan, laid down the Khentii tourism strategy for 2006, which will be the 800th anniversary of Mongolian statehood. Khentii Aimag (province) is believed to have been the birthplace of Chinggis Khan, and thus will be a focal point of 800th Anniversary celebrations.

Natural Fibers
Cashmere linkages with UK and Europe. Production of cashmere scarves has begun with the first batch due for delivery to the UK for finishing in March. Bruce Harris, senior business development advisor at EPRC, visited the UK intermediary and significant players in UK in December 2005. Consequently, the chief buyer for a major menswear chain and the quality inspectors for a second retail chain will visit Mongolia in January to inspect premises and discuss capacities and potential supply programs with Mongolian cashmere companies. The UK intermediary will come to Mongolia immediately prior to the inspection visit to prepare and coach the companies. The visit also confirmed a growing interest in Mongolian cashmere as an alternative to Chinese. Mr. Harris also visited the Berlin distribution hub to discuss the marketing strategy for 2006, including trade fairs in Düsseldorf and a TV endorsement program.

Spinning Capacity. In spring 2005, EPRC commissioned a report on the Mongolian cashmere value chain, which highlighted market opportunities for investors in high quality yarn spinning and dyeing plants. Subsequently, a major Mongolian-owned company recently made a significant investment in a spinning and dyeing line to be imported from Italy and commissioned in March/April 2006. EPRC staff have been advising the company and have now been approached for technical assistance through the project’s Business Development Fund to provide oversight of the installation and commissioning. The development of high quality spinning capacity in Mongolia is fundamental to the growth of the cashmere finished goods sector (value added, knitting and weaving) as it reduces dependency on the current inflexible and monopolistic supply and/or import of yarns from China.

FINANCE
Local private equity fund gains momentum. EPRC has continued to provide guidance to the new local investment bank, MICC, as it continues its efforts to establish a private equity fund. The project assisted in initial discussions with a major SME equity fund manager who is considering providing technical assistance in conjunction with an investment by the Asian Development Bank. The fund manager will be submitting this deal to its Board of Directors for approval in January.

ENERGY SECTOR SUPPORT
Energy Law. With the Ministry having decided not to submit planned amendments to the Energy Law to Parliament until April, EPRC is again pushing for a full rewrite of the law.

Energy Master Plan update. Initial discussions on the preparation of an update to the 2002 Energy Master Plan were initiated. EPRC is now planning to collaborate with the Ministry of Fuel and Energy to develop a vision and an implementation plan, which will take elements like regional economic growth, least cost planning, and the role of renewable energy into account.

Commercialization of energy companies. The Ministry requested that EPRC initiate the development of a standard, bankable coal purchase and sale agreement between the Mongolian generating companies and coal mines. Implementation of these new contracts will encourage the generating and coal companies to act in a more commercial fashion. The contract will also have the additional benefit of providing the coal companies with longer-term secured sales, and will give them the opportunity to negotiate for financing of mine improvement projects to reduce production costs by increasing mining efficiency, thus stabilizing coal prices. More predictable fuel pricing is expected to bring an element of stability to energy rates.

Energy sector finance. Chief accountants and other accounting and budget representatives from each of the Central Energy System companies attended daylong workshops hosted by EPRC in December. These workshops presented the results of EPRC’s reviews and subsequent adjustments to the 2004 financial statements (which had concluded that the energy sector is operating far more deeply in the red than had previously been supposed). Attendee response was surprisingly positive, and project staff were able to unveil what had been suspected but not known due to traditional accounting practices. A short follow-up to this session will be held with the audit companies responsible for auditing the companies’ 2005 financial statements to ensure that all involved parties are up to speed.

Government Resolution 233 of 2005. After fifteen months of encouraging the Ministry of Finance to remove the restrictions on proper accounting for assets, the Finance Minister signed this new Government Resolution on December 13. For the first time all business entities will now be permitted to maintain asset accounting records in accordance with international standards. This new resolution requires each company to determine the true estimated useful lives for assets, thus recognizing that these lives will differ in many cases. This is particularly relevant for the energy sector, given the impact of depreciation on tariff calculations.

PUBLIC EDUCATION/NATIONAL DIALOGUE SUPPORT
Open Government holds live national chat on the budget. On December 13, MPs Zandanshatar, Purevdorj, Tserenbaljir and Ganhuyag participated in a national dialogue on tax reform on the Open Government website. It was carried live over national TV, radio, and the internet. The participants expressed their own views and analysis on tax reform of Mongolia and answered questions raised from public. The events generated 8,790 hits from 400 unique visitors on the internet. 272 questions were received including 37 from the internet, 110 from telephone call-ins, 121 from cellular phone messages, and four from the audience. It is estimated that over 600,000 Mongolians watched or listened to the program.