As a next parliamentary election approaches, the Government is increasing the size of its housing project and is reducing the interest rate of housing credit.
Last week, the Government passed a decision to implement a 100,000 Family Housing Project and thus keep yearly interest rate of housing credit below 8%.
It is the right time to judge if the decision is feasible or not, who will pay for real expenses and what should be taken into account in order to implement this challenging task, and express own views and positions from the point of civil society.
Ulaanbaatar City needs some 200,000 family apartments so far. If to look back at previous housing projects before implementing this ambitious project, we need to have completely new approach of governance, urban planning and investment etc. With respect to governance or state policy, it is obvious that Mongolian government possess no integrated long-term policy regarding the housing and that its actions are limited only by populist promises made between elections with intention to win them.
Actions taken by authorities are often ephemeral as they do not think before acting but act before thinking. For instance, three years ago the authorities proudly laid a foundation stone to build Power Plant #5, a new power source crucial for the city’s housing project, in Uliastai, eastern uptown sub-district of Ulaanbaatar City.
But they have changed their mind to build it on the base of existing Power Plant #3. Such a careless and irresponsible treatment to such an ambitious and important project makes us think that they never undertake proper surveys and studies or they work under someone’s pressure.
In both cases, it is visible that the authorities are not satisfactorily negligent and responsible and lack strong governance management. Moreover, our government in every stages measure its action results according to the amount of money spent but not to achievements made and outcomes reached and what Mongolian people did benefit from that.
For instance, when I tried to find out how many families managed to get modern apartments thanks to government’s 40,000 housing program, the only information I managed to get from the official website administered by Housing Financing Corporation, the government’s agency in charge of the program, was that a total of MNT31.4 billion was spent for housing projects in Ulaanbaatar City and rural provinces between 2007 and 2009 under the government housing program and current balance amounts to MNT1.3 billion”.
Would not it be more important for citizens to know not the amount of money spent but the number of families got apartments so far under the program?
It can be concluded that there is no urban planning for Ulaanbaatar.
If there is, it must be a special plan that is against the will of citizens and that is intended to make our lives more complicated and more uncomfortable.
If they even had a plan to implement, their plan must have been to build dwelling apartments inside high school yards, on kids’ playgrounds, blocking the roads, cutting the flood-control dams or filling the spaces between buildings.
In a civilized country with good governance, infrastructure system is provided prior to building apartments. But it is different in Mongolia.
First we build apartments and afterwards build infrastructure. As result, every family in ger districts dig own water well in own yards and transport sewage separately.
Even if we hired saboteurs to make planning and undertake it for us, the situation would not be such a catastrophic like today. There are few extraordinary abnormalities existing with respect to housing investment source and selling prices.
Existing infrastructure access and capacity of water, sewage and electricity in Ulaanbaatar City is no longer able to afford the city’s increasing demand because authorities allows to build apartments in every free spaces close to infrastructure system in a disorganized way.
Housing land licensing is still tricky and hidden for ordinary people like mineral licensing. Reselling these licenses at higher price is the biggest and most profitable tax-free corruption source. It is not a secret anymore that the size and scope of this licensing business is getting bigger and bigger, making it a certain political power already.
A reason that hikes up apartment price is the corruption money to get housing land license and other relevant permits. The decision to keep housing credit interest rate below 8.0% as stated in previous program and 6.0% as in new program is beyond reality.
Current yearly rate of commercial banks or money market is 14% means that the margin of 8.0% would be paid by budget or by taxpayers.
It is a government’s attempt to regulate market price of goods and service. In all cases where goods & service prices are not regulated by market’s rule of demand and supply, final victims of it are consumers on long-term basis.
Government’s interference never reduces market price of goods and services, meaning there no balance between demand and supply. The Government decides to “issue housing credits with interest rate of 6% to middle-class families without own apartment in possession”, which means all citizens without apartments.
The priority of the housing program should be to build one or two storey cheaper dwelling apartments with access to hot and cold water system affordable by low-income families.
In order to build such apartments, it would be faster if turn lands owned by citizens into investment.
It is efficient that the government issue bonds and get long-term credit in order to make infrastructure investment. Besides, distinguishing of population by their employment with public service not by income level in order to provide with apartment with preferential conditions, makes their interest to work with public service which would make the government more cumbersome.
The time has come to take into consideration the above problems concerning the governance, urban planning and capital source before launching successive program.
The most countries require by law that citizens have proper insurances of life, house, vehicle, property etc against natural calamities.
Not public but private firms are responsible for property insurance and small insurance companies purchase an insurance from another big company as a means of risk management. Reinsurance companies are mostly big and transcontinental financial corporations.
In Mongolia, in order to get a housing credit or buy movable and immovable properties on leasing, it is a requirement that the property is insured against risks such as fire, flooding, quake and other calamities.
Basically, the only mean to protect private or public properties from all risks that might happen due to natural calamity is insurance.
17% of all properties damaged and destroyed by 9.0-magnitude earthquake that spawned a deadly tsunami into northeast coast of Japan had earthquake insurance and American AIR Worldwide experts estimate that the amount of loss to be paid by insurance companies is approximately US$35 billion.
As earthquake insurance premium rate is very high in this regularly-shaking nation, not everyone affords to get insurance coverage. Though this type of service is not common for this reason, almost one sixth of its population had earthquake insurance.
The Japanese earthquake is the second costliest natural catastrophe for insurance companies after Hurricane Katrina (US$100 billion).
It means $35 billion of the total loss will be paid not by the Japanese government but by international insurance companies altogether.
Share price of insurance companies is dropping in big stock exchanges. Share price of insurance and reinsurance companies such as Munich Re, Allianz, Swiss Re, Hanover Re, Admiral, RSA and Prudential went down to 1.1- 5 percent on the quake day.
International insurance and reinsurance system has already suffered the loss of US$10 billion due to recent earthquake in New Zealand and US$8.0 billion from unrest in Mid-East and Arab.
Anyway, almost every nation has insurance system under, which any loss caused to property due to an incident or calamity is compensated if it has insurance coverage and some countries even has a law which rules the deadline to complete insurance compensation or states that in case of becoming homeless, the cost spent to reside in another place must be compensated.
Insurance is a capital that makes up the largest portion of financial market. The insurance accumulation in developed countries serves as a bearing column for capital market and a leverage to stimulate securities trading. At the end, shares of big insurance companies are placed in relatively stable and long-term investment funds. In any country, social, health, pension and risk insurance funds serve not only as a core of capital market but also a reliable source of risk management.
Then, where Mongolia’s insurance capital is accumulated and how much it has been growing? This question has been put many times by Mongolians, especially NGOs headed by Ganbaatar from Trade Unions, but the authorities seem like not willing to give certain answer.
There is no warranty that a natural calamity would hit Mongolia. Does anyone know how much real estate is in Mongolia and how much of them have insurance?
In order to have an estate insured, first it needs to be registered. Then, how much of all real estate has registrations? It is already the time to register the property of citizens, bring them into economic circulation and protect them from risks through insurance.
It was reminded two years ago by well-known economist Hernando de Soto during the 2010 Mongolia Economic Forum and a whole sub-session was dedicated to risk management during this year’s Economic Forum.
Time has come to Mongolia to develop risk management institutions, including insurance system, immediately and ensure its proper function as to market principles, before getting into mining mania. A natural calamity is never predicted.
In a democratic system, under which the government is replaced as result of elections, an extraordinary duty of the government is to establish and develop a reliable insurance system, which is a crucial tool to protect the society from risks.
PS: I extend my deepest sympathy over terrible tragedy the Japanese people suffer.
I would like to note here that the patience, mental strength and unity of Japanese people made me wonder, respect and prideful.
A regular Mongolia Economic Forum closed few days ago. There is almost no developing and democratic country in the world, except Argentina of President Perona’s time, who satisfactorily managed to use rich mineral resources to make the country develop properly. Almost every state who managed to develop its country based on mineral resources, had totalitarian regimes. Chris Devonshire, who attended the Forum, wrote that the rest of the world closely watches how Mongolia that cannot no longer exercise democracy properly and pass non-democratic decisions, would deal with a challenge to make its natural resources a fundamental for development.
Mining mania mentioned several times during the forum by attendees, including President Elbegdorj, has already started to happen in all government and socio-economic levels of our country. Today, all affairs that the country faces, are connected to future mining income and any work or business not related to mining is no longer go further.
The government’s size and spending is getting bigger and bigger and the government’s budget expenditure accounts for 2/3 of the country’s economy. The government’s expenses boosted by rumors of mining income even exceed expected high income and its difference is about to reach to rate equivalent to 11% of the country’s economy.
As the next parliamentary elections get closer, political parties and authorities only talk about how to distribute shares of Tavan Tolgoi and whom to give it to or whom not. The authorities are spending sleepless days to look like they fulfilled their pre-election promises by distributing shares to the people. It has started to count chickens before they are hatched.
They say that shares are not available for children who would be born after the last day of this year. It appears it is the fault of these children that they are born not in right time. They also state that only those with incorporated company can buy shares cheaply and those without a company can blame themselves. According to authorities, all city problems including smoke, traffic and water, will be settled by the money to come from mining. And no one talk about how they are spending existing money.
Everyone knows that high school principals in ‘close cooperation with politicians’ have been stealing open sport-grounds inside the school yard to build residential buildings for their own wallet, but no one dares to say it loud. Everyone is expecting big money. Those who exenterated funds of social care, pension and health, are also hungry waiting for next bait to come from natural resources. I do not think that current social insurance system that cannot function properly, would suddenly begin to work well even there is more income to come.
A person in mania gets separated from reality and normal standards and sometimes does shameful things. Exactly the same acts are happening in all government levels. Press and media also suffer from this disease, writing only about mining income and issues surrounding Tavan Tolgoi shares. An expectation that Mongolia will develop and each citizen will get rich thanks to massive income soon to come from Oyu Tolgoi and Tavan Tolgoi, is spreading across the society. In order to manage this expectation properly, we need no efficiently marry and co-ordinate mining industry with the rest of economic fields.
Every company needs to find their place and supply their goods and services to accumulate capital, based on fair competition by undertaking the above co-ordination effectively. Besides, such a big expectation can lead to inflation only if there would be no increased economic productivity and final victims would be consumers, especially those with low income. If mining income cannot support and increase economic productivity at all and produce only inflation, then economic growth can become a castle in the air.
Only the economic growth that is capable of making a particular industry competitive in international market can ensure a real and long-term development only. Thus, I demand politicians and the government stop their mining mania and carry out realistic activities.
The time has come for us to find the most rational and efficient way to possess underground resource of Tavan Tolgoi deposit and benefit from its fruits from generation to generation.
The country’s future, social stability and order as well national security will depend on how we deal with such a new intellectual challenge. The Government of Mongolia decided to sell 10% of Erdenes TT to domestic professional investors and give 10% free to its people, 30% to international investors and own remained 50%. So far, it selected Deutsche Bank (Germany) and Goldman Sachs (the U.S.A) as underwriter for IPO and BNP Paribas (France) and Macquarie Bank (Australia) to involve in the sales and brokerage activities.
Shares in state-owned company Erdenes-TavanTolgoi will be sold within 2011 and each citizen is expected to receive 550 shares.
If the shares would be sold as to this government version, in a country like Mongolia where the half of its population lives only for daily foods to eat, the people will hurry to sell their free shares at first chance to do so.
All capital will concentrate in hands of few people and after some time the poor will remain poor. Mongolians will be begging money from donors sinking in debts.
The two political parties in power are doing this with final purpose of looking as if they fulfilled their pre-election promises. Since it is going to take more time for us to receive real money after Erdenes TavanTolgoi make initial profits and distribute its dividends, I suggest to make a little change to this.
1. It is necessary to ensure that 10% of existing and to-be-determined reserve of Tavan Tolgoi Deposit should be always equivalent to 10% of total shares of Erdenes Tavantolgoi Ltd. Otherwise; there is possibility that by issuing additional shares, the value of previously existed shares is diluted.
2. Let us give 500 shares to existing population of Mongolia.
3. Though it might be a good idea to sell 10% to national companies, it is a burdensome task. It would be unfair to sell shares at nominal price by comparing Erdenet Mining Corporation or Mobicom Company with those passive companies that did nothing for ten years and did not pay a single penny to tax and this is the discrimination of citizens with no company. Instead, let us distribute this 10% in shares, 500 shares per new-born citizen of the country. It means our current population of 2.7 million can double to 5.4 million. After that, we can look back again to improve our system.
4. I propose to hand over 500 shares together with the Gerege or certificate of the Mongol to each citizen and to new-born child citizen to certify that the holder is a real owner of the country’s treasure. But do not make it a political game.
5. But the Government will own 30% and let us develop secondary market of securities by means of selling another 20% at domestic stock market. Anyone with wealth can acquire and sell it freely.
6. Let us apply this model not only in Tavan Tolgoi but also in all of other strategic deposits. The Gerege should play a basic role in ensuring that that being a free and happy citizen of independent and democratic Mongolia is the guarantee of good life. If we manage to effectively coordinate this capital with hard work and commitment of every single person, then the proud to be a Mongol will arise. In order to make the Gerege a guarantee for each Mongolian person to live in wealth, a law including the following provisions needs to be adopted.
а. Open personal account for each person with the Development Bank or with the Human Development Fund and deposit dividend from 500 shares to this account on annual basis. Let us state in the law that owner of the shares is not entitled to sell his shares and can use certain amount of his dividend on specified conditions. He only can spend that amount for limited purposes such as buying or repairing apartment, paying tuition fee or treatment. The government can also spend the capital to deal with such issues. The goose that laid golden egg in Aesop’s fable would be this share.
b. Shares can be transferred to children and grandchildren under a will. By doing so, Mongolians all generation can own apartment despite they might be poor ones. c. It would be fair if the Development Bank pay an interest equivalent to the long-term apartment purchase loan to the balance of long-term personal account.
Besides, this capital can be spent to issue credits to big infrastructure projects. Generally, in some countries, pension and health funds are brought into circulation in this way. Only in this way, we can provide each family with modern apartment and deal with almost all urgent problems in Mongolian society.
This model was successfully implemented by Singapore to achieve today’s progress. We should raise initial funds of operation by selling 30% at foreign stock markets. Basically, shares are usually issued piece by piece to sell by constantly increasing the price. Anyway, up to 80% of total shares will be circulated at free market and remained 20% will not be for sale to be distributed as dividend.
It is also required that one third of company’s board of directors is civil representatives and that all information is open and transparent.
The Gerege of Mongol would be a real step towards making Mongolians prideful, self-confident and respected. Thus, let us give every single citizen an opportunity to work, create and live well in own country.