Investment driven Great Tumen Initiative
The 18th Meeting of the Consultative Commission of the Greater Tumen Initiative (GTI) Program took place in Ulaanbaatar from June 21 to 22. Outside of Mongolia, the Consultative Commission includes China, Russia, and South Korea. Delegations and administrators from ministries of finance, trade, economy, export, and import of the aforementioned countries participated in the meeting.
The GTI is an intergovernmental cooperation mechanism of four countries: China, Mongolia, Republic of Korea and Russian Federation, supported by the United Nations Development Programme (UNDP).
In 1995, GTI member governments signed agreements to establish this mechanism, aimed at strengthening economic and technical cooperation, and attaining greater growth and sustainable development in NEA and specially the Greater Tumen region. In particular, the GTI focuses on the priority areas of transport, trade and investment, tourism, agriculture, energy, with environment as a cross-cutting sector.
The initiative was named after the 520-kilometer Tumen River that flows through China, Russia, and North Korea. Mongolian provinces in the Greater Tumen region include Dornod, Khentii, and Sukhbaatar.
On the first day of the meeting, Development Bank of Mongolia (DBM) took the opportunity to present the national investment agenda, the government’s policy, and opportunities for financing agricultural and mining projects.
Deputy Prime Minister U.Enkhtuvshin opened the high-level discussion on the topic of “Priority Development Programs: Financial Cooperation Initiatives”.
In his address he said, “Looking at the foreign trade data for Mongolia in the last 10 years, around 70 to 90 percent of all trade is conducted with member countries of the GTI; Russia, China, and South Korea. China accounted for around 80 percent of Mongolia’s exports while Russia accounted for 30 percent of imports into Mongolia,” U.Enkhtuvshin said.
“Cabinet is in the process of preparing to economize the Tavan Tolgoi mine as part of its action plan to implement large-scale projects. The plan is to work together openly and transparently with the private sector and foreign investors to finance and develop a comprehensive complex that features a coal processing plant, local power station, and a road system,” the deputy prime minister said.
Ever since a controversial bill by Parliament in 2012 to restrict foreign investment in strategic sectors, foreign investors have been wary of investing in Mongolia. In his speech at the conference, Head of Investment Policy at the National Development Agency L.Munkhbat underlined that the 54 percent resurgence in foreign investment seen this year is a sign of recovery in confidence.
He highlighted that the decision to establish a council to protect investor rights under Cabinet has been a significant accomplishment. The council is intended to receive complaints from investors and help address the issue.
L.Munkhbat also reported that 115 projects costing 16.1 billion MNT have been planned to be implemented as part of the three pillar development policy. Cabinet is seeking to fund 59 of these projects with foreign loans and financial support. Investors that invest upwards of 500 billion MNT will be able to establish a stability agreement with Cabinet.
Other investors will be eligible to receive stability permits, be exempt from taxes for five years by investing in free trade zones, and be exempt from customs tax on equipment and machinery if the company is a SME. In terms of non-tax incentives, the government is willing to provide financial guarantees for innovative project and products, looser restrictions on factories and technological parks, and exemption of foreign employee tax for companies operating in infrastructure, manufacturing, education, and science.
Representing the mining sector at the conference, Deputy Director of Erdenes Mongol O.Odbayar presented on Mongolia’s mining assets. He reported that the government has planned a 67.5 million USD expansion of the Baganuur mine and a 18 million USD expansion of the Shive-Ovoo mine. Additionally, plans have been made to construct a 320 million USD metallurgy factory, lay down the Tavan Tolgoi – Khangi road for 215 million USD and the Tavan Tolgoi – Choir road for 176 million USD. Meanwhile, a 6.9 billion USD power complex is being planned to be built at the Shivee-Ovoo mine and a 123 million USD coal processing plant is planned to be built at the Tavan Tolgoi mine.
In the agricultural sector, the Ministry of Food, Agriculture and Light Industry reported that there is a comprehensive project that includes stabilizing farming production and increasing production of meat, milk products, and wool and cashmere. On the sidelines of the conference, the administration of DBM gave an interview regarding some of the projects that will be implemented.
CEO OF DBM B.BATBAYAR
What role will DBM have in attracting foreign investors to projects and agendas in Mongolia?
Foreign investors mainly invest in Mongolia for two different reasons. One is to trade with us and the second is to receive returns on a profitable project. Our country is focused on developing the foundational infrastructure while implementing beneficial projects. We are focused on making sure that the benefits from developing fundamental infrastructure and profitable projects helps activate the economy. It is important to be upfront and clear about exactly which projects will be financed with the funds from a foreign investor. DBM not only provides funding in the traditional sense but also is providing joint-loans through its involvement in beneficial projects. If a foreign financial organization provides equipment and machinery at concessional rates, we can lease the equipment to businesses in Mongolia that are interested. Our equipment leasing company was established relatively recently. But it has found early success. It has begun to provide equipment and machinery to the mining, agricultural, and transport sectors. Moving forward, it is possible to expand the operations of the leasing company into the energy and fuel sectors.
If an investor is interested in investing for the long-term and receiving dividends, they can put money into our investment fund and receive dividends each year. Our investment fund must be ready in order to take advantage of these opportunities. It needs to be in line with the international rules, procedures, and standards of an investment fund. It needs to be clear from the start on how and when an investor in the fund will receive their dividends. An investor will only put their money into something that is clear and honest from the start. In order to speed up our implementation of the investment fund, we are working with several experts and consultants from the US. The investment fund will prioritize funding in mining and manufacturing. In addition, it will likely also invest in green ecological products and specific sectors, such as agriculture. By opening up these channels and opportunities, Mongolia can attract foreign capital. Our bank’s role is to facilitate the mechanism to incorporate trade, investment, and cooperation into the development of the economy.
Are foreign export import banks interested in working with you and jointly investing in projects?
Of course. Countries establish an exim bank in order to supplement economic growth. It also works to support the foreign trade of its respective country. First and foremost, it is important to invest in ventures and products that domestic manufacturers can produce right now. This means we are following the model of other countries to develop their national economies first. Our main sectors of mining, agriculture, and energy need foreign investment and new technology. We are working to determine which country’s technology fits best with the main sectors in Mongolia and to establish a concessional agreement with the exim bank of that country to lease or purchase equipment. In other words, if a company determines that a particular machinery or equipment is most suitable for their operations, we can use our channels with that exim bank to support the project. For instance, a credit line has been opened between DBM and the exim banks of China and Russia. There are credit lines with other exim banks as well. Businesses in the light industry sector have an open channel to receive a loan from European Union countries to purchase equipment.
How many projects have requested funding from DBM?
There are many projects that request funding from us. But there are few projects that fulfill the five requirements set forth by DBM. A company must fulfill 100 percent of the legal requirements before receiving funding from us. Our operations will be flawed if we begin to finance projects with no feasibility studies, no environmental studies, no collateral, or guarantees. Even though DBM is mandated to provide development loans, at the end of the day, it is a for-profit organization. Our standards are rather high. In addition, we are legally required to provide no less than 60 percent of our loans at projects aimed at exports. DBM also finances projects that seek to provide alternatives to imports and create new jobs. Therefore, it is not only about fulfilling the requirements but the project must be export-directed or focused on replacing imports. This year, DBM invested large amounts of money into increasing export volumes and expanding the processing capacity of export products. For example, as part of the cashmere agenda, a loan was provided to cashmere exporting companies to renew their equipment and machinery, as well as strengthen their operational assets.
Businesses in the light industry sector lack the equipment and machinery to fully process raw materials domestically. Our funding will be geared towards increasing production capacity and increasing value added production. When a company increases its production capacity, it will need to purchase more raw materials. As a result, we have provided loans to purchase raw materials without delay. Mining projects such as iron ore processing plants, steel processing plants, and gold mining were supported with our funding. Gold not only makes up one of the main export products of Mongolia but it also is a large contributor to the foreign exchange reserves. DBM invested a lot of money into gold companies operating at secondary deposits. Beginning this year, we will be financially supporting companies that operate gold mines at primary deposits. We must first determine what mechanism will be used to invest in these ventures. In order to operate primary deposit gold mining, it requires a lot of equipment and machinery to be imported into the country. One of our important requirements is that a company is able to operate without damaging or destroying its surrounding environment. It is possible to finance a project once it is clear that it has no negative environmental impacts. Even if it is economically beneficial, we will not finance a project if it is environmentally negligible. Therefore, our capacity of funding and the timeline of a project must be in line. Writing a few ideas on a piece of paper is not a project. A company needs to prepare research, data, and basis for funding, same as with any bank. We provide information about our requirements regularly. We also saw that we need to improve the feasibility studies and environmental impact studies of even professional organizations. This will increase the projects that meet our requirements.
Is it true that the majority of proposed projects are not able to fulfill the requirements for collateral asset?
There are instances where projects are not able to fulfill the requirement of collateral. We provide loans at values up to 90 percent of the collateral. If a project is economically beneficial and has no negative environmental impacts, but does not fulfill the collateral requirement, it can still be financed through the investment fund, which helps distribute risk evenly. We are working to improve these opportunities. There is no possibility to not expend any money and receive billions of MNT in loans from DBM.
Doesn’t the Law on Development Bank require that all investment be jointly-funded?
Yes. Every investment must be made in collaboration with a foreign investor or foreign financial organization. It is one way of sharing the risk on the investment.
GENERAL ECONOMIST OF DBM
D.DELGERSAIKHAN
How would you signify the importance of the trade in the GTI?
The GTI has been actively implemented since 1995. It is the only initiative to develop Northeast Asia that is supported by United Nations Development Program. In other words, it is something that operates under the flag of the UN. The initiative prioritizes investment in trade, tourism, infrastructure, and heavy and light industry. The main organization that invests in these ventures is the exim bank of a country. Our country does not have an exim bank. Amendments were made to the Law on Development Bank to require that at least 60 percent of funding goes towards increasing exports. This allows DBM to act both as a development bank and exim bank. This is why our bank is at the forefront of organizing the conference of the GTI. China, Russia, and South Korea are the other members of the initiative. China is the second largest economy in the world and Russia and South Korea are in the top 10 globally. Therefore, it is of great importance that we are able to introduce and present investment opportunities in Mongolia to these countries.
How confident can we be that these countries will invest more into our economy?
These countries have invested in our country and have experience working with us in the past. This leads to some expectation. Cabinet announced that it is implementing its three pillar development strategy. This, however, requires billions of dollars. We believe that it is a significant step in the right direction to present these large-scale projects at a conference of the GTI. We are hoping and expecting great results.
Isn’t it possible to jointly finance these projects together with the exim banks of GTI member countries?
That is possible. The new updated Law on Development Bank allows us to jointly fund loans, investment, and funding into the investment fund. DBM has also been presenting opportunities for cooperation to participants.