Outcomes and Value Chain Mapping

UB Post

June 25, 2010

In all industrial sectors, especially in all segments of mining ventures, there is value chain. Value chain is chain of activities from the very beginning of project research, to exploration, enrichment, and final production, that gives final product some value. In Mongolia, added-value chain would be more appropriate notion as it is wrongly referred as cost of value. Mongolia has only one specific industry that goes through all activities of value chain. This is cashmere industry.


In the value chain, the more getting close to delivery of products to the end customer, the more competitiveness it creates sometimes global in extent by creating future demand for the customers.
For instance, “Chanel”, “Burberry”, or “Zegna” brand name of cashmere products are sold US$500 while Mongolia’s and Chinese cashmere shirts, made of cashmere taken from exactly same goats, sold at US$100 because of quality and design.

Those top brands are well located themselves on the map of value chain analysis. It is vitally important where to be located, identify target product, and where to move forward on the map of value chain.It is worse than to shoot on the foot if large sum of investment is made and no good competitive product is made. In the end of the 1980s, North Korea produced a vehicle same as Mercedes Benz. Uncomfortable and poor design someone may think like a vehicle of wartime, such a waste of money and time. Aggressive thinking that one can do whatever goes into mind proves unsystematic knowledge or communist way of doing. By public funding, by emotional state, and with no research and experimentation, it turns waste of time, waste of investment, and waste of labor. On behalf of State, such unproductive use of public funding in such a society, no one is taken into accountability for this. Same situation persists in Mongolia. Let’s take an analysis of value chain in mining sector of Mongolia.

In copper industry, Mongolia has been producing enriched copper of 25 percent for the last thirty years. But our copper goes to pure copper producer where it is processed and added as much value and has been transferred to next activity of value chain. In a decade, we would be positioned in this stage of value chain, and may produce pure copper for the global market. In a following decade or twenty years, we would jump to next stage.

The question is to make good prediction in terms of time to where we move forward in the value chain. Because in every activity of the value chain, there is world-class competitors that offer low cost, high productiveness, and as much value added products. We need to have high competitiveness and need to compete with those. But now we talk to move into value chain of metallurgical industry. The Government aims to build a heavy metallurgical complex in Sainshand. Brilliant idea and nice thoughts.

But in terms of time, what outcome can we expect. Where would be positioned and in how long term? We need to make precise planning for every segments of mining value chain. Otherwise, what would happen if great amount of minerals are extracted after many years of debates, and such huge amount of investment is made into a project to make final product, but no one could buy it because of some reason. The reason involves so many things such as quality of the product, cost of transportation of products to end users as well as economic and political risks.

For a landlocked country, can it be competitive enough against those products made in two neighboring countries, through the territory of which we are planning to make transit transportation.
It would be a better plan if we concentrate more on processing, and enrichment of variety of minerals in the first stage of global mining value chain, and produce highly competitive value added products and spend revenues generated from these activities into more highly competitive different sectors. We have vast amount territory and small population, education sector we can improve it a lot to the world-class level that attracts foreigners to study in Mongolia and graduates can work in every corner of the world. 

Swiss-model banking and financial hub for the region is another opportunity we can strive or next generation Singapore we can build up that attracts foreign tourists with eco foods, good management natural resources. Main basis for our nation’s sovereignty is definitely a neutral policy between two giant neighbors. It is time that we need to predict more precisely from where to where we should move forward in the value chain.

Translated by Ch.Sumiyabazar

Face to face Interview-Mongolian National Tv, Apr.22, 2010

Social Cancer

UB Post

June 16, 2010

Micro mining prospectors, small-scale or community mining, or individual artisanal miners, that we usually call as “ninja” miners, are the cancer of Mongolian society that has been ever growing uncontrolled year by year in the past decade. It is largely depend on Mongolia’s politicians whether this cancer turns into malignant tumor that may affect normality of the society or benign tumor that may disappear as the economy grows, and more and more highly paid jobs are created.

Lawmakers for the last three consecutive terms in parliament were too silent over this “cancer”, but it matters us a lot.

Contributory sector of the national economy, mining officially employs around 40,000 workforce including 6,000 workers in Erdenet copper mining corporation. But countrywide we have outnumbering unauthorized miners in Mongolia. According to a formal figure reported by the Government to Parliament, the number was estimated around 35,000 ninjas were engaged in illegal extraction of gold, coal, spar, tungsten and many more different kinds of ground minerals in 18 out of 21 provinces. This number may be exceeding more than 40,000 when local public servants, and residents occasionally join them over the weekend.

Ninjas, around four percent of Mongolia’s total workforce population, are carving out a new nation, making a totally different way of living under severe shortage of water supply, and shelter built in unhygienic condition.

They tend to have strong superstitious beliefs in their everyday life like the more you drink with money made from gold mining, the more you will gain, or if you start by a group of nine, you will be stronger than deity of the mountain.

A small quantity of gold, found after digging unsafe holes and washing earth in big bowl for a whole day using toxic chemicals, is sold to nearby parked vehicle with dark tinted windows, and eventually ended up with alcoholism and prostitution take place over night. World of ninjas has become ever strongest today in Mongolia. However, artisanal mining has been in existence in most developing countries with abundant natural resources. Even United States and Australia had experienced such informal mining in their history.

I was told by a foreign expert in this field that illegal mining is pursued because of four major reasons only. Those are sharp economic downturn or loss of livelihood due to severe natural disaster, getting rich in short time, undertakes the activity of mining seasonally or temporary self-employment. But in Mongolia we have all those four reasons.

What move shall we make? At any cost, illegal mining should be eliminated. This cancer is growing bigger and becoming more toxic as the decision makers keep passing of bill on hold. In this sense, today’s politicians are accountable for their too ignorant failure to take necessary step

Election of members to parliament is meant to stop all activities that may cause damage to the safety of humans, but those members of parliament, State Great Khural, have become like ostrich that buries its head in the sand imagining that the whole body is concealed.

Not for just passing a law to legalization of ninja type of activities, but we need more efficient law that formally regulates this present-day contradicting relation in accordance with acceptable international standard. In a place where dozens of thousands of illegal miners are working, if there is no rule of law, unlawful manners would take effect.

Local government needs to have more power to take control on the activities of illegal miners within acceptable frame, because they getting out of social control. In Khovsgol province’s Tsagaannuur soum, illegal miners and local tsaatan, reindeer herders, are conflicting with each other, some cases even involve gun shots.

Ninjas are armed with guns today. Criminals have their own rule set up in a place, where there is no rule of public law. They tend to become more organized, and fight with others for land, some worst cases proved that it might turn into a civil war.

In an African state, civil war wages from a local armed conflict for the land of diamond deposits. In those countries, such “cancer” has already become a “malignant” one that threatens to-be or not-to-be of that nation. In Mongolia, I hope we still have chance to keep it “benign”.

Five metric tons of gold is extracted annually which equals to almost all industrially mined gold sold to Bank of Mongolia. Since enforcement of hefty windfall profits tax of 68 percent, gold sales to Bank of Mongolia has declined by three fold, and gold smuggling takes place in turn. Actually Bank of Mongolia should have bought at higher price than black market for its gold reserve.

Formal legalization of illegal mining will be key fundamental basis to keep it controlled and open. The choice is at the hands of State Great Khural members of today as it soon will discuss a draft law to regulate this “cancer”. We want to live in peace and proud.

Translated Ch.Sumiya

Share and Bounty

UB Post

June 11,2010

Any company in the world raises capital in three different ways. Initial step is to make own investment, second is to get credit from third party, final step is raise funds by issuing own shares.

So a company issues shares to raise funds, but not to distribute. But those two major ruling political forces in Mongolia have joined their voice to support this strange motion.

A political “brainwashing” process is taking place in Mongolia as there a superwealthy named company established, and its “Bounty of the Nation”, a election promise of wealth distribution, has turned into a decision to make ten percent of total Tavan Tolgoi shares to be given to every citizen. The decision was announced in a recent televised news that it would be made available through so called Human Development Fund.

Tavan Tolgoi project, first of all is a business, profit seeking one. The project will go forward smoothly when all parties earn profit. But it won’t if it is largely politically favored, and used as a tool to rationalize some election promise.

Even it will take time to see first expectation of profit after it goes all the way through lay out initial investment, coal extraction, production, sales and finally make profit. For the necessary infrastructure constructions of paved road, railway, and power generator, it needs huge amount of funds. The government is expected to build those infrastructure developments as well as urban planning around the mining town. A private company makes no investments in those assets, but if the government releases certain amount of funds to finance those infrastructure projects, then the private company makes commitment to do that.

So far what is clear is that all these projects would be managed by “Erdenes MGL”, a state owned corporation, ten percent of which would later become available for public. The point is Human Development Fund may open accounts in the name of each eligible citizen of Mongolia to make cash transaction as those two political parties have promised to make. And, ten percent of Erdenes MGL would be one available option for public to buy under that cash transaction. But who will represent that ten percent in the board of directors?

Another question is Erdenes MGL company’s market evaluation of its own, which should be approved by all shareholders. In order to make market evaluation, investment amount on each part of the Tavan Tolgoi project should be clear. The project’s profit relates to its total sales.

However, the project will move forward with the efforts of both and foreign developers, but head company Erdenes MGL should trade its shares in both local and foreign stock markets.

The main reason to make it public traded is derived from difficulties how to differentiate from which Mongolian company would benefit. In other words, Mongol-999, a national consortium that joined more than 2000 private local businesses under its flag, cannot be given a special power. The rest of 50,000 Mongolian private businesses will be kept out of beneficiaries because they did not join. This may cause a defect in market evaluation of the project’s operation expense.

Generally speaking, in Mongolia, a political risk has always affect cost of private business’s normal operation. But this consortium and groups, first of all, should define themselves investors or contracted developers. It can not be both. There is even no any private company in Mongolia who can handle this project both financially and technically capable.

By inviting foreign mining giants into the project, it will build a confidence to sell shares in foreign stock market. How would foreigners believe even when Mongolians, ourselves, do not believe in government owned corporation.

In order to get listed at local stock exchange, all companies must announce their annual reports accurately. 64 public listed companies out of total 342 registered at the Mongolian Stock Exchange have announced their annual reports in 2009. But only four of them had complete reports. It is doubtful whether to sell share at the Mongolian Stock Exchange which has ten public companies actually. Some people are not even aware that Financial Regulatory Commission is accountable for this failure of misreport, not Mongolian Stock Exchange.

It may not be a matter of question for the Government, who does not differentiate points of share and bounty, how the local stock market is working, especially during these historical days of Tavan Tolgoi project discussion, but it matters us a lot, to people of Mongolia.

Professional Ethic Codes

UB Post

June 4th, 2010

When a nation reaches certain level of development, a significant change in social ethics can be seen. That country may have reached impressive figures in term of economic growth; however, when there is no change in social ethics, it still suffers setbacks. We may relate that point to that nation’s uniqueness, culture and history. But in a language of developed world, communication of the society members is regulated by an “invisible” hands.

That “invisible” but more tricky hand is professional ethics. In developed world, communication of the society members is regulated by certain laws and jurisdictions. But not all social relations. It is impossible for definite. Basis of the social relations is set by that nation’s history, custom, traditions, religion, or someone dictator or ruling class of the society that would eventually make up ethic codes of that nation in greater meaning.

In America, wherever you travel through its vast territory, one can observe highways, bridges, residential areas, commercial centers, public rules, safety measures, and service facilities they have created for all are so much human oriented. Each construction is large enough to ensure comfortable and safety of people. And, quality is wonderful.

Of course human is not a machine, makes a mistake. Other countries of the world closely watch, and learn lesson from this amazing country that has built condition one can corrects his or her mistake and never repeat. Around ten years ago, a Minnesota bridge collapsed down. The reason of the accident was metallic component of the bridge. Later all bridges, and commercial structures, that used such metallic components for the construction, were inspected in detail, and replaced that part. In Mongolia, this ethics view is totally upside down, especially for the road and housing constructions. Some buildings could have been better not to build. It is shameful if we listen to their “magnificent” names of those structures; something called Plaza, a two-storey place built on the land “stolen” from children’s playground. Government of the Ulaanbaatar city has given land of the city’s only children’s park to some private businesses by conspiring, but now begging for donation to build another new park.

Law makers plan to build 18-storey tower on the land of its only remained park at the back. Both constructors and government are too ignorant. What they would build is just a monument of unaccountability that would be opened by white-gloved officials in splendid ribbon-cutting ceremony. In less than a year, that structure would be damaged and go for another unexpected maintenance project.

Professional ethics make everyone accountable for their doings, especially those steps that may harm well-beings and safety of the people. For instance: to become a surgeon doctor in America, one has to graduate university level education, and need to attend two-year course later in order to get a permission to serve medical service to people. Based on all these procedures, local government of that state gives that permission for certain period.

Each surgeon doctors are members of the American Medical Association (AMA). If one fails to obey professional ethic codes or any code of conduct, and caused damage to the reputation of surgeon, the association expels that surgeon doctor from AMA membership and requests the local government to suspend that surgeon doctor’s rights.

Professional ethics concerns every moral issue to take care of their customers or users when providing a service to the public. For instance; surgeon doctors never allowed to sell and promote medicine directly and indirectly, to hide double effects of medicine or injection, to disclose privacy information of patients, and to keep silent over dishonesties being made by their fellow colleague members. Same type of rule also applies to lawyers too. In other words, the rules are made by lawyers themselves. Rights to health and right to justice are two sides of human rights. American Bar Association (ABA) sets model ethical codes related to legal profession. A journalist has also its own code of conduct. A role of each professional association is to create and maintain a code of ethical standards for those applied professionals, core values of that sectoral workers. That value is made up in mind of every person from their early life.

In all levels of academic education of America, cheating and violation of copyrights are considered as theft and that attempt may lead to expel from school. But in Mongolia or Russia, that copyright theft could be explained as a mighty rule of thumb as sincere help to others. In this point of view, different conflicting definition of ethical codes may begin. In every field of the society, there is a professional ethical code. We, Mongolians, are now should understand and count on professional ethics are the basic conditions that will make quality difference in the socio-economic development of the country. We need to find common solutions that will ensure more and more civic participation and less state interference in all professional sectors of the society as we move forward for the development of the nation.

Chicago-Denver-Ulaanbaatar

Translated by Ch.Sumiya

The Decay

UB Post

May 28,2010

The flood of drainage that have deeply penetrated into social life of our Mongolians, inundating corridors and floors of all government buildings and decaying our whole society rapidly, is the corruption and bribe. The corruption is originated from Latin word ‘corruptus’ meaning depravity, decay and bribe.


The history of mankind proves that a number of states and civilizations have discontinued to exist in the past, by decaying and decomposing not from outside but from inside. Only those countries that managed to establish proper standards of cultural and human relations capable to prevent the corruption before it happens or stop it as it happens, achieve more success than others, developing their economy intensively and making their population wealthy and happy.

It has been 25 years since world countries are ranked according to how the citizens of that country evaluate the corruption rate in government. According to the 2009’ Corruption Perception Index Survey conducted by the Transparent International involving 180 countries of the world, our country stood at 120th place together with Kazakhstan, while our southern neighbor is ranked at 146th and our northern neighbor at much better ranking or at 76th place. Though the corruption rate in China is twice less than in Mongolia, they fight the corruption with the force twenty times stronger than ours. “International Herald Tribune” Newspaper (Page 3, May 21st, 2010, IHT) published about thousands of government officials being sentenced for the crime of corruption in China. The Vice Minister of Supervision Hao Mingjin called a press conference where he stated that 3058 public officers including several city mayors were inflicted for corruption to various sentences till life imprisonment.

These officers were found guilty of corruption and swindle for abusing their power in distributing some US$386 million that the government allocated in connection with construction projects, land development, transfer of fixed assets and evacuation of residents. The “Associated Press” Agency warned that the government distribution of cash to population in connection with the regulations of fixed capital followed by rapid development of this country might aggravate the corruption which already widely spread, in which the Agency was right. “Communist” authorities started to acknowledge that the corruption is the biggest threat to their authority.

This communist country with a single political party system fully recognizes the corruption as their biggest enemy and is taking decisive actions to fight this. In our country with multi party system, the corruption has already spread to and invaded whole society and has turned into a widely-accepted normal standard of inter-human relationships. The two political parties that alternately ruled whole government, including executive and judiciary governance, have been encouraging the corruption instead of stop and tackle it.

Anti corruption reforms have a good chance of success only when they are moved by a top leader and persistent enough to overcome bureaucratic resistance and inertia according to experts. They also have to involve civil society and be free from political manipulation.

One clear example is that though many cases of bribery and corruption linked to central and local government officials are released by the press, the linked officials have become masters in ruling out them using other press and media. Because almost every press and mass media in Mongolia, particularly newspapers, television channels, are owned by a particular political party, all news about the corruption cases are all flash in the pain. Internal democracy of political parties has been also disappearing gradually. The method to internally bribe its members, who raise a certain question about responsibility and accountability by promising high positions, has spread widely. In this way, the corruption has become the biggest enemy of Mongolians.

Translated by P.Shinebayar

POLICY AND RATE

UB Post

May 21, 2010

Last week the Central Bank of Mongolia had published in all daily newspapers own interview with itself about its new decision to launch a program so-called “banking capacity building and supporting banks with equity increase” and first of all increase its “policy rate” by one percent reaching 11 percent.


It is said that our Central Bank has decided to toughen its monetary policy, according to world practice that all central banks of the world increase their interest rate as the inflation grows. 
Though commercial banks made Wednesday their proposal of purchasing the securities worth of MNT337 billion following this news, the Central Bank sold CBS (Central Bank Securities) worth of MNT290 billion with weighted average rate of 10.21 percent. Commercial banks slowed substantially thier lending to local businesses.

The owners of commercial banks in Mongolia are very lucky guys indeed. It is very nice to operate in a country whose Central Bank policy interest rate almost doubles world’s commercial banks loan rates. It is enough just to import cheap money from foreign banks and invest in CBS. If the dollar inflation risk is managed carefully, it is safer and more reliable than issuing credits to business in Mongolia.

Commercial banks gets another luck: to increase their equity capital at the cost of taxpayers. This is another legitimate way of equity in commercial banks, that are under the control of high ranking public officials, especially of ruling political parties, without any interest. Sharing any return on policy is one thing where the two ruling political parties coalistion exercises its consensus. Money does not make differences among poltical parties.

The idea of making sure that Mongolian commercial banks maintain their required ratios in capital is a good one. Increasing equity in this way alone is like if one treats the symptom of serious chronic illness in the monetary system that provides liquidity to the economy.

We must address the causes of the illnesses. Central Bank do not talk openly and bravely that basic reason of such chronic illness is outside banks. The position of President of Central Bank is the one that must clearly express its position on such important matter to decide the destiny of the country and that must fight for this.

The major reason of Mongolians large migration abroad is because Mongolian businesses get bank loans with the world highest interest (20-25 percent). This cost of financing makes the private sector (especially those who is not connected to authorities) not priftable and the economics not competitive. The latest example is that last night 3,000 young people, stood in a queue all night long just to register for selection for works in South Korea.

Why the loan interest rate, which is the cause of all these problems, is so high?

The major reason is that saving interest rate of commercial banks is very high (16-19 percent). This is the result of price war between commercial banks not to lose the few depositors of huge saving accounts. Because of non taxes on profit from saving interest earning, lending money to commercial banks is much easier than running own busineses in here. Besides it is quite risky to operate in private sector under current circumstance where corruption spreads and flourishes by walls of of public offices.

It is even more risky if you buy shares of companies listed in Mongolian stock exchange because the companies release not correct information about their businesses and financials. Another reason is commercial banks are not able to issue loans for longer, extended period because the maximum savings term is only one year.

The condition under which there will be more depositors and more money to save in banks is that the a lot of money should be accumulated in hands of people as a result of their hardwork. A country can be stable provided that there are large segment of middle and above middle class in the society, capable of accumulating the capital and investing. It is difficult for employers to purchase equipmet in order to improve their productivity as they cannot find a cheaper financial source for the term more than ne year. Plus, companies are not willing to expand and grow because government impose more tax on them as they employ more people.

The source that inspires and creates the requirement to improve the productivity is healthy and fair competition. Unfortunately, it is replaced by machination and conspiracy, in all sectors of economy. 
It has become an accepted standard of governance that a group of few people in the name of their poitical parties swindles properties of the country and capital city in close “partnership” with their partners, relatives and tribes. 
The third reason of high tugrug interest rate is the inflation that is about to gallop. Economists say sometimes that inflation is the robbery of government. The government inceases budget expense at any time they wish to, saying it is for the sake of people. In fact cost of increase and disbursement is almost and always higher than the help it selp. Becuase the assistance is organized so that people in close contact with political parties, their friends and relatives benefit first. The same princeiple is governing almost all state owned enterprises.

The devaluation of money can be limited if, only the budget expense is less than 17 percent of GDP and its growth is less than the growth of GDP. Those in Central Bank of Mongolia, who prepared the above mentioned program, surely know that if we fail to eliminate the above factors affecting the bank policy, then the monetary policy will fail to achieve its objectives.

The Central Bank is the most politicized institution like any other institution that are supposed to be free from political influence. Even if the Central Bank authorities want to say something, those who appointed them will shut their mouth by giving a black look only once.

Should taxpayers continue to pay for prodigal expenses of irresponsible government? How long Mongolia people must serve as a guinea pig?

Translated by P.Shinebayar