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, May 18, 2006, 3:09AM

ECONOMIC, FINANCIAL, AND TRADE POLICY SUPPORT
Tax reform. EPRC initiated preparation of a bulleted list of Value Added Tax (VAT) law changes in April, required in order to develop a new draft of the legislation. The Parliamentary Budget Standing Committee (PBSC) completed its revisions to the draft Personal Income Tax (PIT) law and submitted them to Parliament for the first reading in the general session, which began on April 28. The proposed new law provides for a 10% flat rate and increases the credit threshold to 84,000 Tugrik/month (about $71). The PBSC has now begun work on the Legal Entity Income Tax (LEIT) legislation, also known as the corporate income tax (CIT) law.

Tax reform facilitation. EPRC continued efforts to update stakeholders on the tax reform process and on minimizing institutional resistance in April; this included meetings with local businesspersons and the IMF representative. The project team also worked on developing user–friendly tax information materials for members of Parliament and the general public.

Additional shadow economy survey results shared with the National Statistics Office (NSO). On April 5, as part of the continuing EPRC–NSO seminar series, EPRC staff presented initial estimates of Mongolia’s GDP adjusted to incorporate the projections of household income derived from the shadow economy survey conducted in October 2004. These initial estimates use the revised projections for total household income derived from the survey as an input into a social accounting matrix (SAM). SAM is a national income accounting framework which provides internal consistency checks on the four sectors producing and expending GDP—households, business firms, government, and foreigners. Using a SAM and the survey–derived household income estimates, the adjusted estimate for GDP in 2004 is significantly larger than NSO’s official estimate. The uncounted portion of GDP was primarily due to two elements:

• On the production side, the sum of informal activity not measured and shadow–activity tax evasion.
• On the expenditure side, most of the discrepancy was in household consumption and investment.

The project will continue to work with the NSO on different methods of projecting household income using survey results to produce a range of estimates which are likely to yield a range of revised GDP estimates.

CLUSTER AND BUSINESS DEVELOPMENT SUPPORT
Tourism
Tourism portal announces share offer. The founding members of the “Wecome2Mongolia” (W2M) tourism portal that EPRC helped establish agreed on the initial share holding of the company. “Dama International”, the design and operating company will hold 30% of the shares, the Tourist Information Center (TIC) will also hold 30%, and the remaining 40% will be offered to the industry. The EPRC team expects that an institutional investor will take half of the offer and individual investors will take the rest. With project assistance, W2M has also engaged an expert to optimize chances of the portal domain being picked up by popular internet search engines.

Tourism retreat brings public and private sectors together. EPRC helped the Ministry of Roads, Transport, and Tourism (MRTT) organize a tourism sector retreat on April 23. Minister Tsengel and Director of Tourism Batjargal attended the retreat along with representatives from the Mongolian Tourism Association, Mongolian Tour Guides Association, Ger Camps Association, GTZ and UNDP. EPRC, MRTT and W2M made presentations on international best practice in the tourism sector, the GoM Tourism Action Plan, and internet marketing, respectively. Private sector representatives asked for additional input in tourism policy and the creation of a private sector–led National Tourism Organization. Discussions also included the feasibility of introducing a “room tax” to support tourism promotion, and the creation of a tourism satellite account in the National Statistics Office (NSO) to have a consistent methodology for estimating the contribution of tourism to GDP. After the retreat, MRTT requested EPRC assistance with these items.

Training for tour guides. A second group of 16 tour guides graduated in April from the EPRC–sponsored guide training program that the Mongolian Tour Guides Association organized and delivered.

Peace Corps Volunteers develop aimag web sites. Ten volunteers from eight aimags have applied for EPRC assistance to develop aimag–centered tourism websites. The Peace Corps and the project teamed up last year to develop pilot websites for Khentii and Uvurhangai aimags. If all these eight aimags are accepted it will bring the total number of aimag websites to eleven. The aimag websites are all linked to the W2M portal.

Natural Fibers
Cashmere linkages with US. George Segal, the EPRC cashmere intermediary in New York, has reported renewed interest in Mongolian cashmere and has held meetings with “Bobby Jones”, “Talbots”, “Philips Van Heusen” and “Perry Ellis”. A buyer from Perry Ellis is currently scheduled to visit Mongolia in August.

Other linkages
Opportunities for handicraft exports. EPRC attended a meeting organized by the Ministry of Trade and Industry and the US Embassy to consider new opportunities for Mongolian handicraft exports to gain access to US markets under the Generalized System of Preferences (GSP). Representatives from the Gobi Initiative and the GER Initiative also attended. The meeting discussed issues such as consolidation, quality, consistency and delivery.

Japanese buyers scheduled to visit Mongolia. Two buyers from Japan visited Mongolia from April 29-May 6 under EPRC’s Routes to Market Program. Jim Krigbaum, who identified non–traditional export opportunities during a 2005 assignment with EPRC, accompanied the buyers. The Japanese are interested in blueberries, mares’ milk derivatives, pet food, and mushrooms. They visited producers in Ulaanbaatar and the countryside, as well as the blueberry crop centers in the Khuvsgul area.

FINANCE
Housing finance. Nine commercial banks and the Bank of Mongolia, all signatories last month to a Memorandum of Understanding (MOU) to establish a Housing Finance Corporation (HFC), formed a working group to oversee its formation. The working group, consisting of Khaan Bank, Golomt Bank, Trade and Development Bank, XacBank, Zoos Bank and the Bank of Mongolia, selected a team of local and international consultants to assist in the process of organizing the company. Through its Business Development Fund (BDF), EPRC will co–finance the feasibility study with the signatories to the MOU. The consultants will work in sub groups to:

• Develop a business plan, including an operating budget, capitalization plan and staffing plan
• Draft the bylaws of the company
• Develop standard loan documentation, underwriting policies and operating procedures, and
• Determine the most appropriate instruments for securitization of mortgages.

ENERGY SECTOR SUPPORT
Legal/legislative. EPRC is reviewing the current draft version of the proposed new Energy Law. The new draft is to be delivered to the Minister’s Advisory Board in early May and is to be presented to Cabinet on May 20. A draft of the proposed new Renewable Energy Law is scheduled for presentation to the Cabinet in May. The Minister of Justice has appointed a new working group for development of a Concessions Law, with the group’s first responsibility identified as preparation of a concept paper to be ready in May.

Newly formed ERA Audit Unit completes its first audit. ERA auditors, hired on project advice, performed their first audit in April, completing a successful audit of Power Plant 3. During the week of April 24 the project provided additional training on International Accounting and Financial Reporting Standards (IAFRS) to the second and third newly hired ERA auditors. This training successfully concluded the project’s energy intern training program.

Standard coal contract. EPRC completed a draft standard coal supply agreement and submitted it to the Ministry of Fuel and Energy (MoFE) in April..

Accounting conversions. EPRC initiated Uniform System of Accounts conversion activities for the two remaining systems, the Central Energy System and Eastern Energy System. These are the final planned system conversions; they are to be completed by August. The Western Energy System will not be converted due to its lack of generating capacity and its poor financial condition. Representatives from each of the entities and the ERA attended a four–day project workshop in Ulaanbaatar and received training on conversion methodology, IAFRS, and financial analysis.

Energy sector finances. In April EPRC received and summarized energy sector financial results for 2005. The officially reported income for the sector was a profit of 3.1 billion Tg (~$2.6 million) that, when adjusted for foreign currency exchange rate changes and capitalized maintenance, turns into a loss of 4.4 billion Tg (~$3.7 million). This compares favorably to EPRC’s calculation that last year’s loss was in excess of 35 billion Tg (~$29.4 million). The project has arranged for World Bank representatives to receive these updated financials from the ERA.

PUBLIC EDUCATION/NATIONAL DIALOGUE SUPPORT
Summer Economics and Finance Institute for young professionals. Following a round of exploratory meetings with ten potential participant groups—the Bank of Mongolia, Ministry of Finance, Ministry of Trade and Industry, Mongolian Stock Exchange, Commission for Regulation of Financial Institutions, two commercial banks and two higher education institutions—EPRC organizers of the Institute circulated a proposal asking the participants to respond with their preferences to a list of six organizational issues. The Institute will be a residence activity for 30 participants with three courses, each two hours per day, taught by western professors and experts. The three courses will be chosen from a menu of six, including project cost/benefit analysis, financial institutions, open economy national income accounting, and economic and tax reforms in development. As soon as the participant institutions’ responses to the proposal are tabulated in the first week of May, EPRC will select a venue for the Institute and will recruit instructors.

Draft proposed new laws submitted from Ministry of Finance (MoF) for posting on the Open Government website. Mongolian drafts of proposed legislation have been posted on the OG website, including laws and amendments on financial leasing, savings insurance, customs, customs tariffs and customs tax, money laundering, and terrorism financing. The OG website provides facilities for separate discussion threads with questions and answers for each newly proposed draft law or amendment. English versions will be posted on the OG site as they are translated.

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, April 17, 2006, 4:05AM

ECONOMIC, FINANCIAL, AND TRADE POLICY SUPPORT
Tax Reform
Tax Law Drafting: EPRC continued working on drafting a simplified Mongolian VAT law in March. Also in March, the Parliamentary Tax Working Group (PTWG) completed point–by–point recommendations on the Personal Income Tax (PIT) proposals from the Ministry of Finance (MoF), and was working on Legal Entity Income Tax (LEIT; aka Corporate Income Tax) and Value Added Tax (VAT) recommendations.

Tax Reform Facilitation: Tax reform facilitation meetings continued in March, including follow–up meetings with the Chairs of key Parliamentary standing committees and with representatives of the General Department of National Taxation (GDNT). Parliament remains committed to discussing the tax laws early in the spring session.

GDNT Assistance: EPRC staff met with the GDNT to discuss assistance that it has requested in drafting regulations and providing explanatory materials on concepts expected to be contained in the tax package, once passed. A second meeting was also held to confirm the transfer of tax administration assistance responsibilities from EPRC to the World Bank. The World Bank is negotiating a multi–year activity within its Governance Assistance Project (GAP) for this purpose.

Shadow Economy Study: EPRC continued analyzing data in March from the most comprehensive national household survey ever carried out in Mongolia. The study, commissioned jointly by USAID with the National Statistics Office (NSO) and the Open Society Forum (OSF), attempts to calculate the size of the shadow economy. Previous studies have covered different segments of the informal/shadow economy, but none has calculated the “total shadow”. The project is currently recalculating the 2004 gross domestic product (GDP) of Mongolia, including estimates of both the informal and shadow economy. The results suggest that the income generated by the formal economy amounts to about one-half of total domestic income; the other half is attributed to activities of the informal and shadow economy.

Collaboration with the National Statistics Office: EPRC offered two seminars in the NSO in March, one on the social accounting matrix and another on the shadow economy. Several meetings with NSO officials were also held to discuss joint EPRC–NSO projects. Issues included joint seminars, a summer economic policy school, internships, other training, a survey of NSO users, publication of a bilingual glossary of statistics/economics/policy terminology, calculation of the producer price index (including price indexes needed for fuel cost escalators in the energy sector), the shadow economy, the 2004 household survey, quarterly GDP statistics, recalculation of official GDP figures (2000–2005), SAM/GDP and national accounts, modeling (input–output and computable general equilibrium), support for the “Statistical Development Program, 2006–2010”, assistance in the formulation of the NSO “Action Plan”, and assistance in the organization of and contribution to statistics workshops to be organized in April.

CLUSTER AND BUSINESS DEVELOPMENT SUPPORT
Tourism
Tourism Portal: The EPRC–initiated tourism portal was launched at an industry reception held on March 24. The launch of the portal, Welcome2Mongolia (W2M), attracted an audience of over one hundred tour operators and service providers. The portal will provide comprehensive information on all aspects of tourism in Mongolia, on–line booking services with electronic payment settlement, and an interactive inquiry service and forum. The company, W2M Ltd, will be owned and operated as a commercial company. EPRC is now assisting W2M in engaging the Mongolian International Credit Corporation (MICC) to prepare a prospectus and business plan for a private offering to sell shares and raise $50,000 in start–up capital. The portal is available on-line at http://www.welcome2mongolia.com/.

Tourist Guide Training: The first group of graduates of the tourist guide training program, conducted through the Mongolian Tourism Guides Association, graduated on March 27. The program will train 60 guides over a 12–week period. On successful completion of the program, participants will become members of the association and will be guaranteed jobs for the season.

Ger Camp Association Training: The EPRC team is assisting ‘Nomadic Urtuu’, a newly formed ger camp association, to develop and implement training programs for members. The training covers all aspects of hospitality management and is designed to ensure consistent service in any of the 16 member camps. The first training sessions were conducted in March.

Natural Fibers
Cashmere Linkages with US: George Segal, the EPRC cashmere intermediary in New York, opened a cashmere showroom in New York representing the cashmere companies that visited the USA in February 2006. The showroom, located on Broadway, will be financed from commissions earned from orders from US buyers.

Business Development Fund: The Business Development Fund is currently working with two cashmere companies to install new plant and upgrade existing equipment to meet the challenges accruing from the recent interest in Mongolian cashmere. To date, $2.5 million has been invested in the industry since September 2005.

FINANCE
Housing Finance: On March 30, nine commercial banks and the Bank of Mongolia signed a Memorandum of Understanding (MOU) to establish a Housing Finance Corporation (HFC). Khaan Bank, Anod, Golomt, Mongol Post, Trade and Development, Xacbank, Zoos, Capitron and Capital committed to working towards establishing HFC as a private sector–controlled company. Signing of the MOU was the culmination of three working meetings that EPRC helped organize. When established, HFC will initially:

• Advise and assist the government on legal, regulatory and institutional issues necessary to promote development of the mortgage market
• Promote short–term incremental loans in the ger areas
• Encourage and support the growth of the primary mortgage market, including standardizing underwriting policies and documentation
• Lay the groundwork for secondary mortgage market development
• Raise medium to long–term funds both through the sale of its securities or as a direct borrower.

Employee Stock Ownership Plans: On March 17, David Binns, an internationally recognized expert on the use of employee stock ownership plans (ESOPs), made a presentation on International Best Practices and Practical Considerations for the use of ESOPs in Mongolia. In attendance were representatives of the public and private sectors, including companies, financial advisers, bankers, policy makers and government officials who have a direct or indirect interest in an ESOP and related stock compensation plans. EPRC brought in Mr. Binns at the request of the State Property Committee to develop recommendations on the use of ESOPs in Mongolia’s privatization plans.

ENERGY SECTOR SUPPORT
Energy Regulatory Reform, Market and Tariff Advisor: USAID approved Mr. Russell C. Brown to join the EPRC team as long-term Senior.Energy Advisor. He will be joining the Energy Team full–time on April 10th. Horst Meinecke will remain through the end of his contract in September. During the transition period, Russ will concentrate his efforts on energy policy and market and regulatory reforms, while Horst will concentrate on pending short–term issues such as revisions to the energy law, the development of bilateral power purchase and sales agreements, a standard coal procurement contract, and the development of a concession law and associated concession agreements.

Market Rules: At the end of March, Mr. Michael Bekker completed a short-term assignment to draft a set of bilateral market rules and operating procedures. The project organized a series of meetings throughout the consultancy with individual and group stakeholders. All enthusiastically endorsed the proposed principles and rules; full implementation, however, will have to wait until the ongoing installation of meters is completed in the summer of 2007 with assistance from KfW, and funds are found and allocated for data gathering, market clearing software, training, and dispatch simulation software at the National Dispatch Center (NDC). As identified by EPRC expert Doug Bowman, upgrading the capabilities of NDC in these areas will require an additional $1-1.5 million of funding.

Meeting with New Minister of Fuel and Energy: On March 27 senior EPRC representatives accompanied Ambassador Pamela Slutz and USAID Senior Program Manager Jeff Goodson to an introductory meeting with new Minister of Fuel and Energy Erdenebat. During the meeting Ambassador Slutz informed the Minister that USAID regards the energy sector as a continued priority for USG support due to its importance for the economic development of Mongolia.

Energy Sector Asset Accounting: EPRC and the ERA’s Regulatory Auditor jointly presented the new asset accounting requirements to Power Plants 3 and 4 in March. The plants have now formed multi–disciplinary teams to conform to Government Resolution 233, which changes the methodology for setting asset lives.

ERA Regulatory Auditors: The project team assisted the ERA in the selection and hiring of two auditors in March, bringing the staffing up to the desired level of three. The auditors will receive training both from the ERA auditor that the project previously trained, and directly from EPRC.

PUBLIC EDUCATION/NATIONAL DIALOGUE SUPPORT
Essential Business Laws: Translation and review of the 54 business laws that have been updated with all amendments in both Mongolian and in English—as well the 50 investment and taxation treaties of which Mongolia is a signatory—is proceeding more slowly than expected. This delay is due to the scarcity of well–trained legal translators and an internal review of sub–contracting procedures that The Asia Foundation, an EPRC sub-contractor, is undertaking in its Mongolian operations.