MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT REPORT IMPLEMENTING BUSINESS ENVIRONMENT REFORMS FOR ECONOMIC RECOVERY December 2022 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT This report is a product of the staff of the International Bank for Reconstruction and Development/The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the World Bank, the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this report. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. 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II MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT GLOSSARY AFCCP Authority for Fair Competition and Consumer Protection ASEAN Association of South East Asian Nations AU Accelerator Unit DU Delivery Unit EAP East Asia and Pacific EIP Eco-Industrial Parks ES World Bank Enterprise Survey FTA Free Trade Agreement GASI General Authority for State Inspections GASR General Authority for State Registration GDP Gross Domestic Product GDT General Department of State Taxation GIZ The Deutsche Gesellschaft für Internationale Zusammenarbeit GoM Government of Mongolia GSP Generalized Systems of Preferences GVC Global Value Chains IFC International Finance Corporation ILO International Labour Organization IMF International Monetary Fund IP Industrial Park IPC Investor Protection Council IPR Intellectual Property Rights IPS Investment Policy Statement IRM Investment Road Map LPI Logistics Performance Indicator LERO Legal Entities Registration Office MED Ministry of Economy and Development MDDC Ministry of Digital Development and Communications MOF Ministry of Finance MOJHA Ministry of Justice and Home Affairs MPAA Mongolian Professional Advisor Association NDA National Development Agency NGO Non-Government Organization NLIS National Land Information System NRP New Recovery Policy PPD Public-Private Dialogue PPP Public-Private Partnership SIRM Systemic Investor Response Mechanism SME Small- and Medium-Sized Enterprises SMEDA SME Development Agency SPS Sanitary Phytosanitary Regime UNIDO United Nations Industrial Development Organization UBI Unique Business Identification WTO World Trade Organization WBG World Bank Group III MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT FOREWORD While the negative spillovers from the COVID-19 regulatory frameworks or ineffective competition policy pandemic, ensuing border frictions with China, enforcement. Addressing government regulations supply chain disruptions exacerbated by the Russian and practices that restrict market competition or invasion of Ukraine, and rising geopolitical tensions weaken the enforcement of competition policies may have dented progress made in financial and is necessary to generate an enabling investment private sector development in Mongolia, one feels climate. Coordinating policy efforts to improve the lessons have been learned on the importance of business environment and promote contestable having a favorable business and investment climate and open markets is key to creating incentives to support strong economic recovery and resilience. for entrepreneurship and increasing pressures One also sees greater motivation by the Mongolian to innovate and invest. Second, is the focus on authorities and policymakers to deepen reforms government services key for functioning markets. This and open more opportunities for achieving systemic focus offers a potentially positive perspective on the impact and transformational change. The objective role of government in creating a conducive business of this report is to provide an assessment of the and investment climate in Mongolia. Focusing on business environment for private sector development improving the quality of government services such as and present a set of recommendations on improving judicial services and firms’ experience with the courts the impact of the government’s New Recovery when it comes to commercial matters imply looking Policy on economic growth and recovery through beyond existing institutions and delivery channels for entrepreneurship, increased equality of opportunities resolution of commercial disputes. This might also among firms and resilience of the economy to shocks imply new approaches including greater sensitivity to in the long term. While private sector development size when handling claims, automation of workflows is driven by many factors including efforts of private using digital tools to enable greater interoperability entrepreneurs, it is nonetheless affected by a range of among government ministries, agencies, and government services including policies and regulations departments as well as the court system. Third, a establishing the business environment. In turn, this focus on reducing barriers to international trade and influences dynamics between firms and investment facilitating the domestic manufacturing of goods to decisions on whether to enter new markets, launch boost non-mining productive sectors and support new products, or adopt new technologies. Mongolia foreign investment. This refers mainly to Mongolia has a lot to gain by advancing business and investment becoming more attractive to foreign and domestic climate reforms from the standpoint of private sector investments and allowing the country to diversify from development and economic diversification. investments in the extractive sectors. The financial sector also has a crucial role to play in financing However, despite significant reforms in the business investments needed by firms. environment in recent years, many firms and the economy are yet to reap the benefits. This is partly Importantly, it is a call that recognizes that the because business and investment climate reforms business environment can influence macroeconomic in Mongolia, like in many emerging economies, still performance, resilience towards negative shocks and face the challenge of continuously modernizing economic growth. It argues that to reap the benefits and simplifying its business environment as well as that business and investment climate reforms has to limited resources involved in sustaining coordination offer, requires recognizing the politics of private sector and reforms of complex business laws. It is crucial for development and creating a domestic constituency policymakers to stay the course when tackling business of stakeholders, and recognizing that progress on environment reforms – ensuring policy coherence business environment reforms is inextricably linked and minimizing implementation gaps throughout the to commitment to macroeconomic stabilization. transition phase while modernizing policies and legal Business environment reforms in Mongolia demands frameworks in the medium to longer-term. Also, these looking beyond the negative spillovers from the same concerns when unanswered tend to disrupt COVID-19 pandemic and the resulting difficulties of the and reduce incentives for both domestic and foreign last three years, and towards the structural challenges investment needed to enable firms to upgrade or and opportunities offered for deeper reforms. The main reorient activities to become competitive and integrate messages developed in this report must be translated into global value chains. into a country business environment reform program complete with tools for communicating reforms and This report is a call to arms for a new approach to supported by complementary measures facilitating business and investment climate reform and private entrepreneurship and accelerating economic sector development in Mongolia. First, focus on diversification. increasing competition amongst firms to foster the necessary innovation pushing firms towards the frontier and exploiting possibilities that new business processes, products, markets, and technologies can offer. Fostering competition implies reforming Andrei Mikhnev restrictive regulations, discretionary application of the World Bank Country Manager for Mongolia IV MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT ACKNOWLEDGEMENTS The acknowledgement for support and contributions legal associates, in particular Bolormaa Gulguu. to this December 2022 edition of the report, revised The peer reviewers were Vincent Palmade (Lead from the June 2022 edition, should be read together Economist, World Bank), Ganbaatar Jambal (Senior with the acknowledgements made in relation to the Consultant, World Bank), and Sihab Azhar (Senior earlier edition as indicated below. Theformer thanks Operations Officer, IFC). continue to be relevant. The revisions to the the June 2022 editon of the report have been prepared by a World Bank team led Several government counterparts who generously by Thilasoni Benjamin Musuku (Mongolia Country shared their time and insights were appeciated, Sector Program Coordinator and Senior Financial including from the Cabinet Secretariat and the Sector Specialist) and comprising Javkhlan Bold Acceleration Unit, the Ministry of Justice and Home Erdene (External Affairs Associate), Erdenebulgan Affairs, the Ministry of Economy and Development, the Ganbat (Consultant) and Sukhchimeg Tumur (Team Ministry of Digital Development and Communications, Assistant). Advise and support as sought and received the Authority for Fair Competition and Consumer from members of the study team that prepared the Protection (AFCCP), the General Authority for State June 2022 edition especially Philippe de Meneval, Inspections (GASI), the Parliament Task Force for the Alessio Zanelli, Monica Paganini and Jigjidmaa Permit Law and the SME Agency. Dugeree as well as the partners and associates at Finally, the team was grateful to World Bank and legal firm Melville Erdenedalai LLP. The collaboration IFC colleagues, private sector representatives, of the Cabinet Secretariat and National Commission representatives of development partners engaged in on State Productivity is greatly appreciated. The Mongolia and civil society leaders who generously translation assistance of Nergui Dorj is appreciated. shared their time and valuable insights during the Graphic work and typesetting was provided by Khanui course of the development of this body of work. Luvsandorj. Both editons of the report were prepared under the The following were the acknolwdgements in the June overall guidance of World Bank Group managers Zafer 2022 editon of the report: The report was prepared Mustafaoglu and Andrei Mikhnev. by a World Bank Group led by Philippe de Meneval and comprising (in alphabetical order) Iwona Maria Borowik, Jigjidmaa Dugeree, Xavier Forneris, Lars Grava, Narantuya Jambalsuren, Monica Paganini, and Alessio Zanelli. The team was assisted by Sukhchimeg Tumur. Legal input was provided by the law firm Melville Erdenedalai LLP, its partners and V MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT TABLE OF CONTENTS I. INTRODUCTION 1 a. Scope of the Technical Assessment 2 b. Summary table of short and medium-term recommendations 6 II. OVERVIEW OF MONGOLIA’S COMPETITIVENESS AND PRIVATE SECTOR 9 a. Mongolia’s economic complexity and challenges 10 b. Enterprises’ perception over business environment obstacles 11 III. MONGOLIA’S BUSINESS ENVIRONMENT REFORM PROCESS 13 a. GoM capacity of conducting systematic business law review 14 b. Public-private consultation on draft legislation 15 c. Strategic oversight of the business environment reform agenda 16 d. Management and monitoring of economic reforms 18 IV. BUSINESS LAW: ENSURING FAIR RELATIONS BETWEEN BUSINESSES AND THEIR STAKE- 20 HOLDERS a. Competition law 21 b. Insolvency and bankruptcy 24 c. Enforcing contracts 26 V. SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS 29 a. Business registration 30 b. Procedures relating to construction, electricity and property registration 31 c. Business permits and licenses 34 d. Business inspections 38 e. Customs procedures 42 VI. ATTRACTING AND RETAINING FOREIGN INVESTORS AND INVESTMENT 45 a. Investment policy 46 b. New investment law 48 VII. FACILITATING ENTREPRENEURSHIP AND ECONOMIC DIVERSIFICATION 50 a. Policy framework for industrial parks 51 b. The new SME Agency: governance and objectives 54 ANNEX 1: OVERVIEW OF THE MONGOLIA 2019 ENTERPRISE SURVEY 57 ANNEX 2: GENDER AND THE BUSINESS ENVIRONMENT IN MONGOLIA 62 REFERENCES 64 VI I INTRODUCTION a. Scope of the Technical Assessment b. Summary table of short and medium-term recommendations I INTRODUCTION a. Scope of the Technical Assessment 1. Mongolia’s economic growth performance enforce and monitor what is already on the books, has been impressive—though volatile—in the while access to regulatory information, licenses, last decade. Mongolia is the least densely and finance is uneven. The 2020 Business climate populated country in the world with 3.4 million survey undertaken by the National Chamber of people inhabiting a territory four times the size of Commerce and Industry of Mongolia showed Germany. It has demonstrated significant success that all size businesses encounter difficulties in in reducing poverty and elevating human well-being obtaining necessary permits to start a business due since the early 1990s1. Fueled by the extractives to heavy bureaucratic processes, the numerous industry and international commodity prices, the steps and signatures required, gaps between laws economy has however become highly dependent and regulations, and other technical requirements. on commodities exports, especially coal and Private sector managers in Mongolia spend copper such that one-quarter of Mongolia’s gross three times more time dealing with government domestic product (GDP) and nearly 90 percent of regulations than in other parts of East Asia export revenue are derived from the extractives and Pacific Region. Regulations are frequently industry with weak linkages between mining and changing, and the playing field is uneven and the remainder of the economy.2 This dependence biased in favor of State Owned Enterprises (SOEs). exposes the country to large swings in commodity Insufficient investor protection mechanisms and prices. In addition, Mongolia faces a job challenge— the lack of a stable and transparent regulatory particularly for its youth even before the COVID-19 environment undermine investors’ confidence. pandemic—with its high and rising unemployment Foreign investors also indicate that opening a and falling labor force participation rates, notably business in Mongolia is more difficult compared for women. The jobs challenge arises from a to domestic investors. A renewed regulatory disconnect between the sources of economic reform agenda would strive to simplify, automate, growth and the sources of jobs. The employment digitalize and render the public bureaucracy fairer, share of the mining sector—the most productive more transparent and predictable, and more sector and a key driver of economic growth— conducive for enterprises. has remained stagnant at below five percent of the workforce for the past twenty years. In the 3. The Government of Mongolia (GoM) has meantime, a steady transition of employment out recognized the need for a more conducive of agriculture—from about half of all jobs in 2000, investment climate and implemented several to about a third in 2010, and a fourth in 2019— significant reforms. The promotion of private has not been met by employment growth in high sector development is a central element of the productivity manufacturing and services sectors. GoM’s economic policy. Reforms of the business environment were implemented incrementally 2. Despite significant progress, Mongolia needs to during the past twenty years, with progress in strengthen the business enabling environment complex areas such as simplifying inspections for a level-playing field and a more productive with the establishment of the central authority private sector beyond mining.3 The 2019 for inspections (GASI), eliminating the minimum Enterprise Surveys—results of which are detailed in capital requirement for establishing domestic Annex 1 —found political instability, the tax regime, limited liability companies, or allowing mobilizing and access to finance as the top three obstacles movable collateral to boost access to finance. for firms (35.2, 17.2 and 15.9, respectively).4 The adoption of the Law on Tangible and Although Mongolia’s corpus of regulations is Intangible Movable Property Pledge in 2015, relatively strong and modern in many areas,5 there and establishment of a web-based pledge- is often a significant implementation gap to better notice registry in 2017 allow Small and Medium ¹ Mongolia fares relatively well in the World Bank’s Human Capital Index (HCI), with a score of 0.61 in 2020, higher than the average of the EAP region and lower middle-income countries. Mobile phone networks cover 99% of the population, with 70% smartphone penetration. Access to banking services is one of the highest in the world. ² World Bank (2020), Institutional and Structural Reforms for a Stronger and More Inclusive Recovery, Policy Note for Mongolia, June 2020. Note that while the mining sector represents close to 25 percent of nominal GDP, its share in real GDP is estimated around 16 percent. ³ As detailed in the Country Partnership Framework (CPF) for the period of FY21-25; Focus Area 2: Boosting competitiveness, Objective 2.1 Improving the business environment. 4 2019 Enterprises Survey-Mongolia, World Bank, https://www.enterprisesurveys.org/en/data/exploreeconomies/2019/mongolia#2. 5 For instance, Mongolia’s score in the latest Doing Business 2020 report published is above the EAP average for 7 of 10 indicators, and below average only in indicators “Getting electricity”, “Trading across borders” – in particular for the time and costs it takes to export – and “Resolving insolvency”. Overall, Mongolia score along the global average among the 190 countries measured in the latest Doing Business report (discontinued at present). 2 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT INTRODUCTION I Enterprises (SMEs) to offer moveable assets several important legislative reforms that are such as accounts receivable, inventory, livestock, critical elements of the business environment. The equipment, and future income as collateral to NRP targets improvements in private investment banks – a major move to improve access to through 2023-25, although the extent to which finance for SMEs. this is realized will depend on improvements in the macro environment and on the consistent 4. The recently adopted New Recovery Policy (NRP) implementation of key legislative reforms. In this aims to further address binding constraints to respect, the NRP decree includes in its Annex 4 a medium-term economic development. The NRP list of draft laws to be urgently discussed at the is a 10-year strategy adopted by the Parliament in Parliament session of Mongolia, and in Annex 5 a December 2021 for the effective implementation of list of draft laws to be sequentially presented and Mongolian long-term Vision 2050 policy.6 It includes tabled at the Parliament session in 2022 (see Table 94 projects valued at MNT100 trillion (US$33 1 below). However, the NRP still lacks details on billion) to strengthen six major pillars: (i) recovery private sector participation, selection of projects of operations of border ports; (ii) energy sector and the role and responsibilities of different recovery; (iii) industrial sector recovery; (iv) urban government agencies accountable for the NRP and rural development; (v) green development; (vi) implementation. Further, as of December 2022, improving public sector productivity. To finance although some of the laws have been proposed these projects, the NRP aims to mobilize private to the Parliament and are pending approval, and sector funding through initiatives such as Public some of the laws are yet to be proposed to the Private Patnerships (PPPs). The NRP also includes Parliament. Table 1: List of Draft Laws included as priority for 2022 in the NRP Annexes 4 and 5 Annex 4: List of draft Laws to be urgently discussed at the upcoming Parliamentary session • Revised version of the Law on Licensing or the initial draft of the Law on Permits. • Draft Law on Legal Status of Professional Associations. • Draft revised Law on the Chamber of Commerce and Industry. • Initial draft Law on Temporary Suspension of Certain Types of State Inspections. • Draft amendments to the Law on Procurement of Goods, Work and Services with State and Local Funds. Draft amendments to the laws on corporate and personal income tax, amendments to other taxation legislation, and • draft law on exempting from some taxes. • Draft amendments to the Law on Civil Service. Annex 5: List of draft laws to be sequentially submitted to the Parliament of Mongolia in 2022 • Initial draft Law on the State and Locally Owned Companies. • Revised Law on Bankruptcy or Law on Insolvency. • Revised Law on Procurement of Goods, Work and Services with State and Local Funds. • Law on Public-Private Partnership. Initial Draft Law on Creating Enabling Environment for Financing the Development Projects to Support Economic • Revival. • Revised Law on the State Inspection. • Package of Laws on Land. • Revised Law on Investment. • Initial draft Law on the Enforcement of Civil and Administrative Court Decisions. • Revised Code of Civil Procedure. 6 In response to the Covid-19 pandemic, Mongolia’s Long-Term Development Policy Vision 2050 was approved by the Parliament on 13 May 2020, with an aim to transform the country into a leading regional power by 2050. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 3 I INTRODUCTION 5. Even though the business environment is only one markets and the support for innovation.7 However, of the elements of a country’s competitiveness, business regulations play a specific role as they it often “sets the tone” for an attractive provide the overall framework that will be followed investment climate. Economic development by the private sector, government departments, depends on a wide number of potential policy regulatory agencies and the court system. The actions, such as the efficiency of government lack of a reliable regulatory framework will be institutions and regulations, corporate governance considered a major risk to investors, with a risk and the protection of investors, the quality of of deterring needed financing, for example in the infrastructure, macroeconomic stability, the infrastructures. quality of health and education, training, the level of competition, the efficiency of labor and financial Table 2: Key categories of the business environment Key Areas Elements of the business environment Commercial and contract law, company law, collateral law, insolvency and bankruptcy, Economic Law investment law, competition law, consumer protection, PPP law. “One stop shop”, single window, inspections, permits, licenses, ministerial orders, Administrative system & rules circulars, instructions, standardized forms and model documents. Legal portal, company registry, collateral registry, credit bureau/registry, electronic Digital services signature, unique business identifier, online payment of taxes. Case law, court procedure, case management, training of judges, tools for enforcement Judicial system or orders and judgements, specialized courts/chambers. Tax and Subsidies Corporate tax, VAT, social contribution, registration duties, selective interventions. Source: World Bank study team illustration 6. The quality of the business environment has also of this technical assessment, which necessarily become a critical element of the competition focuses on some of the key building blocks aligned between countries aiming to offer an attractive with Mongolia’s institutional and regulatory legal environment for investors. Almost7all reform program, notably: (i) key commercial laws; countries are implementing or are in the process (ii) registration, permits, licensing and inspection of undertaking significant reforms of their legal procedures for businesses; (iii) policy for attracting framework, often with the underlying objective foreign investors; (iv) policies for supporting SMEs of shifting from a command-and-control system development and clusters. While this report does towards being more market-driven, a change that not focus on important issues related to tax implies repositioning the rule of law at the heart policy, financial sector regulations and access to of the political system. This legal competition finance, all business environment components are creates pressure on countries to adapt or follow interconnected and would need to be strengthened international trends and practice changes, while simultaneously to achieve meaningful and sometimes at the same time struggling to retain sustainable change. GoM is commitment to their legal tradition and cultural identity. It also supporting and growing light industries, including requires strategic management of the reform the interrelated agribusiness sectors of meat, wool process as it may lead to a perceived instability of and leather this report also discusses elements of the rules of the game and fail to achieve results if the institutional and legal framework for industrial capacity constraints are not considered. development and trade such as the Law on the Legal Status of Industrial and Technology Park 7. In this context, this report reviews the existing (2022), and the implementation of the recently- policy and regulatory framework impacting adopted SME Law (2019). enterprise creation and development in Mongolia and provides a set of recommendations to 8. To assess Mongolia’s business environment, improve the impact of the NRP. As described the team conducted a broad literature review, above, the business environment can encompass interviews and focus group discussions with a wide array of areas that are beyond the scope business managers, business organizations, 7 These elements are part of the competitiveness of countries, defined by the Global Competitiveness Report of the World Economic Forum as the “set of institutions, policies, and factors that determine the level of productivity of a country and provide economic prosperity to its citizens.” 4 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT INTRODUCTION I government officials and development partners Framework11, in particular its focus area 2 based in Mongolia. The desk review included (“Boosting competitiveness”) and its objective research and technical papers, government 2.1 (“Improving the business environment”) and reports and working papers, a list is included in aim to support the design and implementation References. The report has notably been informed of potential development policy operations and by the 2018 Mongolia Systematic Country technical assistance programs. Diagnostic (SCD) and the Country Economic Memorandum (CEM) published in September 10. A key cross-cutting topic that is addressed up 2020.8 Some recommendations draw on front relates to needed enhancement to the Mongolia’s results in the WBG’s Doing Business reform process itself. International experience 2019 report, which measured select aspects of demonstrates that successful reform actions the business environment for domestic firms.9 require consultations with and coordination of The team also leveraged conclusions of previous different stakeholders and especially with the IFC assistance to Mongolia, notably regarding private sector. Interagency coordination and a Mongolia’s adaptation of its investment policy and strong focus on implementation are also crucial strategy to better leverage existing foreign direct to the success of any reform efforts. Despite investment, attract new forms of FDI and diversify Mongolia having a relatively sound regulatory its economy.10 Interviews were conducted with governance framework in place, private sector SMEs, members of business organizations and consultation and participation are perceived by donors. Focus group discussions were held with stakeholders interviewed as time-consuming the assistance of a local law firm and allowed and not impactful due to changes in political the analytical team to gather inputs from local priorities and lack of a stable and reliable reform enterprises on reform priorities. Enterprises process. The impact of political instability over the interviewed included a cross-section of company investment climate has also surged as a major size and maturity across a variety of industries. obstacle in the latest World Bank’s Enterprise The consultations were conducted based on a Survey, which highlights the needs for an effective model questionnaire developed by the team. and stable reform process. The shortcomings of the regulatory reform process are deeply felt by 9. For each chapter, the report presents key the private sector, which has expressed some recommendations regarding reform priorities. degree of “reform fatigue” towards a process These recommendations aim to ensure that which too often resulted in poorly drafted laws, Government’s business environment policy and underlined the need to account for the and SME support framework are well-designed, implementation challenge which remains a key targeted, and cost-effective to best meet the constraint for reform impact. objectives laid out in Mongolia’s NRP. Some of the recommendations provided can be addressed in the short term, while other recommendations are only implementable over a medium to longer- term period. The indicated timeframes are preliminary and based on the experience of other countries. The summary table below provides a compilation of the short and medium-term reform recommendations, which are described in more detail in the relevant chapters of the report. They constitute overall a comprehensive business environment reform program that simultaneously balances short-term de facto implementation gaps as well as longer-term de jure legislation and policy modernization impreratives, thereby building trust in the reform process. These technical recommendations are aligned with the recently-approved Country Partnership 8 Nganou, Jean-Pascal; Eckardt, Sebastian; Zhao, Luan; Batsuuri, Davaadalai; Batmunkh, Undral; D'Hulster, Katia. 2020. Mines and Minds: Leveraging Natural Wealth to Invest in People and Institutions (English). Washington, D.C.: World Bank Group. http://documents.worldbank. org/curated/en/273001600370275964/Mines-and-Minds-Leveraging-Natural-Wealth-to-Invest-in-People-and-Institutions 9 While the Doing Business discontinuation has been officially announced on September 16th, 2021 by the WBG, historical data of DB indica- tors can be used with due regard to their strengths and limitations, and complemented by alternative metrics or data sources, focusing on business regulatory reforms and their outcomes. This Technical Assessment does not refer or rely on historical DB rankings. ¹0 See notably “Investment Reform Map for Mongolia”, the IFC, 2018. ¹1 Country Partnership Framework for Mongolia, fiscal years 2021 to 2025. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 5 I INTRODUCTION Table 3: Summary table of Short and Medium-term Recommendations Topics Short-term reform recommendations Medium- to long-term reform recommendations 1. Prepare NRP’s business environment reform action 5. Explore the value of establishing a high-level Public- plan, with activities, milestones, responsibilities, and Private Committee for the Business Environment Business Environment Reform Process periodic reporting mechanism and develop online (Investment Climate) overseeing strategic priorities reform monitoring tools for improved transparency and monitoring the implementation of the reform and communication on reform implementation. agenda. 2. Strengthen the MOJHA’s capacity to conduct 6. Revise the Law on Legislation, which is included systematic Business Law review, in particular review among the list of laws to be revised by 2024 the budget and staffing needs of the Department of (Parliament Resolution No.12 of 21 January 2021) Legislation. 3. Strengthen the consultation process of the draft laws through effective participation and contribution of the private sector, NGOs, and the citizens & ensure that comments on the proposed legislation obtained in the consultation process are all made publicly available and responded to. 4. Clarify the institutional relationship and respective functions of the AU, the MED, MOJHA in coordinating the business environment reform process 1. Amend and complete the existing Competition Law 3. Strengthen the advocacy role of the AFCCP for the and secondary legislation in line with regional and elimination of regulations that prevent competition in Competition Law international experience (including the definition strategic sectors. of cartels, anticompetitive agreements, natural monopolies and assessment of dominance and detailed procedural rules). 2. Adopt/revise Guidelines on key topics for the private sector, e.g., merger control and increase transparency in decision -making of the Authority for Fair Competition and Consumer Protection (AFCCP). 1. Adopt the revised Insolvency Law submitted to 2. Design and implement non-binding principles for out Insolvency and the Parliament for approval, to fully align the legal of court workouts (OCW) to be used by debtors with Bankruptcy framework with international standards (including multiple creditors (suppliers, banks, or other large the treatment of the debtors’ assets, reorganizations, lenders). and creditors’ participation in the insolvency proceedings). 1. Revise the Civil Procedure Code with a view to support 4. Consider creating a specialized commercial court court automation, improve the flow of cases through (or Chamber) for handling commercial disputes and stricter rules on time standards and introducing ensure providing adequate training to judges hearing Enforcing contracts stricter rules on adjournments and continuances that commercial cases. can be granted. 5. Consider creating a small claims court (or Chamber). 2. Revise the Law on the Enforcement of Court 6. Provide training of judges and court personnel in Decisions with a view to apply stricter standards on commercial law. notification and enforcement. 7. Improve court automation by introducing e-filing, 3. Facilitate the utilization of Alternative Dispute e-service of process and e-payments of court fees Resolution (ADR) by providing incentives to those and promote the development of a solid e-court who attempt conciliation in commercial cases. system with case management tools for lawyers and judges. 1. Increase data exchange and improve the system 2. Create an effective online single window interface interoperability between the General Authority for system for all business start-up procedures, State Registration, the local tax office and the district eliminating the need to submit hard copies of the Business registration social insurance department. required documents and/or have physical interactions between the applicant and the authorities. 3. Eliminate the requirement of obtaining a company seal and ensure that it is not required in day-to-day practice when dealing with the public administration. 4. In the longer term, ensure the development of interoperable ICT systems that are able to transmit and share business information across all government agencies. 6 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT INTRODUCTION I Continuation of table 3 Topics Short-term reform recommendations Medium- to long-term reform recommendations 1. Introduce a clear-cut system of inspections in which 3. Reduce power outages, both in terms of frequency Procedures relating to construction, electricity, and property registration the number and type of inspections depends on well- and duration, and increase collaboration between defined risk categories of buildings. utility providers and other public stakeholders to 2. Streamline the building permitting process and simplify and automatize the process of connecting to introduce a single online window for application and the electric grid. approval of construction-related permits. 4. Improve efficiency, consistency, and transparency of land administration services, including titling and registration. 5. Further increase the geographic coverage of cadaster and immovable property registry. 6. Continue the digitization of cadastral maps and property titles and consider introducing a common identifier as to effectively link the information recorded by the immovable property registration agency and the cadastral agency. 1. Set out in detail activities that are licensed together 3. Upgrade the e-Mongolia platform to provide online with their approval and procedural timeframes transactional services for obtaining all permits, Licensing Business through secondary legislation. registrations and notifications. 2. Clarify the relationship of the Permit Law and sector 4. Set up the Permit Council for improving public-private specific laws and consider whether any changes are coordination and allocate permanent technical staff required to be made to existing laws and regulations to support the Permit Council in its review process. in light of the Permit Law. 1. Strengthen capacities of government entities 5. Revise and upgrade the State Inspections Law. authorized to undertake state inspections by provision 6. Create data management policies, that should of targeted training for the inspectors. Develop include open data for consumers, businesses and systematic training curriculum for inspectors and other regulators for example social protection, or tax. make some of training as mandatory. Performance measurement of each inspector should be measured 7. Increase peer to peer learning by improving foreign not only how many training sessions an inspector relations with inspectorates especially those that went through but also how he or she applied this consider as best practice. Business inspections knowledge in certain processes, for example in giving 8. Monitoring and evaluating should assess progress consultations. against outcomes and impact especially related to 2. Enhance the role of government entities authorized to risk management. undertake state inspections associated with offering advice, guidance, and training for businesses. 3. Ensure wider consultation is conducted on the draft revised State Inspections Law to ensure that current shortcomings and constraints are adequately addressed and other laws and regulations that provide for or relate to state inspections are reviewed for consistency and clarity. 4. Ensure the continuity of existing work and efforts of GASI such as online portals and tools in light of the recent restructuring. 1. Develop pre-arrival processing system by the 4. Improve automation of customs clearance process Customs; develop Authorized Operators program that will allow electronic submission of transport IT system to support self-declaration and payment documents, payments for all border agencies plus processes. railway and the national air freight forwarder MIAT. 2. Implement more robust risk assessment and 5. Invest in infrastructure trade logistics that meet Customs procedures management system to substantially reduce physical international standards to favor diversification of the inspections by Customs and other government economy. entities authorized to undertake state inspections 6. Increase the participation to trade agreements while medium and low risk consignments. aligning to international standards to stimulate cross- 3. Implement Standardized Operational Procedures border economic exchanges. across all Border Crossing Points and internal 7. Streamline the inspection process for exports by terminals to eliminate uneven performance and ensuring coordination between Customs and Other reduce unnecessary steps and procedures developed Border Agencies (OGAs) and eliminating duplication by units. of functions. 8. Develop a national single window (NSW) for trade, connecting all relevant agencies and fully automating all trade-related procedures. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 7 I INTRODUCTION Continuation of table 3 Topics Short-term reform recommendations Medium- to long-term reform recommendations 1. Develop a new and clearly articulated Investment 3. Develop a comprehensive Business Environment / Attracting and Retaining Policy officialized in an Investment Policy Statement Investment Climate reform program. Foreign Investors and (IPS) that reaffirms the GoM’s commitment to 4. Re-create or strengthen the investment promotion welcome foreign investment as an engine of growth capacity Investment and diversification, alongside domestic investment, to strengthen effective investor protection, and to 5. Design and implement a realistic investment fully operationalize the Systemic Investor Response promotion strategy that is aligned with the new Mechanism (SIRM) created in 2018. investment policy and focus on a few sectors that can both help Mongolia reach its socio-economic 2. Implement a consistent and transparent taxation objectives and present real potential for investors. policy in the minerals and extractives sector. 1. Define policy directions/objectives on which the new 3. Consider offering investment visas to attract young Investment Investment Law shall be based upon. foreign entrepreneurs and engineers to encourage a Law 2. Revise current Investment Law in relation to minimum faster development of the IT sector. capital requirement. 1. Strengthen the legislative framework regarding 3. Integrate the vision of IP and development of Framework for Industrial Developing an Effective certain gaps and shortcomings addressed in this new products and technologies into the national report by way of amending the Law on the Legal strategy for SMEs competitiveness and economic Status of Industrial and Technology Parks or when diversification. Parks (IP) drafting secondary legislation 4. Coordinate IP development with Mongolia’s policies 2. Consider adopting the concept of the Eco-Industrial on (i) Research and Development (R&D) promotion; Park. (ii) Higher Education Reforms towards development of relevant skills, and (iii) Intellectual Property Rights (IPR). 1. Determine up front an appropriate budget to cover 4. Pilot new programs supporting SMEs digitalization Capacity and role of the SME both specified operating costs and program costs and economic diversification, incorporating over the medium-term to enable efficient planning. international best practices in design, implementation, 2. Build the operational capacity of the SME Agency and program monitoring, notably in the ICT and the through knowledge gaps assessment of staff and tourism sectors. Agency specific courses/training/knowledge exchange 5. Expand the SME Agency´s outreach in the regions sessions with experts to address deficiencies in the through fostering partnerships with local authorities operational capacities revealed in the knowledge and international agencies. gaps assessment. 3. Undertake periodic firm surveys and focus groups of potential beneficiaries to validate SME needs, program design and KPIs. 8 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT II OVERVIEW OF MONGOLIA’S COMPETITIVENESS AND PRIVATE SECTOR a. Mongolia’s economic complexity and challenges b. Enterprises’ perception over business environment obstacles II OVERVIEW OF MONGOLIA’S COMPETITIVENESS AND PRIVATE SECTOR a. Mongolia’s economic complexity and challenges 11. Mongolia has a set of structural features that soviet influence. Finally, while it has a past of make it quite a unique country. Landlocked mostly agricultural activities, Mongolia possesses between Russia and China, its vast rural areas lack world-class mineral deposits (e.g., coking coal, essential infrastructure and connectivity. Almost copper, gold) and over the last three decades the half of its population live in the capital Ulaanbaatar exploitation of these large deposits have turned and its surroundings, and the rest is spread the country into mining-driven economy. across small urban centers and vast steppes where people herd livestock such as sheep, goats, 12. Mongolia’s export basket is mostly composed horses, cattle, yaks, and camels. Wintertime of mineral products, and the country has been temperatures often dip below -30 degrees Celsius. losing its export diversity. Despite increasing Agricultural and construction seasons are short, exports, the country is currently not diversified and natural productivity is low with arable land and has relied on a reduced number of mineral constituting only 1 percent of the total area. products to increase the value of its exports Physical constraints due to this geographic (Figure 1 (a)). Already one of the least diversified condition involve high transportation and logistics countries in the world, Mongolia reduced the costs, which undermine the competitiveness number of competitively exported products since of economy. In addition, since the early 1990s the mid-2000s, losing export diversity (Figure Mongolia has become one of the most vibrant 1 (b))¹² and becoming ‘specialized’ in a smaller democracies in the region after being part of the number of products. centrally planned economies of central Asia under Figure 1. Mongolia’s export basket is composed chiefly of mineral products, and the country has been losing its export diversity (a) What did Mongolia export in 2019 (b) Diversity of exports, 2000–2019 Source: Atlas of Economic Complexity. Mongolia has the lowest Economic Complexity Index (ECI) among its peers and ranks 113 out of 13. 133 economies in terms of complexity (Figure 2). In this case, the low agglomeration of know-how of Mongolia—represented by an export basket mostly composed of low complexity products and concentrated in the natural resources sector—can imply longer jumps into new sectors and pose relatively more challenges in its future diversification process.13 ¹² Diversity is the number of products the country exports competitively (with a ‘revealed comparative advantage’ more than 1) ¹³ Hausmann (2016) argues that the accumulation of know-how or tacit knowledge, which is embedded in goods and services produced and traded between countries, is a key driver of economic growth. Using international trade data, the author shows that the ECI, a measure of how diversified and sophisticated a country’s export matrix is based on its revealed comparative advantage, is strongly associated with GDP per capita; complexity explains future economic growth. See Hausmann et. al (2021) for further reference on the theory and methodology of economic complexity. 10 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT OVERVIEW OF MONGOLIA’S COMPETITIVENESS AND PRIVATE SECTOR II Figure 2. Mongolia has the lowest ECI among its creation of more and better jobs. Private Sector peers Development as the main driver of growth and jobs is often constrained by an unpredictable investment climate. Despite some advances in the business environment, private investors still perceive Mongolia as a high-risk environment. Mongolia’s implementation of business laws and regulations is weak, access to regulatory information, licenses, and finance are uneven; regulations are frequently changing; the playing field is uneven and biased toward SOEs. 15. Mongolia is open to FDI in terms of policy (de jure), but still registers low volumes of FDI relative to comparators. Mongolia receives over half of Source: Atlas of Economic Complexity. its FDI from two countries (Canada and China)— principally in natural resources—exposing it to 14. The economy contracted as the COVID-19 the economic outlook of those investor countries pandemic adversely affected exports, FDI, and the sector. Sudden policy reversals—at times private investment, and domestic activities in encouraging FDI and at other times openly hostile 2020. A stronger foundation for a sustainable and to it—in addition to the revocation of licenses and inclusive recovery from COVID-19 must be based permits without notice or justification and other on a more diversified and resilient economy, state practices have eroded investor confidence. which requires upgrading the investment climate Mongolia also performs poorly in terms of market and implementing support programs that help dominance, the intensity of local competition and to accelerate firms’ transformation and the the effectiveness of antimonopoly policies. b. Enterprises’ perception over business environment obstacles 16. Firms responding to the 2019 Enterprise Survey 17. The significance of political instability for report corruption, tax rates, access to finance, Mongolia’s private sector has increased and political instability as the most important substantially since 2009 and is now considered obstacles in their business environment (see the largest obstacle particularly among retailers Annex 1 for further detailed analysis). These (43 percent), firms with foreign ownership (44 factors are barriers to growth and job creation. percent), and companies 20 years or older (66 More than one-third (35 percent) of employers percent). Only for manufacturers, exporters, and identified political instability as the most important relatively young employers (operating for ten obstacle to their current operations. Tax rates and years or less) is the political situation not the access to finance were mentioned by 17.2 percent biggest concern. Instead, access to finance is the and 15.9 percent, respectively, with corruption top obstacle for manufacturers (30 percent of issues cited by 9 percent for firms, followed manufacturers) and exporters (42 percent). More by inadequately educated workers (5 percent). than one-third of younger employers see tax rates According to the size of firms, the constraints as their biggest challenge. Similarly, a smaller, but were perceived as follows: small firms and large growing share of employers considers corruption firms confirmed political instability as the biggest the largest obstacle. The share of firms perceiving constraint for 36.52% and 28% respectively, corruption-related issues as the biggest challenge whereas 28.57% of medium firms perceived tax increased from 4 to 9 percent between 2009- rates as the biggest constraint to operations. The 2019. The share of firms identifying tax rates as perceptions of managers among the different the main constraint remained relatively constant size of firms can differ based on the capacity to over time, reaching 17 percent in 2019. navigate business environment obstacles: larger firms may have more options to face obstacles, but at the same time they are also more visible and more exposed to failures of the business environment. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 11 II OVERVIEW OF MONGOLIA’S COMPETITIVENESS AND PRIVATE SECTOR 18. Establishing a more conducive and predictable 19. Limited access to finance and business advisory business environment would benefit micro and services are also among key barriers in SMEs small firms, which constitute the larger share of development. The major constraints for SMEs companies in Mongolia (see Figure 3) and are to borrow from banks are high-interest rates more vulnerable to regulatory discretion. SMEs (approximately is 1.5–2.5 percent per month), in Mongolia are critical to the economy as they short-term maturity (maximum maturity is 48 provide employment, thereby helping to reduce months), and strict collateral requirements (200 poverty and foster inclusive growth. In Mongolia percent of the value of loans in 99.7 percent of particularly—where the mining sector dominates cases, which reflects the deep distrust shown by alongside traditional herding activities—SMEs financial institutions).16 Many entrepreneurs feel appear as crucial agents for diversifying the constrained by their internal capacity to deal with economy. In 2017, SMEs made up 77 percent bookkeeping and accounting issues after they of the active establishments registered at the have formalized their businesses.17 The country is National Statistical Office, contributing almost 18 well endowed with business services to support percent of GDP and slightly more than 2 percent the formalization of firms, but entrepreneurs to exports.14 Significantly, more than two-thirds are not always aware of them. For instance, of the active population—that is, approximately Ulaanbaatar provides services to firms through an 760,000 people— are employed by SMEs.15 innovation center, business incubators, the capital city department for economic development and of Figure 3: Characteristics of the private sector, SMEs. Overall, the business community recognizes Mongolia the presence of an adequate support system for enterprises seeking to formalize. However, 72 Active Companies by Size (2018) percent of enterprises are still unaware of this In 2018, there were around 81,000 active enterprises service system.18 in Mongolia, with a large share of micro enterprises 3 Employees 11 Micro (1-9) Small (1-9) % Medium and large (above 50) 85 Boojoo, L. 2019. Leveraging SME Finance through Value Chains in the CAREC Landlocked Economies: Case of Mongolia. ADBI Working Paper 1019. Tokyo: Asian Development Bank Institute ¹4 Source: Zolzaya and Zhou 2018, cited by Boojoo 2019. ¹5 Source: MoFALI, cited by Boojoo 2019 ¹6 Leveraging SME Finance through value chains in landlocked countries, Asian Development Bank Institute (2021). Peter J. Morgan and Naoyuki Yoshino. ¹7 World Bank interviews. ¹8 Formalizing enterprises in Mongolia: challenges and policy directions, ILO 2015. 12 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT III MONGOLIA’S BUSINESS ENVIRONMENT REFORM PROCESS a. GoM capacity of conducting systematic business law review b. Public-private consultation on draft legislation c. Strategic oversight of the business environment reform agenda d. Management and monitoring of economic reforms III MONGOLIA’S BUSINESS ENVIRONMENT REFORM PROCESS 20. Mongolia needs to strengthen its institutional Mongolia’s public and private institutions, and and organizational efficiency for a successful improving the transparency of the reform process. implementation of business environment The process of obtaining the private sector’s reforms. There is no one-size fits all approach to feedback on draft legislation, as well as providing organizing for a successful program to reform the systematically and transparently an answer from business environment. However, considering its concerned public sector agencies will need to be relatively well-developed institutional framework streamlined to address capacity issues. Enhancing already in place, Mongolia will need to focus on the capacity of the MoJHA and its Department implementation tools and practices, such as of Legislation as well as Cabinet Secretariat involving the private sector at the level of strategic to conduct systematic Business Law reviews decision-making, adopting, and abiding by detailed and suggest annually priority legal reforms and roadmaps with specific actions, deadlines, amendments will also be critical. These reforms and responsibilities, clarifying the functions of are detailed further below. a. GoM capacity of conducting systematic business law review 21. Mongolia, like many other countries, faces tax articles. This legislative tool however requires the challenge of modernizing and simplifying a state-of-the-art legal portal and adequate constantly its business environment, following capacity for undertaking a systematic review of the adoption of increasingly complex and the business regulations to structure the process numerous standards and obligations in legislative and avoid contributing to the unpredictability of texts. Government departments seldom have the the legal framework. in-house technical and legal capacity necessary to produce high-quality commercial regulations 23. The GoM could strengthen the staffing and and are often reluctant to hire costly experts or capacity of the Department of Legislation of the consulting firms to assist them. For instance, Ministry of Justice and Home Affairs (MoJHA) while MOJHA has some legal capacity, it is already as well as Cabinet Secretariat to undertake involved in the challenge of court organization and implement periodic reviews of regulatory and procedure, modernizing civil law, criminal or reform. In addition to a review of the adequacy public law, and has limited resources in getting of the budget and staffing of the Department of involved in the reform of complex business laws. Legislation, its institutional model could be adapted Parliaments have also limited capacity and time for improved transparency and dialogue. The Law to digest the increasingly technical aspects of Reform Commissions (LRC) could provide some modern legislation. valuable lessons, while not being fully transferable in the context of Mongolia.19 LRCs are independent 22. Mongolia tends to follow the principle "one bodies set up to consider the state of laws and new law amends/replaces one existing law", make recommendations or proposals for legal which entails the high political cost of going changes, which typically include a permanent before the Parliament for each law taken committee of 5 to 8 members and an advisory separately. This approach is time-consuming, committee of up to 10 members that can rotate in particular for technical measures that may be periodically. The duties assigned to this institution essential for businesses but insignificant taken vary from country to country but usually include separately for a parliamentary discussion. To mainly making recommendations on updating or address this challenge, developed economies repealing obsolete laws, drafting revised versions have progressively opted for a codification of their of confusing laws, and preparing consolidated commercial law, together with the development of versions of laws. These institutions do not have "omnibus legislation" which allows the government a monopoly of legal reform, which remains the to prepare and propose a single legislative text main responsibility of the executive and legislative which amends directly several other laws (e.g. branches, but they should have the capacity to “Simplification law" or "Law of modernization of the assume a coordinating and systematic advisory economy"). In some respects, periodic omnibus role in the law-making process. legislation can be compared the annual “finance laws” which can modify multiple laws containing ¹9 LRC are often established in countries with a common law tradition which lack a full-fledged Ministry of Justice. 14 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT MONGOLIA’S BUSINESS ENVIRONMENT REFORM PROCESS III b. Public-private consultation on draft legislation 24. Mongolia has a relatively sound regulatory 26. Government does not respond in detail to governance framework in place, but it remains comments submitted. Instead, it prepares a under-utilized due to a series of constraints. The unified and often scant response acknowledging public consultation process for laws to be approved the contribution provided and does not provide by the Parliament is regulated broadly by the Law feedback as to why certain comments and inputs on Legislation20 while the process for secondary are not accepted.26 As a result, entrepreneurs legislation is regulated by other laws.21 Mongolian and citizens often complain that they have little authorities generally publish the text of proposed opportunity to understand the government legislation before it is enacted, making it available positions on matters that they consider as having for comments.22 A Public-Private Consultative an important repercussion on their business Committee (PPCC) was established by order of activities and left feeling that there was not any the General Secretariat in December 2019. The meaningful engagement and consultation. In Committee is a permanent body established under addition, Mongolian authorities generally do not the auspices of the Investors’ Rights Protection disclose forward regulatory plans27 (that is, a public Council (hereafter referred to as “IPC”). It is chaired list of anticipated regulatory changes intended to by the GoM and the Chairman of the National be adopted within a specified time frame) so to Chamber of Commerce and Industry of Mongolia give time to the private sector prepare adequately on behalf of the private sector. Its main function to provide relevant input and comments when is to make comments and provide feedback on draft laws are rushed through. In this sense, the draft laws and administrative decisions which NRP is a welcome change with a list of high priority may affect the interests of domestic and foreign laws and planned legal reforms. investors, the private sector, and their business operations. While a government website is 27. While assessing the perceived lack of impact presenting draft laws, concepts and affording an of the structured consultation process on opportunity to comment on the draft, in practice it draft regulations would require an in-depth is seldom used by the public to provide comments review of the reform process, it seems overall and government answers are not made public. 23 that the relative weakness of private sector involvement in business policies making stems 25. In practice, business associations interviewed from a combination of factors: These include: (i) by the World Bank study team reported that they weak involvement in the initial phase of reform are often given little time to consult with their identification and prioritization, as the design associates and provide meaningful feedback.24 of the reform agenda remains managed by the This problem extends also to the prior phases, public sector and informal private sector inputs; when law drafts are prepared, since in most cases (ii) complicated access to technical capacity to the government working groups have little input contribute and provide meaningful suggestions from the private sector and NGOs. Generally, it is and comments on complex regulatory topics; and reported that the participation of private sector (iii) complex governance structure with several representative in the working groups tasked with technical working groups, which do not allow the drafting of the laws depends largely on the gathering comments in time to comply with the experience and attitude of the head of the working tight deadlines of the public reform calendar. group and the government entity in charge of the overall process.25 ²0 The law primarily deals with what technical requirements draft legislation which includes laws and decisions of the Parliament should satisfy in terms of content and format etc. and the process involved in ensuring that the draft legislation reflects the comments of state entities other than the law initiator itself. Public consultation is not required in respect to parts of a draft legislation such as dealing with the state budget, state investment program, development policies and those protected by law to be secret from the perspective of national se- curity. In addition, the law does not apply to decisions to be adopted by state authorities other than the Parliament. In other words, executive decisions of the Government and other government entities are regulated by separate legislation. ²¹ The General Administrative Law, enacted on 19 June 2015. Examples are (i) amendments to the Law on Corporate Income Tax where 30% tax was imposed for indirect transfer of land and mineral and radioactive licenses by means of transfer of shares in companies that hold land rights and licenses; (ii) amendments to the Law on Personal Income Tax where progressive income tax was introduced (now repealed); (iii) the Windfall Tax Law (now repealed). Another recent example (but not effecting the business communities) is the Law on Associations and the Law on Foundations. ²² The Legislation draft is published on the website with a clear timeframe for comments that is not inferior to 15 days, unless provided differently by law or international treaties. ²³ The website is accessible at: http://forum.parliament.mn/projects ²4 The legislation mandates to publish the draft legislation along with the relevant accompanying documents specifying a specific deadline to submit comments in writing and says that such deadline must be no less than 15 days from publication. However, such timelines are rarely respected in day-to-day practice. ²5 Interview conducted by the team with private sector representatives. ²6 According to the current legislation, the law initiator is to publish on its website a summary as to the comments accepted and rejected within 30 days of the public consultation. ²7 The Government should plan in advance the legislation to be initiated during its term of office and reflect it in the Guidelines for improving the Legislation. However, the Government can initiate a draft law and submit it to the Parliament, even it is not included in the Guidelines and at the request of the government, the parliament may consider draft laws that are not in the List or Guidelines. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 15 III MONGOLIA’S BUSINESS ENVIRONMENT REFORM PROCESS Box 1: International experiences in engaging with the private sector to identify potential policy improvements Singapore actively engages the private sector to identify regulatory shortcomings and potential policy improvements through its Pro Enterprise Panel (PEP). The public-private panel serves as feedback and troubleshooting platform when new policies and public initiatives are tested and rolled out. Businesses can also report to PEP regulatory problems as well as issues relating to red tape and public service performance. In Malaysia, the private sector is also actively engaged in policy problem solving. Feedback from firms on policy matters is encouraged through the online portal of PEMUDAH, a special task force to facilitate business. At the same time, the private sector is engaged in matters of policy design. For example, PEMANDU, a dedicated delivery unit, introduced “Labs” to determine strategic priorities and support reform implementation for the new government in 2009.The Labs bring together relevant public and private sector stakeholders from their field of competence to identify bottlenecks for firms along with potential solutions. Each lab had access to statistics and data analysis. The New Zealand Government is relatively small and there is strong culture of transparency where the policy design process is informed by business groups and private sector committees. Public servants are required to build a network of trusted advisors to gather feedback on policies so that proposals have a large consensus and answer the needs of the business community. At the same time, private sector councils and associations such as Business New Zealand – are asked to regularly weigh in on business regulation matters to the Ministry of Business, Innovation, and Employment (MBIE), which oversees policy, regulation, and services impacting local firms. Such consultations have guided policy design. For example, after businesses complained that government services were fragmented in 2012, the government set up an online portal to provide all the advice and support business’s needs. c. Strategic oversight of the business environment reform agenda 28. Reforming the business environment is a have been established by some emerging complex endeavor with intensive inter-agency countries to reconcile the different viewpoints coordination. Business legislation falls under of various ministries and agencies. These non- the purview of various State bodies, each permanent commissions—which are created by addressing its concerns: MOJHA, Ministry of decree and can meet two to three times a year to Economy and Development, Ministry of Finance, serve as a monitoring and incentive tool—rather Bank of Mongolia, and the ever-growing body than an implementing tool, have often proved more of autonomous authorities such as Financial successful. A condition to the success of such Regulatory Commission and the Authority for committees is the clarity of their mandate, the Fair Competition and Consumer Protection etc. direct support of a high-level champion, and their This inter-agency coordination challenge, coupled direct link with a permanent technical team and with elections and the ensuing political transition, ministerial department necessary to undertake may result in laws that remain in draft form the program management function, which can before being rushed to adoption without having be time-consuming. The permanent staff can be clarified key implementation issues linked to seconded from the Prime Minister office or from the local context. To address this challenge, the a Ministry with an inter-ministerial function such GoM is prone to establishing on a case-by-case as the Ministry of Economy. Involving respected basis some ad hoc task forces with concerned private sector representatives can also be critical ministries and agencies. While these task forces or their success. The case of Morocco’s National may be useful for technical-level coordination, Reform Committee for Business Environment the GoM may explore the need to establishing a (CNEA) is detailed below. higher level committee that would include high level public and private stakeholders. 29. Establishing an inter-ministerial business reform committee involving also high-level private sector representatives has often been essential to the success of reforms in times of political turbulence or in the face of strong resistance from interest groups. High level reform commissions 16 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT MONGOLIA’S BUSINESS ENVIRONMENT REFORM PROCESS III Box 2: Morocco’s National Reform Committee for Business Environment (CNEA) In February 2009 the government signed a “Public-Private Pact for Industrial Emergence” with the main business organizations of the country, which provided among others for the establishment of a high-level public-private Commission to coordinate cross-cutting reforms of the investment climate, notably business law reforms. The Deputy Prime Minister for Economic Affairs was identified as the champion for this action. He laid down a detailed institutional framework for the Committee, which was established by decree and included key ministers and representatives of business organizations and set up in his Ministry a central Reform Management Unit in charge of providing support to various public-private working groups and ministerial project units. The inaugural meeting of the “National Committee for Business Environment’’ was chaired by the Head of Government in December 2009. During this meeting, it approved its first annual reform program for 2010 with a narrow focus on 10 key reform projects. Thereupon, every three months the Deputy Prime Minister for Economic Affairs chaired technical meetings to monitor the reform progress. The following years, the Head of Government adopted each year an action plan that was progressively expanded to include around 40 reform actions by 2013. This institutional framework continued to operate successfully in spite of the political transition that happened following the adoption of the new constitution in 2011 and the ensuring elections. Source: Business Environment Reform in MENA: Setting Up the Right Implementation Framework, The World Bank, Philippe de Meneval, Youssef Saadani, December 2009 Membership of Morocco’s National Reform Committee for Business Environment (CNEA) The General Confederation of Morroccan The Ministerial Departments Enterprises (CGEM) OR PU The Professional Group of T BL The Moroccan Investment and Moroccan Banks (GPBM) C Development Agency (AMDI) SE IC SEC PRIVATE CNEA TOR Federation of Chambers of The National Agency for the Commerce, Industry and Promotion of SMEs Service (FCCIS) (ANPME) OT R S HE R PA RT N E The Competition Council The Central Authority for the Prevention of Corruption (ICPC) Bank AI-Maghrib 30. On the institutional side, the establishment of sector institutions. A study of five countries that the MED and the AU28 for strategic monitoring have achieved sustained economic progress of the reform process is aligned with best over the last 30 years also concluded that relying international practices but entails a careful on a small, dedicated team with direct access to analysis of the respective functions of key public the top government was a common feature of ²8 The Cabinet Secretariat includes a recently established Delivery Unit (DU) positioned as the “Reform Accelerator Unit (RAU)” for the imple- mentation of the NRP. The RAU is staffed with private sector experts as well as top talent from the public sector. Some of its staff has public sector exposure while having a high salary differential compared with civil servants. The AU will have three main functions: (a) coordination between stakeholders and counterparts, (b) focus on project financing issues, and (c) develop a monitoring and evaluation framework for the reforms of the NRP. The AU does not plan to accomplish itself the NRP goals alone but rather selectively assist the Ministries, Depart- ments and Agencies in charge of implementing the key strategic priorities of the government. Day to day reform tasks would remain under the responsibility of ministries and agencies. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 17 III MONGOLIA’S BUSINESS ENVIRONMENT REFORM PROCESS d. Management and monitoring of economic reforms the governments that succeeded in ambitious 32. The new Ministry of Digital Development reform programs.29 The advantage of these and Communications (MODC) established in structures is that they are embedded in the policy January 2022 should also be a key partner for process, yet at the same time are relieved of daily the simplification of the business environment. administrative matters. However, coordinating This Ministry has the mandate of facilitating and clarifying the respective functions of the the digital transition and will need to accelerate AU, the newly established MED,30 the MOJIA and the setting up of fully transactional portals for the new Ministry of Digital Development and procedures, in particular though the e-Mongolia Communications will be critical for the successful national portal.31 The MODC has recently drafted reforms as they all have an important role to play. a mid-term program called the “Digital Nation for 2022-2027”.32 The digitalization of the economy 31. The new Ministry of Economy and Development has been a priority of the Mongolian government (MED) will need to develop rapidly its in-house in recent years, as highlighted in the “Mongolia expertise, its capacity to oversee economic Vision 2050” of 2020 and in the NPR’s objectives.33 reforms and build alliances with public Pivotal steps have recently been taken thanks to counterparts and private sector stakeholders. The the adoption of five laws in December 2021, which MED is still new, it has been established following became effective in May 2022, including the Law the amendments to the Law on the Government on Electronic Signature;34 the Law on Protection of of Mongolia dated November 12, 2021. The MED Personal Data;35 the Law on Virtual Asset Service replaces the National Development Agency (NDA) Providers; 36 the Law on Cyber Security;37 and the with a wider scope of functions, which include Law on Transparency of Public Information.38 national development policy and planning, regional and local development policy and planning, investment policy, FDI, but also macroeconomic policy and the development of integrated policy in the areas of international cooperation, trade, industry, concessions and PPP, technology and innovation, free zones. The MED however does not yet have a specialized department in charge of the business environment. Considering the intensive coordination work needed on business environment reforms, and expectations on transparency on reform progress, the MED could also develop an online reform monitoring tool. ²9 Criscuolo, Alberto and Vincent Palmade. 2008. Reform Teams. Public Policy for the Private Sector. Note Number 318. World Bank Group. Financial and Private Sector Development Vice Presidency. The countries are Botswana, Cape Verde, Malaysia, Mauritius and Taiwan (China). 30 ³¹ In 2018, the Government adopted the resolution n. 259 to guarantee the digitalization of 486 services for governmental entities and organizations. ³² The draft has been posted on the Ministry of Digital Development and Communications website but it has not been submitted/approved to the Government yet. It is available at https://mddc.gov.mn/wp-content/uploads/2022/02/%D0%A6%D0%90%D0%A5%D0%98%D0%9C- %D2%AE%D0%9D%D0%94%D0%AD%D0%A1%D0%A2%D0%AD%D0%9D.pdf ³³ See objective 6.1 under the NPR, which aims to “intensify the efforts to become a Digital Nation; rationalize public information infrastruc- ture, reduce paper-based activities and transfer to digital or electronic communications; ensure that the information and data, which can be obtained, retrieved and exchanged from public information system or domain not to be required from the citizens and legal entities; increase an access and quantity of public services to be provided digitally; and gradually implement the provision of electronic signatures to the citizens”. ³4 The Law on Electronic Signature was adopted on 17 December 2022 and became effective on 1 May 2022. This law repealed the Law on Electronic Signature which was adopted in December 2011. The law is available at https://legalinfo.mn/mn/detail?lawId=16390355252531. ³5 The Law on the Protection of Personal Data was adopted on 17 December 2021 and became effective on 1 May 2022. This law repealed the Law on Personal Secrets which was adopted in April 1995. Given that the Law on Personal Secrets is a rather old and brief legislation, the new law is considered to be the first comprehensive legislation on the protection personal data. The law is available at https://legalinfo. mn/mn/detail?lawId=16390288615991. ³6 The Law on Virtual Asset Service Providers was adopted on 17 December 2021 and became effective on 24 February 2022. This law is adopted for the first time in Mongolia. the law is available at https://legalinfo.mn/mn/detail?lawId=16390242606091. ³7 The Law on Cyber Security was adopted on 17 December 2022 and became effective from 1 May 2022. This law is adopted for the first time in Mongolia. The law is available at https://legalinfo.mn/mn/detail?lawId=16390365491061 ³8 The Law on Transparency of Public Information was adopted on 17 December 20221 and became effective from 1 May 2022. This law repealed the Law on Information Transparency and Right to Information which was adopted in June 2011. The law is available at https:// legalinfo.mn/mn/detail?lawId=16390263044601 18 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT MONGOLIA’S BUSINESS ENVIRONMENT REFORM PROCESS III Box 3: International practices and functions of Delivery Units (DU) A DU is usually a discrete unit at the center of government with a mandate to use the authority of the chief executive to: (i) focus on improving citizen outcomes in a limited number of priority areas; (ii) unblock obstacles when monitoring shows that progress is off-track; and (iii) build understanding and capability for strengthening the underlying actors and systems/processes. The DU approach to public sector performance draws on two broad methodologies: (i) the leadership and management practices from both private and public sectors, and (ii) an understanding of the network of organizations and their relationships that must work together to deliver services to citizens, known as “delivery systems.” DUs are created at the center of government and are typically close to the chief executive (President or Prime Minister). This signals the leadership’s commitment to results and focuses on performance. International experience shows that DUs work best when they: (i) rely on the existing organizational performance framework; (ii) drive a limited number of high-profile goals; and (iii) receive high-frequency data to monitor progress. Different countries adopted different forms of DUs depending on their existing government structures. Although their size varies, DUs usually rely on a relatively small and nimble team of highly skilled experts. Their focus is to change the culture in the public sector with the end goal of delivering quality services faster. Given that they are closely tied to a Chief Executive who drives their establishment and provides the authorizing environment, DUs may not last beyond a specific administration or term in office – they are often semi-permanent structures. DUs must rely heavily on the functioning of existing public management systems within MDAs. After all, it is the MDAs who deliver, while the DUs enable the center of government to manage the process. Source: Driving Performance from the Center: Malaysia’s Experience, The World Bank 2017. Summary of recommendations: 33. Short term: Medium/long term: • Prepare NRP’s business environment reform • E xplore the value of establishing a high-level action plan, with activities, milestones, Public-Private Committee for the Business responsibilities, and periodic reporting Environment (Investment Climate) overseeing mechanism and develop online reform strategic priorities and monitoring the monitoring tools for improved transparency implementation of the reform agenda. and communication on reform implementation. • evise the Law on Legislation, which is included R • Strengthen the MOJHA’s capacity to conduct among the list of laws to be revised by 2024 systematic Business Law review, in particular (Parliament Resolution No.12 of 21 January review the budget and staffing needs of the 2021) Department of Legislation. • Strengthen the consultation process of the draft laws through effective participation and contribution of the private sector, NGOs, and the citizens & ensure that comments on the proposed legislation obtained in the consultation process are all made publicly available and responded to. • Clarify the institutional relationship and respective functions of the AU, the MED, MoJHA, Cabinet Secretariat in coordinating the business environment reform process MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 19 IV BUSINESS LAW: ENSURING FAIR RELATIONS BETWEEN BUSINESSES AND THEIR STAKEHOLDERS a. Competition law b. Insolvency and bankruptcy c. Enforcing contracts BUSINESS LAW: ENSURING FAIR RELATIONS BETWEEN BUSINESSES AND THEIR STAKEHOLDERS IV a. Competition law 34. Competition in Mongolian markets is perceived to creating incentives for entrepreneurship and to be weak. Following the Global Competitiveness increasing pressures to innovate. Report (GCR), Mongolia is among the countries with the lowest perceptions of domestic 36. An effective competition policy framework competition (133 out of 141 countries in 2019 encourages competition by ensuring that all GCR). This result is based on significant market businesses can interact on a level playing dominance (137 out of 141 countries) and limited field and by facilitating entry to markets while competition in services (104 out of 141 countries). penalizing and preventing anticompetitive In addition, the perception of the effectiveness of behavior. The competition policy framework its anti-monopoly policy is significantly low (130 is defined as “the set of policies and laws that out of 137 countries in 2017-2017 GCR) and ensure that competition in the marketplace is not considerably weaker than other countries in the restricted in such a way as to reduce economic region, including China and Cambodia. Moreover, welfare.”39 In practical terms, competition policy manufacturing firms face fewer competitors usually involves the enforcement of antitrust in Mongolia than similar firms do in other East laws (typically rules against abuse of dominance Asia and Pacific region countries and Russia. and anticompetitive agreements, and mergers World Bank Enterprise Survey (ES) data illustrate regulation) and the promotion of measures to how firms in markets of manufacturing goods in enable firm entry and rivalry, typically called Mongolia perceive higher levels of concentration competition advocacy. The former is targeted at relative to other economies in the region: firms, while the latter involves government bodies. 11% of manufacturing firms considered to be 37. Mongolia lacks a comprehensive and effective participating either in monopolistic or duopolistic Competition Policy framework. While the market structures, which is a higher rate than other Competition Law of Mongolia approved in 2010 regional peers such as Cambodia, Philippines, and (the “Competition Law”) addresses most economy- Vietnam. wide issues that may prevent competition in 35. Limited market competition can stem from the marketplace,40 its implementation and restrictive regulations or discretionary enforcement requires adjustments to be in application of the regulatory framework that line with regional and international examples. render entry and operation of new firms difficult, There is scope for improvement concerning as well as from ineffective competition policy the implementation of the Competition Law, enforcement. While concentrated market in particular, regarding merger control, cartel structures may naturally emerge from market enforcement and the treatment of dominant characteristics; (e.g., high economies of scale entities. Although a draft revised Competition and small market size, they can also be related to Law and implementing secondary legislation is competition restrictions enacted by governments being drafted, they have not been approved yet.41 or market players. Addressing government Restrictions imposed on participation of foreign regulations and practices that restrict market investors in certain sectors and a growing role of competition or weaken the enforcement of government as market player should be monitored competition policies is necessary to generate an in order to minimize market distortions. Finally, enabling investment climate, but the effective market conditions and restrictive regulation in implementation of competition rules is equally selected markets such as telecommunications, important. Coordinating policy efforts to air transport and fuel supply should be assessed improve the business environment and promote to identify specific areas for further policy action. contestable and open markets, would be key ³9 Massimo Motta. 2004. Competition Policy. Cambridge Books, Cambridge University Press, p.30. 40 The Competition Law approved in 2010 regulates cartels, monopolies (including natural monopolies), mergers, state aid and public pro- curement (also regulated in the Law on the Procurement of Goods, Work and Service with State and Local Budget). Additionally, it grants an independent status to the Authority for Fair Competition and Consumer Protection (AFCCP) together with ample powers to ensure compe- tition enforcement and competition advocacy. The Agency is also entitled to act against unfair commercial practices - which are different from anticompetitive practices typically covered under an antitrust framework - and assure consumer protection (not only related to unfair commercial practices such as false advertisement or false information about the product features but also product safety). The AFCCP oversees the implementation of the Competition Law, Law on Consumer Protection, Law on Advertisement and parts of the Law on the Procurement of Goods, Work and Services with State and Local Budgets. 4¹ The AFCCP has been working with the Japanese Federal Trade Commission to revise the Competition Law and draft relevant guide- lines. See, for example, the Project Completion Report for the Enhancement of the Fair Competition Environment in Mongolia, 2019 (<283229838283938353838B8BA39188964095F18D908F912E706466> (jica.go.jp) MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 21 IV BUSINESS LAW: ENSURING FAIR RELATIONS BETWEEN BUSINESSES AND THEIR STAKEHOLDERS 38. Key challenges to build an effective Competition a merger transaction and facilitate efficient Policy Framework in Mongolia investments. Key concepts for competition policy enforcement could be clarified through • Merger control policy unduly increases the the guidelines, for example, market definition cost of doing business. The Authority for Fair and what amounts to a concentration. Competition and Consumer Protection (AFCCP) has power to review economic concentrations, • W eak legal framework to attack anticompetitive but the current merger control framework agreements among competitors. Cartels and uses dominance as criterion for notification. other horizontal agreements42 that reduce Moreover, the standard of proof is not clear and competition result in a considerable welfare procedural rules have not been established. loss for the economy as a whole. The current Merger control policy should be designed and Competition Law prohibits anticompetitive implemented to ensure that merger review agreements but falls short of international is effective, efficient, and timely. This means best practice due to lack of clarity, for example, that this policy should prevent operations that the application of an effects-based approach significantly lessen competition and minimize instead of a per-se prohibition to cartels, and the burden of administrative procedures on lack of differentiation between horizontal business to avoid disrupting the development and vertical agreements when assessing of markets. Entry, growth and exit of business anticompetitive agreements. As such, it would are natural in a competitive business be advisable to introduce a definition for the environment; therefore, merger regulations terms “cartel” and “anticompetitive agreement” should not obstruct these efficient processes. as well as a clear separate treatment of 43 as per In line with best international practice, the se violations44 as opposed to other agreements Competition Law should be amended in order to be analyzed on the basis of their effects. to dissociate merger review from dominance. Secondary legislation in line with international Additionally, objective thresholds –based experience is needed to clarify how to apply upon turnover and/or assets rather than Art. 11 of the current Competition Law to deal market shares or possession of dominant with anticompetitive agreements. position – could be introduced as a trigger for merger review. The Competition Law could • Limited mechanisms to detect cartel behavior. An also benefit from establishing a more detailed effective leniency policy is key to detecting and framework on the substantive assessment of sanctioning cartels based on the information mergers, including unilateral and coordinated provided by one of the cartel members in effects, as well as setting out the process to exchange of immunity from the sanctions submit, review and agree structural and/or imposed on the other members of the cartel.45 behavioral merger remedies. In this regard, While this provision existed in the Competition detailed guidelines on the application of the Law (Art. 28), it was later repealed in 2015. law could be a useful mechanism to reduce Reinstating the leniency policy and developing uncertainty regarding the standard of proof, it through guidelines describing the procedure, the required information to assess a merger, circumstances and requirements to apply fine and the applicable substantive and procedural exemptions would be key to strengthening the aspects. A transparent and predictable regime Mongolian anticartel policy. would reduce business risk when engaging in 4² Horizontal agreements refer to agreements among actual or potential competitors present at the same level of the supply chain while vertical agreements refers to those among firms present at different levels of the supply chain, for instance, an agreement between a manu- facturer and a distributor or between a distributor and a retailer. Absent market power of any of the parties, vertical agreements are normally considered procompetitive. 4³ The Term Hard-core cartel refers to “anticompetitive agreements by competitors to fix prices, restrict output, submit collusive tenders, or divide or share markets” as defined by the OECD, 1998, “Recommendation of the Council concerning Effective Action against Hard Core Cartels.” Available at http://www.oecd.org/competition/cartels/2350130.pdf 44 Per se violations imply that no market effect needs to be proved in order to condemn a practice as the object of the practice itself is the restriction of competition. As stated by the OECD 1998 Recommendations at p. 2, “hard-core cartels are the most egregious violations of competition law as they injure consumers in many countries by raising prices and restricting supply, thus making goods and services com- pletely unavailable to some purchasers and unnecessarily expensive for others.” 45 A well-functioning leniency program can destabilize and deter cartels by creating a permanent threat that any of its members may come forward to the authority in order to avoid the fine. The difficulty in stopping cartels is secrecy. Leniency programs can break the code of silence among cartel members and uncover conspiracies that might otherwise go undetected. Additionally, they make investigations more efficient and effective. The programs that have proven to be the most successful give complete amnesty to the first cartel member to come forward and reveal the inner workings of the cartel to competition law enforcers. Thus, most competition agencies around the world, includ- ing the EU and the US, Colombia, Turkey, Canada, Brazil, Mexico, Chile, China, Korea and India, have the ability to offer either total immunity or significant fine reductions to violators that cooperate in their investigations. Miller (2009) found that the leniency program in the US reduced the rate of cartel formation by 59% and increased the rate of cartel detection by 62%. 22 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT BUSINESS LAW: ENSURING FAIR RELATIONS BETWEEN BUSINESSES AND THEIR STAKEHOLDERS IV • Incomplete/Unclear rules to prevent granting procedures for the AFCCP to act has allowed state support that distorts competition. Rules fined companies to challenge the AFCCP guaranteeing that all businesses compete decisions in judicial review on a procedural on a level playing field and enjoy access to basis. Establishing clear and efficient markets are crucial to ensuring efficient and procedural rules, including those for the open markets. Additionally, the state should treatment of confidential information, access minimize interference in the competitive to file and key stages in the investigation process or restrictions on competition by where parties may exercise rights of defense, granting subsidies or any other direct or indirect would increase the transparency and quality advantage to specific firms. While the current of decisions, and ensure robustness vis-à- Competition Law provides the basic elements vis potential judicial review. This would be to develop a state aid control system46, complemented by guidelines on the application further clarification and development of the of the Competition Law to encourage consistent legal framework is needed. This is relevant, practice in order to maintain accountability, for example, for granting tax exemptions or increase transparency, and thereby create a providing soft loans to support investments stable investment climate. in priority sectors. A comprehensive package of measures further defining the scope and • Under-exploited powers limit the role of application of State Aid rules will ensure the AFCCP in key sectors of the economy. that distortions in Mongolian markets are While the Competition Law grants AFCCP minimized and proportional to the expected powers to prohibit state and local institutions benefits of government aid. from restricting competition, promoting a competition culture, and providing opinions on • Reform of the regulatory framework on natural regulations that harm competition, the agency monopolies and dominant firms. The current has not fully embraced the use of these powers. Competition Law allows the AFCCP to identify Appropriate competition policy should focus and monitor natural monopolies as well as on factors that thwart entry or competition in to regulate their output and prices. Given the specific sectors. Advocating for the elimination extended powers of the AFCCP over natural of regulations that prevent competition monopolies, the methodology applied to constitutes a necessary complement to the identify them becomes ever more relevant. agency’s enforcement capacity as it allows Moreover, given that natural monopolies are infusing competition principles in key sectors typically present in network industries – such of the economy. Drawing on the advocacy as electricity, gas or water distribution – closer capabilities of the AFCCP and enhancing cooperation with sector regulators is necessary its role in the economy is crucial to embed to ensure the quality and opportunity of AFCCP procompetitive principles across sectors decisions. Regarding dominant firms, the and markets, e.g., public procurement, and definition of dominance needs to be adjusted remove barriers to competition in sectors under the Competition Law to avoid generating that have a crosscutting effect such as an undue burden on business by including telecommunications, air transport and fuel firms that would not qualify as dominant under supply.47 international standards (referenced under the Competition Law to market shares, which are • The fuel supply market offers a good example set a level that is too low). Per se prohibitions on of how the AFCCP could implement its extensive practices by dominant firms should be carefully powers in terms of antitrust enforcement, fight interpreted to avoid restricting efficient pricing against unfair business practices, prevention of and vertical relationships that would benefit market distortions, and advocacy through the consumers. A revision of the regulatory combined use of different tools. The Mongolian framework applicable to natural monopolies market of fuel supply appears to be highly and dominant firms would be advisable in concentrated at the wholesale level as well as order to align it to international best practices. vertically integrated with the retail level. The AFCCP adopted a series of measures trying • Lack of transparency reduces policy to fight competition infringements (e.g., price- effectiveness. The lack of clear written fixing) and unfair practices but results remain 46 Following the definition included in Article 107 of the Treaty of the Functioning of the European Union, we use the term State Aid to refer to any aid granted either by the State, including any central, regional or local public body, or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods. 47 While these sectors have been pre-identified by the 2012 “UNCTAD Voluntary Peer Review of Competition Law and Policy in Mongolia” as somehow problematic, further scoping will be necessary in order to identify issues in additional sectors and determine their relevance for investment and economic growth. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 23 IV BUSINESS LAW: ENSURING FAIR RELATIONS BETWEEN BUSINESSES AND THEIR STAKEHOLDERS uncertain. Moreover, heavy subsidies to fuel assessment of dominance as well as detailed importers appear to distort competition in the procedural rules to foster due process. sector. Thus, the effective implementation of the AFCCP powers regarding anticompetitive • Adopt Guidelines, after seeking inputs and practices as well as distortive state aid feedback from the public, to help businesses could be used as a tool to encourage well- understand how the AFCCP will conduct functioning markets in a key sector of the investigations and control anticompetitive Mongolian economy. effects of mergers and increase transparency in decision-making of the AFCCP. 39. Key recommendations: • Strengthen the advocacy role of the AFCCP • Amend the Competition Law and secondary for the elimination of regulations that prevent legislation in line with regional and international competition in certain strategic sectors such experience -- among others regarding the as telecommunications, air transport and fuel definition of cartels, anticompetitive agreements, supply. leniency policy, natural monopolies, and b. Insolvency and bankruptcy Insolvency is a problematic area for Mongolia’s 40. Figure 5: Recovering rates from insolvency businesses. According to the latest World Bank procedures data, it can take up to four years to go through the necessary insolvency proceedings. This is Cambodia 14.6 almost one year and a half longer than the regional average for the East Asia and Pacific region (2.6 Myanmar 14.7 years). In East Asia, the only economies that 17.1 Marshall Islands perform worse are Vietnam (five years), Myanmar (five years), and Cambodia (five years) (Figure 4). Mongolia 18.2 Not surprisingly, Mongolia has one of the region's lowest recovery rates: 18.2 cents on the dollar. In Philippines 21.1 the region, only Cambodia (14.6 cents), Myanmar Vietnam 21.3 (14.7 cents) and the Marshall Islands (17.1 cents) perform worse (Figure 5).48 China 36.7 Figure 4: Time to go through insolvency proceedings: Average EAP 37.71 Indonesia 65.1 Singapore 0.8 Thailand 70 Malaysia 1 Malaysia 81 Indonesia 1.1 0 20 40 60 80 100 China 1.7 Cents on the Dollar Average EAP 2.38 Source: Doing Business database. Philippines 2.7 A well-functioning insolvency framework is 41. Tonga 2.7 essential for the healthy circulation of credit— where insolvency regimes are effective, creditors Mongolia 4 are more likely to lend, both in higher volumes Vietnam 5 and at lower interest rates. A balanced insolvency system also operates as a filter that promotes Myanmar 5 economic efficiency by providing a framework Cambodia 6 for the rehabilitation of viable companies and the swift liquidation of unviable ones, thereby 0 1 2 3 4 5 6 preserving jobs and enterprise value in the former Years situations, and freeing up capital and assets in 48 Source: Doing Business 2020. 24 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT BUSINESS LAW: ENSURING FAIR RELATIONS BETWEEN BUSINESSES AND THEIR STAKEHOLDERS IV the latter cases to be put to better use elsewhere. of the insolvency practitioner or for the sale of An effective insolvency framework supports the substantial assets of the debtor. Finally, the efficient reallocation of resources across the individual creditor has no right to request financial economy by facilitating the efficient business information about the debtor from the insolvency exit and liquidation of nonviable companies.49 practitioner or to object to the court's decision (or Improvements to insolvency systems require of the insolvency practitioner) to approve or reject sustained and continuous efforts given that the claims against the debtor brought by the creditor effects of reforms are not immediately evident and itself and by other creditors. only become clear and measurable several years after their enactment when insolvency cases under 43. Mongolia’s insolvency framework does not the new regimes were filed, litigated, or otherwise offer incentives or guidelines for extrajudicial brought to a close. Insolvency proceedings voluntary agreements (out-of-court workouts). for legal entities are regulated by the Law on Many countries have already adopted non-binding Bankruptcy (also known as the Insolvency Law) guidelines or principles to provide a framework for of 20 November 1997. General rules and relevant multiple institutional creditors (banks or other large provisions for court proceedings and liquidations lenders) to cooperate when they have a common can also be found in the Civil Procedure Code, debtor in financial distress. The guidelines often the Civil Code, and the Company Law. Insolvency set time limits for the out-of-court process, and cases are handled by courts of general civil the banks will often agree—under the guidelines— jurisdiction. There is no specialized court or judges to a moratorium on collection or recovery actions trained to deal with insolvency-related matters. among themselves. The objective of the out-of- Further, bankruptcy proceedings are relatively court workout process is to provide a flexible and rare and uncommon. For example, from 2004 informal mechanism for banks to negotiate a to the first half of 2016, only 174 court cases business rescue plan with the debtor, where the were brought before the courts.50 Further, the core of business operations remains valid, and the court's jurisdiction is based on the location of the business is still viable. Out-of-court instruments debtor and insolvency practitioners (also known have many advantages: they provide flexibility as trustees) are not required to have any special and ease of adaptation to the specific needs of accreditation, registration, or license authority to the debtor’s business; they are less formalistic act in insolvency matters.51 and confrontational than formal insolvency proceedings; they involve a confidential process 42. The current legislation presents several thereby mitigating the reputational damage of weaknesses that the planned legislative reform the debtor and make it easier for the debtor to should address. These include improving the continue to maintain control of the business. Box 4 provisions regulating the treatment of the debtors’ below presents the example of Latvia’s adoption of assets, those relating to reorganizations and voluntary out of court workouts (OCW) guidelines. those connected to the creditors’ participation in the insolvency proceedings. For instance, the law does not provide for the possibility of the debtor obtaining credit after the commencement of the insolvency proceedings. All creditors vote on the reorganization plan, and not only those creditors whose rights are modified or affected by the plan - as it would be mandated by good international practice. Furthermore, there is no provision mandating dissenting creditors to receive at least as much as what they would obtain in a liquidation. The law does not require approval by the creditors when it comes to the appointment 49 See Djankov, Simeon. 2009. “Bankruptcy Regimes during Financial Distress.” Mimeo, World Bank Group; Funchal, Bruno. 2008. “The Effects of the 2005 Bankruptcy Reform in Brazil.” Economics Letters, 101: 84–86; Klapper, Leora 2011. “Saving Viable Businesses.” Viewpoint 328, September 2011, World Bank Group; Visaria, Sujata. 2009. “Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recov- ery Tribunals in India.” American Economic Journal: Applied Economics, 1(3): 59-81. 50 Concept Paper for the revised Insolvency Law, prepared by the Ministry of Justice and Home of Affairs available at https://mojha.gov.mn/ wp-content/uploads/2020/09/Tulburiin-chadvarguidel-Uzel-barimtlal.pdf (in Mongolian). 5¹ Insolvency practitioners must be either individuals with a degree in law, finance or economics, who do not have financial and econom- ic personal interests in the debtor’s activities, or legal entities with the rights and responsibilities to provide professional consulting ser- vices in the field of law, finance or economics. For more information, please visit: https://ebrd-restructuring.com/storage/uploads/docu- ments/13472%20EBRD%20(Mongolia%20Country%20Profile%20ARTWORK).pdf MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 25 IV BUSINESS LAW: ENSURING FAIR RELATIONS BETWEEN BUSINESSES AND THEIR STAKEHOLDERS Box 4: The Latvia example of voluntary out of court The Mongolian authorities are adopting a new 44. workouts (OCW) guidelines draft legislative framework that is expected to replace the existing Insolvency Law. The Latvia adopted non-binding out of court debt Government has submitted the draft revised restructuring guidelines in 2009, which were Insolvency Law to the Parliament for approval in developed by a working group consisting of the state March 2022. The draft law was included in the agency “Insolvency Administration,” the Latvian list of laws to be adopted during the 2022 Spring Commercial Bank Association, Latvian Certified Session of the Parliament. The draft revised Insolvency Process Administrator Association, the Insolvency Law aims to address the issues Latvian Labor Confederation, the Foreign Investor’s mentioned above in line with international practice, Council in Latvia, the Latvian Chamber of Commerce providing detailed regulations concerning court and Industry, and the Latvian Borrower's Association. proceedings and re-financing of the debtor. The guidelines are based on the INSOL Principles for a global approach to multi-creditor workouts. 45. Key recommendations: According to a 2010 survey conducted by the Latvian • dopt the revised Insolvency Law submitted to A Ministry of Justice, the guidelines were successfully the Parliament for approval to fully align the legal used in 90 percent of out-of-court restructurings. framework with international standards, notably Indonesia, Malaysia, and other countries in the EAP regarding the treatment of the debtors’ assets, region have also adopted out-of-court guidelines reorganizations, and creditors’ participation in that are successfully used to restructure financially the insolvency proceedings. distressed debtors. However, for OCW guidelines to be effective, there needs to be a facilitating legal • esign and implement non-binding principles D framework in place and a local champion to promote for out-of-court workouts (OCW) to be used by them (usually the Central Bank). debtors with multiple creditors (suppliers, banks, or other large lenders). c. Enforcing contracts 46. Research in various countries suggests that also link contract enforcement, including through firms make fewer investments in the absence efficient domestic alternative dispute resolution of efficient courts while everyday transactions (ADR), with higher FDI flows.55 become more attractive. A study of 27 economies found that the informal sector’s share in overall 47. As in many developing countries, commercial economic activity decreased with better contract contract enforcement in Mongolia can be enforcement quality, evaluated by a country- problematic, particularly about the enforcement wide measure of the rule of law and by the of court decisions. According to the latest WBG firm’s perception of the fairness of courts.52 data presented in Figure 6 below, resolving a simple Improvements in court efficiency are associated commercial dispute through a first instance court with a lower share of the informal sector in the takes more than a year and costs roughly one-fifth of overall economic activity, increased investor the claim value. However, in this respect Mongolia confidence and with increased bank financing of performs better than economies in the East Asia firms for new investment.53 For example, reforms and Pacific (EAP) region, except for Singapore and in other areas, such as creditors’ rights, can Tonga.56 The costs associated with commercial increase bank lending only if contracts can be court are also relatively low and amount to less enforced through the courts.54 Several studies than half of the average costs registered in the 5² Dabla-Norris, Era, and Maria Gabriela Inchauste Comboni. 2008. “Informality and Regulations: What Drives the Growth of Firms?” IMF Staff Papers 55 (1): 50–82. http://www.palgrave-journals.com/imfsp/journal/v55/n1/full/9450030a.html 5³ Among other papers, see G.B. Ramello and S. Voigt, 2012. “The economics of efficiency and the judicial system,” International Review of Law and Economics; Mehnaz Safavian and Siddharth Sharma, 2007. “When Do Creditor Rights Work?” World Bank Policy Research Working Paper No. 4296; John Ahlquist and Aseem Prakash, 2010. “FDI and the costs of contract enforcement in developing countries,” Policy Sciences, Springer, vol. 43(2), pages 181-200, June; Inessa Love, 2011. “Settling Out of Court: How Effective is Alternative Dispute Resolution,” Viewpoint Note No. 329, The World Bank Group, October. 54 MehnazSafavian and Siddharth Sharma, 2007. “When Do Creditor Rights Work?” World Bank Policy Research Working Paper No. 4296. 55 John Ahlquist and Aseem Prakash, 2010. Policy Sciences, 2010, vol. 43, issue 2, 181-200. 56 Enforcing a commercial contract through the Ulaanbaatar District Court takes an average of 374 days, in Singapore it takes 164 days, while in Tonga 350 days. The regional average for the EAP region amounts to 581 days. Source: Doing Business 2020. 26 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT BUSINESS LAW: ENSURING FAIR RELATIONS BETWEEN BUSINESSES AND THEIR STAKEHOLDERS IV EAP region.57 Yet, the enforcement of court being at risk of penalty, leading to enforceability judgments can be a lengthy process that takes issues.61 as much time as the trial itself.58 Reportedly, the length of the enforcement process is connected 49. The quality of the judicial processes could be to the Law on the Enforcement of Court Decisions sensibly improved. Mongolia is still missing many adopted in June 2017 (Enforcement Law),59 which international good practices that are known to intended to slow down the seizure of collateral by sensibly improve the experience with the courts creditors—in particular banks—when the economy when it comes to commercial matters. While was in a period of financial distress.60 specialized administrative courts and procedures are considered relatively effective at resolving Figure 6: Seeking redress through courts for claims brought against government agencies, commercial matters is not particularly problematic Mongolia does not have a specialized commercial while the enforcement of a judgment can be drawn chamber, commercial court, or a small-claims out. court to deal with minor claims expeditiously. In addition, while the law limits the adjournments to unforeseen and exceptional circumstances, practically, such rules are not always respected, resulting in delays when respondents or defendants are prone to dilatory tactics. Furthermore, whilst there is a consolidated law governing conciliation, there are no financial incentives for parties to attempt it. Finally, pre-trial conferences are not provided in civil procedural legislation and there are no electronic case management tools available for judges or lawyers. While judgments rendered in commercial cases at all court levels—including at the appellate and supreme court levels—are required to be made available online, the levels of court automation are low. The e-filing of cases, the Source: Doing Business database. e-service of process, and e-payments of court fees 48. Several smaller foreign investors have suffered are not yet available. due to their Mongolian business partners' 50. The Enforcement Law is outdated and not adapted unreasonable or unethical activities, including to best international practices. The current breaching agreements and not consulting on enforcement law was introduced in June 2017 key decisions. These small investors have found when the Mongolian economy underwent financial it difficult to seek redress or find reasonable distress. In a new economic context after the solutions before Mongolian courts, in part due to pandemic, the law should be reviewed and revised the perception that it is those foreign companies so that court decisions are enforced efficiently that are more likely to abuse the court system without causing difficulties on the parties involved. for their own advantage at a relatively small The lack of specific and accelerated processes for cost. A very common practice is to drag out small claims and commercial matters ends up in court cases through all levels of court and the long delays and complicated processes that are General Executive Agency of Court Decisions often not aligned with the interest of the parties, in (the “Enforcement Agency”) to avoid and delay particular traders and investors, which value more the administration of justice. Unlike some other an accelerated process. jurisdictions, undischarged judgments are free from interest accruals, hence respondents are incentivized to delay payment or satisfaction of any judgment debt for as long as possible without 57 Contract enforcement in Mongolia has a cost equal to 18.3% of claim value. While the regional average for EAP region amounts to 47.2% of claim value, the only economies with lower costs are China (17,5% in Beijing; 15.1% in Shanghai), Hong Kong SAR, China (18.3%), Thailand (16.9%) and Timor Leste (16.5%). Source: Doing Business 2020. 58 Doing Business 2020. 59 Enacted on June 9, 2017, the law entered into force on July 1, 2017. The law is available at: http://legalinfo.mn/law/details/12701?lawid=. The primary change introduced by the law is abolishing the incentive payment that used to be advanced to the court enforcement official based on an ‘incentive payment agreement.’ As a result, the only fees that must now be advanced by the winning party to enforce a judgment are a newspaper announcement fee in relation to the conduct of the auction and an enforcement fee. The latter is established by Regulation on Determining the Costs of Court Decision Enforcement, as approved by the Order No. A/181 of the Minister of Justice, dated August 23, 2013. 60 In its position paper of 2021, the Euro Chamber of Mongolia recommends a revision of such law as to make it more functional and tailored to the post-pandemic context. For more information, please visit: https://resource4.sodonsolution.org/eurochamber/File/2021/11/08/ lsjftfg56pnmm6sb/FOREIGN%20INVESTMENT%20CLIMATE%20IN%20MONGOLIA-final%20printing.pdf 6¹ In many jurisdictions, interest rates are usually set at fixed levels and often several percentage points above the central bank policy rate. See for instance examples from Australia and Hong Kong: https://www.fedcourt.gov.au/forms-and-fees/interest-rates and https://www. judiciary.hk/en/court_services_facilities/interest_rate.html MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 27 IV BUSINESS LAW: ENSURING FAIR RELATIONS BETWEEN BUSINESSES AND THEIR STAKEHOLDERS 51. Like most emerging economies, Mongolia 54. Key recommendations: should continue striving to develop a reliable and efficient judiciary system for the long-term • Revise Civil Procedure Code to support court development of industry and commerce. Such automation, improve the flow of cases through awareness should translate into an increased stricter rules on time standards and introduce budget for the judiciary, but also in a change more stringent rules on adjournments and of approach by the courts about the specific continuances that can be granted. needs of commercial disputes. Judges should • Revise the Law on the Enforcement of Court be encouraged to recognize the objective of Decisions to apply stricter standards on the private sector efficiency as well as that of notification and enforcement. fairness in the enforcement of commercial contracts, debts, and collaterals. Better contract • Consider creating a specialized commercial enforcement and improved access to dispute court (or Chamber) for handling commercial resolution for businesses are crucial elements disputes and providing adequate training to for establishing trust in business relationships judges hearing commercial cases. and enhancing commercial practices in the long term. Claimants of good faith should be • Consider creating a small claims court (or enabled to enforce their rights fairly and cost- Chamber) to resolve minor disputes quickly and effectively. Otherwise, as a direct consequence efficiently. of the inefficiency of the judicial system, private • Improve court automation by introducing parties tend to develop their businesses based on e-filing, e-service of process, and e-payments family and personal relationships rather than on of court fees and promote the development of contractual commitments. a solid e-court system with case management 52. To attain this objective, Mongolia should review tools for lawyers and judges. the functioning of its court system, in particular • Further facilitate Alternative Dispute Resolution the training of judges and court personnel in (ADR) by providing incentives to those who commercial law. According to observers, many attempt conciliation in commercial cases. judges are not aware of the complexities of modern business practices. For some emerging regions of law, such as banking law, secured transactions, or intellectual property rights, few judges have sufficient knowledge of business practices and the complexities of the legal issues. Improving the training of judges could be made by (a) increasing the interaction between the private sector, legal universities, and the legal profession; (b) improving the continuing education of judges; (c) specializing courts and judges in commercial disputes. 53. In addition, the functioning of the court system will highly depend on the reform of the codes of procedures. These rules must provide clear guidance to judges, prevent misuse of the judicial procedures by bad faith claimants, and determine a reasonable cost for access to justice. Enforcement personnel must also be held accountable. If an order or judgment cannot effectively be enforced, then all trial proceedings are for naught. Anecdotal evidence points out that this is often the case in Mongolia for repossessing or seizing collateral. 28 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT V SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS a. Business registration b. Procedures relating to construction, electricity and property registration c. Business permits and licenses d. Business inspections e. Customs procedures V SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS a. Business registration 55. Mongolia has taken necessary steps to simplify Department of Taxation, Department of Foreign the business entry process in the early 2010s. Citizens and Nationality, and General Department In October 2011, the Government revised the of Social Insurance. In addition to assistance in Company Law. The revised law, which came into the registration of foreign legal entities, the OSSC effect in the same year, eliminated the minimum provides investment legal advice and information; starting capital required to establish companies. investment tax and nontax support, guarantee Two years later, in 2013, the General Authority advice and information. Investor residence permit for State Registration (GASR) of Mongolia applications are now being received electronically. abolished the requirement to notarize company However, in practice, entrepreneurs still need to incorporation documents.62 In addition, it signed interact with several agencies to start and operate an agreement with the General Department of their business, such as the General Authority State Taxation (GDT) to exchange periodic data for State Registration, the local tax office, and updates on new registrations between the two the local social insurance department. Also, agencies. Subsequently in January 2015, the companies are still required to obtain a company Parliament adopted the revised Law on the State seal with a specific seal number provided by the Registration of Legal Entities. As a result, the MOJHA.65 Important progress has been made Legal Entities Registration Office of the GASR over the past months, especially in regard to the (LERO) must process company registration services provided by the LERO66. Looking forward, within ten business days for business entities all official services of the OSSC should be provided with foreign investment and within two business through an effective online single window interface days for domestic entities. On June 21, 2018, system in order to reduce bureaucracy, eliminating the Parliament adopted the revised Law on State the need to submit required documents in paper Registration of Legal Entities which entered into format or visit any agency in order to complete the force on November 1, 2018, with time limits and business start-up process67 introduced online registration that is yet to be put fully into practice63. 57. Digitalizing the whole registration process would improve the coordination and the level 56. Business entry still requires several physical of interoperability between agencies. While interactions between different agencies. Since the business registry maintained by the General 2018, the GASR has embarked on an overhaul of Authority for State Registration covers the services related to the registration of businesses whole country and companies are identified and the issuance of different types of documents through a unique business identification (UBI) through the digitalization of the government number across government agencies. Currently, services and enhanced integration with other Mongolia has no electronic system that covers agencies including social security, tax, and the whole company registration process. As a customs. In principle, it should take only two result, applicants need to deal separately with days to undertake LERO’s processes related to the different agencies involved, often submitting registering a domestic legal entity. Representative the same documents over and over.68 Even if units of LERO have started working under the One- company records are stored in digital form, there Stop Service Center (OSSC) for the registration is hardly any electronic exchange of information of Foreign Direct Investment (FDI) companies between the registrar and other agencies. Finally, established in February 2019 by then NDA.64 company records are not searchable, there is no Other participants to the OSSC include the General electronic filing of changes in ownership, and 6² GASR Procedure 227 of February 26, 2013. 6³ For instance, private sector representatives interviewed in June 2022 reported that, as of April 2022, online registration for incorporation of a foreign invested company was not possible in practice. 64 See website : www.invest-assist.gov.mn 65 See Order A/216 of the Minister of Justice, dated 19 November 2018. 66 LERO officers interviewed in June 2022 reported that is now possible to reserve a unique legal entity name, submit relevant documentation and incorporate a company online through e-Mongolia. They also reported that, because of the recent improvements, applicants are only required to visit LERO once to obtain the incorporation certificate. Please note that the WBG team could not independently verify that these statements are true in day-to-day practice. 67 The Law on the State Registration of Legal Entities provides that registration services can be obtained online as provided in this law. How- ever, article 12.4 of the above-mentioned law provides that “an applicant who made an online application shall submit the documents specified in Articles 16.1, 16.2 and 16.3 of this law, which originals are required within 5 working days of receiving a notification to register in the state register as provided in Article 12.1 of this law.” 68 For instance, copies of the State Registration Certificate must be submitted when registering to obtain a 30 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS V electronic signatures are not used for company • Create an effective online single window registration.69 In addition, publicly available interface system for all business start-up information on registered companies is quite procedures, eliminating the need to submit hard limited (that is, only information such as company copies of the required documents and/or have name, address, authorized representatives, and physical interactions between the applicant and direct shareholders are typically included).70 the authorities. 58. Key recommendations: • Eliminate the requirement of obtaining a company seal and ensure that it is not required in • Increase data exchange and improve the system day-to-day practice when dealing with the public interoperability between the General Authority administration. for State Registration, the local tax office, and the local Social Insurance Department. • In the longer term, ensure the development of interoperable ICT systems that are able to • Ensure suitable practice mechanisms to sustain transmit and share relevant business information the business registry's quality, reliability, and among all government agencies. transparency as the repository of business data. b. Procedures relating to construction, electricity and property registration 59. A review of the latest data and scores of by legislation, while public liability, personal injury Mongolia in the Doing Business 2020 indicators (including life-insurances), third-party property measuring property registration, construction and contractor insurance is mandatory for permit and access to electricity show that those participating in construction. Professional Mongolia can further simplify and reduce the certifications are also in line with international best number of procedures and interactions with practice.71 Before construction commences, third- public authorities. While Mongolia fares relatively party entities (licensed architects or engineers) well on data measuring the cost to comply with the are required by law to verify that the building plans procedures, it is below the regional EAP average are following existing construction regulations. regarding data measuring the number of steps During construction, inspections are phased and and the time for implementation. While legislation happen at a specific time during construction or has been modified and revised numerous times to are unscheduled (for instance, if relating to safety align with best practices, improved transparency, standards and working conditions). At completion, and the use of digital technologies for undertaking a final inspection is carried out by the relevant online transactions, further effort is still required agency to ensure that the building complies with for successful simplification of procedures and relevant standards and is ready for occupancy. interactions with public authorities. In spite of the good practices described above, Mongolia is still lacking a coherent risk-based 60. Mongolia has aligned itself with several inspection system where the number and type of international best practices related to inspections depend on well-defined risk categories construction quality control. Construction laws of buildings.72 and regulations are generally and freely accessible online. In addition, building requirements, required 61. The construction permitting process in preapprovals and fee schedules are generally Mongolia remains inefficient due to a large clearly specified. Parties that are liable for number of interactions with multiple authorities. structural flaws or problems are clearly identified Construction companies and developers are 69 Doing Business database. The information was confirmed through interviews with the private sector in March 2022. Such a situation might change once the new Law on E-signature is implemented. 70 EBRD. Business Reorganization Assessment in Mongolia. 7¹ Both the professionals responsible for verifying that the architectural plans are in compliance with existing building regulations and those charged to supervision the construction works must have a relevant University degree, have passed a certification exam, be licensed architects or engineers, and have a minimum number of years of experience. 7² This assessment is based upon the “building quality control index” of latest Doing Business (2020) report. According to the World Bank database, Mongolia scored 14 out of 15 points on building quality control. The only point missing out of the 15 available is due to the lack of a solid risk-based system of inspections implemented during the construction phase. For more information, please visit: https://archive. doingbusiness.org/en/data/exploreeconomies/mongolia#DB_dwcp MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 31 V SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS required to engage with a range of agencies and handful of renewable energy (RE)78. The remainder comply with often onerous procedures prior to is imported from Russia and China. Mongolia applying for a building permit. For less complex has a huge RE potential which can represent builds, these include obtaining pre-approvals a significant source of cleaner electricity for by relevant Fire Departments and the Municipal the country and its neighbors. The country has Urban Planning and Development Agency excellent wind resources, and good solar and (MUPDA) and complying with technical conditions hydropower resources. The Law on the Renewable from utility providers for heating, electricity, water, Energy was passed in 2007 to support and and sewage, among others. Whilst the obtaining regulate the generation and transmission of green the building permit from MUDPA can take as little energy. The law established a renewable energy as three weeks, the pre-requisite procedures can fund and feed-in tariffs (FiTs) for renewable consume several months to a year and are prone energy power sources, including import duty to corrupt practices.73 and value-added tax exemptions for importing equipment and materials for renewable power 62. New connections to the electric grid further plants by SMEs. The government also promotes prove challenging. Securing electricity in Mongolia building a high-voltage direct current (HVDC) requires more interactions with the authorities electric power transmission system between and external parties than in any other country in Russia and China through Mongolia79. WBG the East Asia and Pacific region.74 In Ulaanbaatar, technical assistance is providing support in civil companies intending to connect their building works related to sustainable cooling technologies to the electric grid must not only deal with the and/or integration with RE80, the construction of utility providers but also with a gamut of other grid-connected solar photovoltaics (PV) power stakeholders – including the Road Department, generation81, including tariff reforms in promoting Police and Municipality, licensed contractors, and and introducing green technologies. design firms. In simpler cases, the process can take up to three months and has a cost equivalent 64. The vast majority of the land in Mongolia is under to around 600% of income per capita. In addition, State ownership. Less than 5% of the land is made the average frequency and duration of outages is available for private use, while the remainder is considerably high, and the distribution utility has under the control of the State. State land can be no automatic mechanisms to restore service.75 leased by the private sector primarily for mining The electricity infrastructure is getting obsolete purposes, while foreign ownership is prohibited.82 and doesn’t have a sufficient distribution capacity The Land Law allows land possession for 15-60 to meet the increasing energy demands.76 Only years with an option to renew for a further 40 44 percent of current power consumption by years.83 Similarly, land use rights are granted for the mining and heavy industries sector is grid- five years with an option for a single extension. supplied, while the remaining 56 percent comes An exception is made for pastureland, which from auto-generation or imports from China (with covers 72 percent of total land and is recognized a cost of $0.10/kWh).77 as “common tenure land” and is available for collective management.84 The remaining area is 63. The Mongolian energy sector has a high level protected under special laws to preserve flora and of energy inefficiency and is carbon intense fauna85 (for example, the Law on Forests and the with outdated coal-fired Combined Heat and Law on Specially Protected Areas). Power (CHP) plants. 74% of the total electricity consumption is produced by coal-fired CHP, 65. Mongolia suffers from a cumbersome and costly owned by the State, while 5% is produced by a land administration process. The introduction 7³ According to World Bank interviews carried out in March 2022 74 Data on this topic can be found at: https://www.worldbank.org/en/programs/business-enabling-environment/doing-business-legacy 75 In 2019, the System average interruption duration index (SAIDI) for Mongolia was 62 hours while the System average interruption frequency index (SAIFI) was 15 times a year. Data are available at: https://archive.doingbusiness.org/en/data/exploreeconomies/mongolia#DB_ge 76 The World Bank 2020. Mongolia InfraSAP. Infrastructure for connectivity and economic diversification. 77 The World Bank. 2020. Mongolia InfraSAP. Infrastructure for Connectivity and Economic Diversification. 78 Mongolia. Multi-Annual Indicative Programme 2021-2027. 79 Partnership for Action on Green Economy. 2014. Mongolia’s Transition to a Green Economy: a Stocktaking Report. 80 Smart Government II Project. P176631. May 2022. 8¹ Second Energy Sector Project. P152343. 8² Barcus, H. R. (2018). Contested Space, Contested Livelihoods: A Review of Mongolia’s Pastureland Management and Land‐Tenure Reform. Geographical Review, 108(1), 138–157. 8³ Article available at: https://landportal.org/book/narratives/2021/mongolia#ref25 84 Gender and Land Rights Database Country Profiles. Food and Agriculture Organization of the United Nations. http://www.fao.org/gender- landrights-database/country-profiles/en/ 85 Nyamdorj, B., Molen, P. van der, & Tuladhar, A. M. (2014). Land privatization in urban Mongolia: An observation. Survey Review, 46(335), 90–96. 32 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS V and the multiple amendments of laws related to complaints for problems that occurred at the point land administration, titling, and land evaluation of property registration and when dealing with the have led to public confusion and uncertainty. The Cadastral Agency.92 This discourages individuals Land Law was first enacted in 2002 and has been from completing procedures and paying fees and amended 32 times since its enactment in 2003.86 taxes for registering ownership. A multiplicity of central and local public sector agencies are involved in the land administration 68. Key recommendations: process.87 The interaction of these multiple • Introduce a clear and coherent system of institutions and interests involved leads to a performing inspections in which the number and lack of coordination among agencies and costly type of inspections depend on well-defined risk procedures.88 In addition, the quality of services categories of buildings. provided locally can vary widely.89 • Streamline the building permitting process 66. Databases registering titles and cadastral maps and introduce a single online window for the are separate and disconnected. The Immovable application and approval of construction-related Property Registration Office of the GASR is in permits. charge of handling the property registration process. There is a comprehensive and functional • Reduce power outages—both in terms database for checking encumbrances (such as of frequency and duration—and increase liens and mortgages). Title certificates are kept in collaboration between utility providers and other a scanned format but are not fully digital. Similarly, public stakeholders in order to simplify and cadastral maps showing legal boundaries are automatize the process of connecting to the also computer scanned and kept by the District electric grid. Land Authority and Capital Property Relations Department. The two databases – of titles and • Improve energy efficiency through the maps – are separate and do not use the same establishment of renewable energy technologies identification number for properties. Notably, both and the development and implementation of databases are incomplete and not updated in a a Master Plan to use the renewable energy timely manner.90 Finally, not all privately held land sources. plots are neither registered nor mapped, neither • Improve efficiency, consistency, and on the Ulaanbaatar or the national level. This can transparency of land administration services, lead to land management issues where property including titling and registration. valuations are not based on a transparent and established land and property market. • Further increase the geographic coverage of cadaster and immovable property registry. 67. Transparency and access to information in land administration matters could be readily • Continue the digitization of cadastral maps and improved. The requirements of the legal property titles and consider introducing common documents necessary to carry out a transfer of identifiers as to effectively link the information real estate property are publicly available as are recorded by the immovable property registration the applicable fee schedules for cadastral and agency and the cadastral agency. property registration services.91 In addition, both the Cadastral agency and the property registry commit to delivering their services within a specified timeframe. However, neither property records nor cadastral maps are publicly available. Furthermore, there are no publicly available statistics on the number of transactions, nor specific or independent mechanisms to file 86 The latest draft of the Land Law includes a revised draft of the General Land Law, a revised Law on Allocation of Land to Mongolian Citizens for Ownership, a revised Law on Cadastre, a revised Law on Land Fees, and a Law on Land Acquisition for Urgent Needs 87 The World Bank. 2015. Land Administration and Management in Ulaanbaatar, Mongolia. 88 World Bank interviews. 89 The registration of immovable property and the regulation of all matters relating to the registration and protection of rights are regulated by the Law on State Registration of Property Rights (2018) 90 In this regard, it must be noted that there is a significant mismatch between the records of the property registry and claims on land (The World Bank. 2020. Land Administration and Management in Ulaanbaatar, Mongolia) 91 Cadastral fees are made available through public boards while property registry services fees can be found online. For more information, please see: http://burtgel.gov.mn/service/index.php/eprs-newlist 92 The Agency for Land Administration, Geodesy and Cartography (ALAGaC) is the authority in charge of legal (e.g. land tenure) and tax (e.g. taxation) aspects of land management. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 33 V SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS c. Business permits and licenses 69. Business permits and licenses effectively take Figure 7 (a): Average time required for obtaining an the form of any type of approval issued by a operating license in 2019 government or delegated entity for a business 50 to conduct operations. As a general best 42 practice, business permits and licenses should 40 be based on public policy objectives to protect public health, safety, and the environment or to 30 27 address limited resources. However, business 24 Days permits and licenses can often be burdensome, 20 16 redundant, non-predictable and lack transparency in their administration. They can also be used to 10 serve vested interests or present opportunities for bribery. While business permits and licenses 0 Tajikistan Kyrgystan Lao Mongolia are often used by the government as a revenue- generating instrument, this is inconsistent with good policy, which mandates the administration Figure 7 (b): How many days did it take to obtain of licenses and permits for regulatory purposes. your license? 70. A more streamlined licensing process can reduce the burden of starting and operating a business greater than 25 and issues relating to informality. Licenses and permits in Mongolia can be cumbersome and 10 to 25 costly as they add uncertainty and incur additional costs to business operations. Some businesses 2 to 10 in Mongolia are unregistered, operating without a license or permit, paying no taxes, and relying only on verbal employment agreements.93 Compared 1 day or less to its regional peers, Mongolia has the highest average time required to obtain an operating 0 20 40 60 80 Days license with 42 days vs 16 days in Tajikistan (Figure 7 (a)).94 According to the Enterprise Survey, Construction permit Import license Operating license only 3 percent of respondents confirm that it takes Source: World Bank Indicators. one day or less to obtain an operating license, whereas 23-25 percent of firms need from 2 to 25 71. Mongolia has previously engaged in permits days, while the majority of firms reported a period and licensing reforms with limited degrees of greater than 25 days with around 10 percent of success. The current Law on Licensing of reporting up to 60 days (Figure 7 (b)). Similarly, Business Activities was enacted on 1 February more than 25 percent require more than 25 days 2001 (the “2001 Licensing Law”) to regulate to obtain an import license and more than 70 relations concerning the issuance, suspension percent a construction permit. In reference to the and revocation of licenses required for business establishment’s experience of the whole process activities that may cause harm to the public of obtaining an operating license, 60 percent interest, human health, the environment or national agreed that public officials were professional and security, or that require certain conditions or transparent in making decisions, while 62 percent specialist expertise. Since its adoption in 2001, the reported comfort to voice complaints. Additionally, law has been amended 69 times. The law provides on the positive side, 89 percent declared that no for 103 general types of licenses divided into 210 informal gift or payment was requested when subtypes of licenses in 19 different sectors.95 applying for the operating license. 72. The 2001 Licensing Law provides a list of business activities requiring licenses and the general procedures for granting, suspending 93 ILO. 2015. Formalizing enterprises in Mongolia: Challenges and policy directions. 94 World Bank Indicators 2019. https://data.worldbank.org/indicator/IC.FRM.DURS?locations=MN 95 Concept Paper to the draft Licensing Law initiated by the Parliament Member Byambatsogt Sandag http://forum.parliament.mn/ projects/11132#collapse1. 34 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS V and terminating permits and licenses, which are Law to the Parliament for discussion. The Permit further complemented by sector-specific laws Law is the result of consolidation of the two draft and regulations. There is no unified framework laws. The Permit Law was adopted with the aim that regulates standards and requirements and to improve the process of issuing, suspending, procedures, often due to coordination issues revoking, and terminating licenses, establish a among different regulatory agencies.96 The definitive list of permits and develop a unified complex licensing environment in Mongolia is control and coordination system. regulated by different laws providing numerous licenses, permits, and certificates. Several sector- 74. Under Section 6 of the NRP, Mongolia is specific laws provide for permits that are not committed to resolving and streamlining covered by the 2001 Licensing Law. According to a the system of state inspections, licenses, survey conducted in 2016, 54 entities were issuing and technical specifications required by the more than 914 different kinds of permits. This government authorities. To support businesses creates confusion on the permitting and licensing more transparently and efficiently, the government process in various sectors such as cross-border aims to reduce the number of licenses and permits business activity and increases corruption risk. by 50 percent and to monitor progress by setting up and maintaining an integrated electronic database Box 5: “Licenses” and “Permits” in Mongolia of licenses and ensuring its accessibility to the public. With the approval of the Permit Law, the The 2001 Licensing Law provides for the term country aims to cease unnecessary licenses from “license” (literal translation of the Mongolian term is businesses and to establish a unified database “special license”). As per the 2001 Licensing Law and of licenses to ensure transparency. The Permit the related sector-specific laws, government entities Law aims to: (i) limit the creation of new permits/ grant licenses. However, certain sector-specific laws licenses without law; (ii) set time limits and also provide for the term “permit” which government deadlines in the process of granting and renewing entities can also grant to businesses. For example, permits; (iii) establish a review process with a in the construction sector, construction companies Permit Council; and (iv) improve transparency require a construction license (granted for a period with an online permit database. These reforms of 5 years) to construct certain types of buildings and would help support a systematic and effective the license is granted by the Ministry of Construction simplification of permits that affect business and Urban Development. Concurrently, construction development, while also monitoring adequately companies obtain a permit to commence specific business activities that could pose environmental construction work, which is granted by the local and social risks. government which is valid from the commencement of the construction work until the end of the 75. While the Permit Law contains many positive construction work. Another example is that in changes, there could be certain improvements order to establish a bank, the business would need made in line with best international practices. to obtain a banking license issued by the Bank of The World Bank has the following remarks Mongolia. However, if the licensed bank wishes to regarding the Permit Law: establish its branch or settlement unit, a permit is • Relationship between the Permit Law and required to be obtained from the Bank of Mongolia. sector specific laws: The Permit Law defers Obtaining a permit should be simpler than obtaining to sector specific laws in a number of areas, a license given the nature of the activities involved, which could reduce its overall impact. Some however the process is often similarly onerous. provisions indicate that sector specific laws 73. A new Permit Law has been adopted in June 2022 will need to be in conformity with its provisions, in an effort to streamline the issuance of permits while conversely, other provisions provide that and licenses and follow a unified framework. the Permit Law will defer to sector specific The new Permit Law will become effective from 1 laws. Clarity in terms of the relationship January 2023 and the 2001 Licensing Law will be between the Permit Law and sector specific repealed with the entry into force of the Permit Law. laws is necessary to avoid creating confusion Revisions to the 2001 Licensing Law has been or potential “legislative vacuums”. Otherwise, under discussion since the Government submitted the situation that existed in the 2001 Licensing a draft to the Parliament in 2014. However, no Law and sector specific laws will likely to remain progress has been made until recently. In March the same. 2019, 22 members of Parliament proposed a • Difference between ordinary and special new draft Licensing Law to the Parliament, while permits: The Permit Law draws a distinction the Government submitted its own draft Permit between ordinary and special permits but does 96 World Bank Interviews. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 35 V SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS not define clearly the distinction between the Secretariat. It is prudent for the Council to have two types of permits. Apart from a few specific necessary support and resources to fulfill its implications in time-limit and the term of the mandate. As of December 2022, there is no permits, the purpose and usefulness of the publicly available information concerning the two categories does not appear well-grounded. establishment of the Permit Council. Conversely, follow on work is needed to further clarify and refine the two categories. • Systematic review of the stock of permits versus quality control of new permits. The • Inventory and listing of permits. The list Permit Council seems predominantly focused of permits in the Permit Law seems overly on new permits. A more systematic streamlining comprehensive and detailed. Going forward, and review of permits and their subsets are there should be greater clarity in terms of critical for engendering clarity among economic grounds and criteria for making certain activities stakeholders and those with inspections that as licensed activities. safeguard social and environmental assets may be required. • Time limits: Time limits set in the law for processing applications and extension requests • Effect of the law on existing licenses and could be too short or unrealistic for permits for permits. The effect of the Permit Law on existing certain complex activities. There is also a risk licenses and permits are unclear. Specifically, it of confusion as to when the time limits set in is unclear as to whether there would be review, the sector specific laws will prevail and whether cancellation or limitation of the overall number they will be amended in line with the Permit of permits and licenses. Law. • Alternative/complementary approaches: • Online database of permits: Initiating an o Risk-based approaches to regulating electronic register of all permits constitutes business activities. Public administration an important step according to international efficiency can be improved greatly by experience. The Permit Law provides that focusing checks on business activities that the Government shall approve a regulation present higher risks to public safety and the with respect to information on the integrated environment. This would require classifying permit online database, its clearance and economic activities into risk categories registration of permits on the database, as based on impact on health, safety, and the well as provide references and other relevant environment. While specific activities that information. It would be useful to clarify the pose a high risk to public health, safety or status of these procedures as well as the the environment would demand a thorough relationship between this and other portals inspection and mandatory licensing such as the trade information portal which requirements, in the case of lower-risk already includes several licenses and forms. activities onerous licensing requirements Currently, government entities authorized to can be replaced with a simple registration grant permits have their respective online or notification through an online platform. permit systems through which the applicants o Standardized application forms: The can file their request to obtain permits and law provides minimum information monitor its status. For instance, permits to be requirements that could be further enhanced. obtained from the Ministry of Mining and Heavy Further—beyond legal provisions—in most Industry, the Ministry of Finance and the General countries the simplification effort entails Customs Authority can be obtained through a focus on improved standardization an online licensing portal license.mn, and the and certification of application forms Ministry of Environment and Tourism has its such as paper forms, online forms, and own licensing portal. It will also be important standard operating procedures used by to assess whether sector specific laws would the public administration. For end-users, prevent the digitalization of service delivery the form is often the only visible part of because of mandated use of paper documents any administrative action. The systematic or physical presence, resistance to change, lack translation of legal and regulatory provisions of interoperability, or similar constraints. into clear and standardized forms can • Permit Council: The Council could play an play an important role in transparency, important role for public-private coordination the simplification of processes and the and as an institutional gatekeeper. The office of digitalization of permits. the Council is to be performed by the Cabinet 36 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS V 76. Upgrading the e-Mongolia platform to provide 77. Key recommendations: transactional services to businesses and citizens alike will be a critical step for simplification of • Upgrade the e-Mongolia platform to provide licensing. The e-Mongolia platform aims to ensure online transactional services for obtaining all that public services are responsive, accountable permits, registrations and notifications. and accessible to save time and costs for • Adopt secondary legislation concerning the citizens.97 To date, the e-Mongolia platform has operation of the Permit Council for improving digitalized over 684 services.98 However, most public-private coordination and allocating services offered are still purely informational. For permanent technical staff to support the Council business registration, the platform requires LERO99 and detailed regulations providing standards and to process the application of business entities and guidance to aid the Permit Council in effectively to submit the documents afterward.100 E-Mongolia implementing its mandate. also allows registered business entities to obtain “letters of reference” to confirm specific rights or • Further enhance the digitalization of licensing certify registration.101 The system does not release procedures allow businesses to obtain their any electronic certificate and the whole review licenses promptly and in a transparent manner. process must be done in person with paper-based Make it clear as to whether the Permit Law will documentation, given the non-effectiveness of a result in cancellation or limitation of the existing Law on E-signature. There is a widespread lack of permits and licenses. awareness among citizens and business entities of all services and transactions that e-Mongolia • Clarify the relationship of the Permit law and can offer. For most services, citizens are unclear sector specific laws and consider whether any about the procedure that needs to be followed and changes are required to be made to existing the information available in the system, since there laws and regulations in light of the Permit Law. is not enough transparency about the data and the • steps required to process an application.102 Limits to access to the Internet may also hinder the outreach of the platform: although more than 70% of the Mongolian population own a smartphone, few have access to the Internet beyond social media platforms because data plans with mobile phone companies are too expensive.103 97 The e-Mongolia website is accessible at: https://e-mongolia.mn/services/citizen/sector/all. 98 Updated in accordance with the data on https://e-mongolia.mn/home. 99 LERO does not offer online services to foreign invested companies. 100 This is due to the fact that registration of any changes in the charter or change of the executive director of company need to be reflected on the back of the state registration certificate of the business entity. 101 The executive director of the business entity has to register with e-Mongolia by including phone number, bank account and/or e-signature. It is not clear if it is possible for the applicant to review/monitor the process of handling the request/application. 102 World Bank. 2022. Prioritized Human-centry Digital Services for Mongolia Final Report. 103 World Bank interviews. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 37 V SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS d. Business inspections 78. Mongolia had consolidated several sector- GASI and GASI offices at aimags and the capital specific inspectorates into one single inspection city effective from 1 January 2023 (see below). authority, the General Authority for State Inspections (“GASI”) with the adoption of the 80. The World Bank Group supported GASI in a State Inspections Law in 2003. Snce then, the series of reforms between 2009–16, which led governance and practices of the GASI have been to a decrease in inspection and a more targeted adapted several times to keep pace with best approach. A report in 2016 found that, as a result practices and private sector needs. Inspections of the reforms, the burden from inspections are tools which government or delegated entities in Mongolia had generally decreased, and in deploy to ensure and monitor compliance with particular, the share of businesses inspected rules and regulations. They consist of on-site each year by GASI.105 On average, the number of visits by regulators (inspectors), which may be inspections by the GASI ‘inland’ unit responsible for a pre-requisite for issuing permits (ex ante) or all Mongolian businesses decreased by 57 percent they can be used to monitor compliance with between 2009 and 2015. This decrease resulted the terms of a permit (ex post). Inspections by in savings in administrative compliance costs of various agencies can often be non-standardized, more than US$2.6 million over four years. Reforms duplicative, unclear, and are often avenues for during this period included the introduction of bribery. Nevertheless, there are several reform risk-based inspections, inspection checklists, and options available to governments to make the inspection planning. Respondents to a survey inspections system more effective and efficient, covered by the report confirmed that GASI had including shifting from policing and punishment, put in place targeting methods, which relied on to counselling and advice to improve compliance risk assessment and resulted in significantly less by businesses. frequent visits to low-risk businesses, including those with good compliance records. In addition, 79. Currently, GASI has a complex governance GASI inspectors used sanctions less frequently and operational structure because it works and placed more effort into informing, advising across various sectors in a geographically large and otherwise supporting businesses with their territory. The approximately thirty surveillance compliance matters. areas in the Authority’s responsibility are split into seven departments: (a) Food/Agriculture; 81. Nevertheless, the assessment report also found (b) Environment/Geology/Mining; (c) Health/ that many complaints remained concerning low Education/Culture; (d) Infrastructure; (e) Border; professionalism of many inspectors, sector- (f) Occupational Safety; and (g) Nuclear-Radiation. specific issues, and significant variations in There are also two key horizontal departments, implementing the reforms between rural areas. namely, the Risk Management, Strategy, Frequent concerns include inspections still being and Planning Unit—responsible for overall used as a revenue-generating tool by central risk assessment and planning, strategic and and local governments alike and that many of operational planning, and consolidating data on the requirements being checked are outdated inspections—and the Administration Department— or inadequate. In addition, GASI suffers from responsible for monitoring and evaluation, human excessive political interference, in particular resources, finance, and legal units. The Authority frequent changes in senior management. is also divided by geographical locations. GASI 82. Another important reform was the deployment is headquartered in Ulaanbaatar and consists of of the “Glass Inspections Portal” (2015–21), senior management, horizontal departments, and which was designed to allow businesses to administration. Then there are local GASI offices track their own file, receive notifications and for each Aimag (administrative sub-division) and results (including what measures and penalties the capital city, Ulaanbaatar. The Chairman of have been taken), and upload their complaints GASI is appointed by the Cabinet and reports to concerning inspectors. The portal was also used the Deputy Prime Minister.104 However, due to by GASI for planning of inspections on a risk recent amendments to the State Inspections Law basis, data sharing, workflow management, and initiated by the Government, there will no longer be recording and analysis of inspection results. More 104 This section was adapted from an internal World Bank Group report prepared by Donald Macrae. 105 “Mongolia Inspections Reform Project – 2009-2016: Evaluation Report on Reform Outcomes”, World Bank Group, May 2016. 38 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS V specifically, the portal had the following features: responses and evidence submitted by businesses. The system is still in the developmental stage. • Allow businesses safe and secure access to their profiles in the inspection database 84. If the plan is to develop the system despite using a unique ID and password, where they the restructuring of GASI, full deployment of could review all inspections reports, complete the system will likely significantly increase checklists, view the measures taken and the amount of data collected. It will become assigned risk levels, and provide comments on difficult to manage vast amounts of information the inspection report or express disagreement if strategies and objectives are not developed with the conclusions and measures taken by an clearly and purposefully. Furthermore, processes inspector. If a complaint against an inspector need to be in place to ensure fraudulent data is was lodged, the system would notify the upper- not being entered into the system. It is important level inspector or chief inspector to review the to develop and share these processes openly with case and reply back to the business. businesses and consumers so that they can avoid providing fraud and misleading information, which • Allowed GASI to plan “joint” inspections that may result in raids or unplanned inspections. covered more than one regulatory area. The Consumers and businesses also need to be team of inspectors were usually led by the educated and better understand the risks and inspector in charge of the dominant sector hazards and impacts of business activities where the business operated, for example, on human health and safety, as well as to the for the mining sector, the lead was either a environment. Moreover, it is crucial that the entire mining or an environmental inspector, but if GASI, including the Aimag and city-level entities, the company has a previous history of non- participate and are involved in the development of compliance in occupational safety, the lead the operational systems and portals to be used by was the occupational safety inspector. consumers and businesses. • The system also allowed for tracking the time 85. The inspections reform initiatives have also spent on conducting an inspection by both the faced setbacks. With the approval of the inspector and the business. Businesses could Minor Offences Law, enacted on 11 May 2017, even upload the amount of time their employees the sanctions provided in various laws were spent on assisting with an inspection, its overall consolidated into one legislation. However, one duration, and how much it cost them. of the negative effects of the Minor Offences Law 83. Digitalization of inspections is in progress; appears to have been the removal of the option however, managing data and developing policies of providing lower penalties based on the level of based on data analysis needs to be strengthened. breach, such as being able to provide a warning or From 2021, GASI started developing www.E- an opportunity for an issue to be addressed. With khyanalt.mn as a system to replace the Glass the approval of the Minor Offences Procedure Inspections Portal, which would continue as an Code, the prosecution is also involved in the archive of inspection history covering 2015–21. process of imposing sanctions for those who The new system consists of three interoperable breach various laws. portals: 1. Inspectors portal; 2. Consumers portal; 86. A draft to revise the State Inspections Law and 3. Business portal. The Consumers portal in its entirety was initiated and submitted to allows citizens to upload their complaints related the Parliament on 1 May 2020 by members of to products or services. Complaints would then the Parliament while the Government is also be seen by inspectors to determine if they should working on its own draft law to revise the State take actions, such as conducting investigations Inspections Law. It should be noted that the or inspections. Reports on such actions are then State Inspections Law applies to inspections uploaded to the system and the complainant will be carried out not only by GASI but also by other notified of the results of actions taken. Businesses government entities. The need to improve the will be able to use the portal’s checklist to conduct legislative framework is a result of a lack of a self-check against requirements. They can also detailed procedures for conducting inspections complete check lists with their responses and i.e. what specific inspection would be carried for attach necessary evidence (documents, photos, each sector/fields are not clear and conflicting video recording) and share with the Inspectors regulations with regard to the process, outcome, portal. Inspectors can then decide whether to and powers of state inspectors provided in sector- organize a physical inspection based on quality of specific laws, and a lack of clarity regarding the MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 39 V SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS rights, obligations and participation of individuals for corrective steps costing money and time. and legal entities in the inspection process. In addition, the law lacks alternative forms of state 89. Implementation of policies across the entire inspections, such as the ability to provide advice system, including Ulaanbaatar city, districts, and recommendations and issue warnings. There and aimag inspectorates, requires better is also a need to prioritize or target inspections communication, monitoring and evaluation and focusing on safety, protecting the public interest, this could particularly become challenging in light and preventing grave damage; currently, the of the recent restructuring. During the collection broad scope of operations results in repeated of data for the Time Release Study (TRS) in 2019, and unnecessary inspections being carried out it became obvious that orders from the GASI HQ on business entities that are not considered to were implemented unevenly across institutional be at risk or are less risky. Finally, the process of levels. Developing required standard operating inspection should be separated from investigating procedures to bring unification of processes are and imposing sanctions for minor or administrative highly desirable. Thus, special attention should be offenses provided under the Minor Offences Law paid to ensure better communication, monitoring and the Minor Offences Procedure Code. The and evaluation among various inspection law initiator provides that the draft law aims to authorities address these shortcomings and constrainst. 90. Looking forward, the there is need to further 87. In parallel, the Government has proposed the improve inspectors’ training, as well as support Law on Temporary Suspension of Certain the recent focus towards the provision of advice, State Inspection to the Parliament.106 The draft guidance, and training for low-risk businesses. In law was proposed in an effort to reduce the 2016, GASI planned to provide such “consultancy” negative impacts of the COVID-19 pandemic on services to 6,366 businesses, in the end delivering the economy, increase economic efficiency, and it to 5,336 businesses. Providing advice, guidance, accelerate economic recovery by suspending and training to businesses is a new function for scheduled state inspections. The draft law provides inspectors. At the beginning of instituting these new that there will be no scheduled inspections for a functions, inspectors were opposed to advising period of three years and inspections will only be businesses because they were afraid to lose what made in the event of submission of complaints, they saw as their main role, namely catching and requests or petitions from the public, decisions imposing fines on as many non-complying firms of a government entity, or other circumstances as possible. Preliminary feedback from enterprises leading to direct and indirect damage to human indicated that the provision of advice was valued life, health, or the environment. As of December and could contribute to developing a more 2022, the draft law has not been approved. productive relationship between inspectors and firms. Training inspectors, the Risk Management 88. Allowing inspection authority itself to Department, middle managers, and high-level define and set critical inspection criteria policy advisors through concrete examples (for may create potential conflict of interest and example, developing check lists and simulating implementation challenges. Many laws stipulate inspections), has also been essential to sustain that implementation of their legal provisions is these institutional and operational changes. the inspection authority’s responsibility while not providing a clear framework or specific criteria. 91. Recent amendments to the State Inspections This not only results in additional work for the Law and the restructuring of GASI. Prior to the inspection authority, requiring it to acquire new establishment of GASI, state inspections were knowledge but also creates regulatory gaps carried out by sector-specific inspectors operating on enforcement as inspection authority has to under various government agencies. GASI was conduct inspections based on risks. A recent established by combining more than 20 state example of this concern was demonstrated in the inspection units and agencies operating under enforcement of the Law on Animal Health. This law various ministries responsible for more than does not clearly define the roles of veterinarians 30 surveillance fields. However, after several and GASI inspectors in relation to the issuance years some key stakeholders concluded that of export certificates and inspections. As a result, the consolidation under GASI had not delivered exporters of animal-originating products faced the expected outcomes of reducing the number multiple and repeated inspections and requests of inspections and the associated regulatory 106 The law will not apply to inspections to be carried out by the Bank of Mongolia, the Financial Regulatory Commission, tax, customs, social insurance, health insurance, and government entities in charge of child and family development matters. 40 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS V burden. On the contrary, key stakeholders felt that • Strengthen the capacities of government entities GASI had increased its enforcement pressure on authorized to undertake state inspectionsby businesses, relying on heavy sanctions and creating developing a systematic training curriculum considerable burden. On 11 November 2022, the and providing targeted training for inspectors, State Inspections Law was amended resulting including making aspects of the training in the restructuring of GASI. The amendments mandatory. shall become effective from 1 January 2023. The amendments provide that inspections shall • Measure the performance of each inspector, be carried out by (i) central state administrative including the completion of the number of bodies (i.e. ministries), (ii) state administrative training sessions attended and their ability to bodies (i.e. agencies) and (iii) entities mandated apply their knowledge to certain processes, to implement inspections at local level. The for example, in conducting consultations and amendments then removed references to “central providing advice. authority/body to implement state inspections” • Create data management policies, which should (i.e. GASI). The rationale for the amendments were include open data for consumers, businesses, (i) eliminate the overlapping functions of state and other regulators, for example, social inspection bodies and state inspectors, (ii) ensure protection or tax. Develop systematic reporting integrated management for planning, approving, both to public and private sectors that cover implementing and monitoring the implementation not only imposed and collected fines but also of sectoral policy, (iii) improve the implementation concerning risk reduction. of policies and decisions, and (iv) improve policies, decisions and their implementation based on the • Increase peer-to-peer learning by improving result of inspections.107 Accordingly, all functions foreign relations with inspectorates in other of GASI would be transferred to the relevant jurisdictions, especially those that are considered ministries, agencies, local governors and/or other to have best practice. inspection authorities (such as professional associations) and these entities would be become • Monitoring and evaluating should assess responsible for state inspections in their respective progress against outcomes and impacts, areas/sectors. The amendment also provides especially related to risk management. that inspection bodies shall not be obliged to • Ensure wider consultation is conducted on the contribute income to the state or local budget draft revised State Inspections Law to ensure Another concept introduced by the amendments that current shortcomings and constraints is “preventative state inspection” where inspection are adequately addressed and other laws and would be carried out in order to prevent, detect regulations that provide for and/or relate to state and stop illegal activities and risks to human life, inspections are reviewed for consistency and health, public and environmental safety. clarity.Ensure the continuity of existing work and 92. Key recommendations: efforts of GASI such as online portals and tools in light of the recent restructuring. • Enhance the role of government entities authorized to undertake state inspections to be able to effectively provide advice, guidance, and training for businesses. Introduction to the Law on Amendments to the State Inspection Law available at https://online.flippingbook.com/view/240352611/2/, 107 pages 249-250 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 41 V SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS e. Customs procedures Mongolia has undertaken significant efforts to 93. International experience and studies reveal improve trade facilitation and to modernize its that reducing barriers to international trade customs procedures, yet the country is still lagging and facilitating the movement of goods across behind the average for East Asia and the Pacific national borders can boost a domestic economy (EAP). Compared to the average in EAP countries, and support foreign investment.109 This would Mongolia requires the implementation of lengthy but be particularly important for Mongolia to become less costly procedures at its trading borders (Figure more attractive to efficiency-seeking FDI, the 8). According to the Logistics Performance Indicator type of FDI that is most transformative and allow (LPI), Mongolia ranks 130/160 globally and scores the country to diversify from resource-seeking lower than most of its peer countries and the average investments.110 In 2019, the WBG carried out a EAP (with a score of 2.37) (Figure 9).108 detailed Time Release Study Report to, measure Figure 8: Time and cost for trading across borders the real-time spent by border control agencies (2020) and private sector stakeholders on importing and exporting goods; collect information on issues and barriers; improve the coordination and performance of these agencies and private sector stakeholders; and ensure compliance with trade facilitation agreements and deepen the trade facilitation process. The WBG report found that the main barriers affecting trade at the border are: (i) weak coordination of border control agencies, and a lack of integrated information systems; (ii) the number of inspections by GASI and Customs; (iii) terminal infrastructure does not meet standard requirements and is obsolete; (iv) traders’ lack of awareness of the laws and regulations on foreign trade; and (v) the bureaucratic workflows to issue export/import certificates.111 Although the country still faces difficulties with customs clearance and inspection procedures, affecting the average time needed to export/import goods (see Table Source: World Bank, Doing Business Database. 3), several interventions112 have improved the country's competitiveness and tradability.113 Figure 9: LPI score Source: LPI, World Bank. 108 The LPI score is measured on six different levels: customs; infrastructure; ease of arranging shipments; quality of logistics services; tracking and tracing; and timeliness. The index ranges from 1 to 4, with a higher score representing better performance. 109 IFC. 2019. Time Release Study Report.. 110 WBG IRM 2019. 111 IFC. 2019. Time Release Study Report. 112 Examples are, the adoption of the National Trade Facilitation Roadmap, the establishment of the National Trade Facilitation Committee, the development of the single window application, and the creation of electronic data exchange. 113 Article available at: https://www.wto.org/english/tratop_e/tpr_e/tp506_crc_e.htm. 42 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS V Table 3: List of Export/Import Activities with their Average Time to Release and Move Goods across Borders Activities Average Time Goods imported by road and released at the inland terminal 3 days, 12 hours, and 7 minutes Goods imported by road but then transshipped by rail to the inland 3 days and 40 minutes terminal Goods imported by rail and released at the inland terminal 4 days, 20 hours, and 10 minutes Goods imported by air and released at Buyant-Ukhaa airport 2 days, 12 hours, and 32 minutes Exporting goods by air from the Border Crossing Point 18 hours and 25 minutes Exporting of goods by air via on-call service 4 days, 20 hours, and 35 minutes Exporting of goods by road via on-call service 2 days, 18 hours, and 51 minutes Obtaining import and export certificates and permits 11 hours and 56 minutes Source: Mongolia Time Release Study Report 2019. 94. The country is still lacking alignment with causes challenges with WTO obligations and international standards to improve its trade affects the country’s competitiveness. agreements. As a WTO member since 1997, Mongolia’s role as a key trade partner has 95. Mongolia has to meet strict packaging standards improved significantly since the signing of the and requirements when exporting to other first Free Trade Agreement (FTA) and Economic countries.119 Processed products destined for Partnership Agreements (EPA) with Japan114, and export must meet international sanitary standards the recent implementation of the Asia-Pacific Trade both for outer and inner packaging. All relevant Agreement (APTA).115 Under the APTA , the country, standards are included under Mongolian Law together with China, has mutually implemented and in accordance with the National Food Safety schedules of concessions to reduce tariffs by Standard General Rules. In addition, a specialized an average of 24.2% on several products116. This border inspector checks the documents and helped the country to promote the Belt and Road physical condition of goods for export. For initiative and to deepen bilateral economic and instance, exported meat products are subject trade cooperation with China. In addition, the to very strict procedures and standards set by country has benefitted from several Generalized the importing country, particularly if trading with Systems of Preferences (GSP) programs from Russia or China. WTO Member countries to diversify its exports: Figure 10: Export diversification, by product (2019) 117 exports under GSP accounted for 31 percent of Mongolia’s exports to the United States, with GSP trade almost exclusively oriented towards one product, tungsten.118 Mineral products account for 85.9 percent of Mongolia’s exports, with very little diversification in other sectors such as agriculture products (Figure 10). Negotiations are underway to export Mongolian cashmere products to the United States on duty-free. However, Mongolia is significantly behind international standards in dealing with the country’s Sanitary Phytosanitary (SPS) regime; the import quotas on certain agricultural products; and inspections at the borders when trading with China (particularly in Source: Atlas of Economic Complexity, Harvard University the recovery phase of the pandemic). All of this 114 The Japan-Mongolia Economic Partnership Agreement allows for zero tariffs on imports of deep-processed leather products exported from Mongolia. 115 APTA is a preferential trade arrangement reached among developing countries under the aegis of the UN Economic and Social Commis- sion for Asia and the Pacific to promote South-South cooperation. China officially acceded to the Agreement in 2001, whose membership now includes Bangladesh, China, India, Laos, Korea, Mongolia and Sri Lanka. 116 Article available at: http://english.mofcom.gov.cn/article/newsrelease/significantnews/202101/20210103029223.shtml 117 Article available at: https://www.wto.org/english/tratop_e/tpr_e/tp506_crc_e.htm. 118 Office of the United State Trade Representative. Mongolia and the Generalized System of Preferences (GSP) Program. 119 Final Report. BSH. Export Process Analysis. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 43 V SIMPLIFYING PROCEDURES FOR STARTING AND OPERATING A BUSINESS 96. A transparent and modern trade facilitation • Develop a pre-arrival processing system system will enable Mongolian businesses to trade by Customs; develop Authorized Operators more easily and improve the country’s overall program and IT system to support self- export competitiveness. As a landlocked country declaration and payment processes. between China and Russia, Mongolia relies heavily • Implement a more robust risk assessment on its trade relationships with its two powerful and management system to substantially neighbors. However, its poor infrastructure and reduce physical inspections by Customs and trade facilitation system inhibit diversification of government entities authorized undertake the economy and competitiveness of its sectors. state inspections for medium and low-risk In line with the NPR, the Ministry of Foreign consignments. Affairs launched the Mongolia Trade Information Portal, an online repository for all trade-related • Implement Standardized Operational regulations. The portal aims to help streamline Procedures across all Border Crossing Points trade and customs regulations, simplify border and internal terminals to eliminate uneven inspection practices, as well as enhance private performance and unnecessary requirements. sector capacity to meet export requirements to • Invest in trade logistics infrastructure that meet support export diversification, especially agri- international standards to foster diversification livestock.120 of the economy. 97. Key recommendations: • Streamline the inspection process for exports • Improve automation of customs clearance by ensuring coordination between Customs process that will allow electronic submission and Other Border Agencies (OGAs) to eliminate of transport documents and payments for all duplication of functions. border agencies, including to the railway and national air freight forwarder MIAT. • Develop a national single window (NSW) for trade, connecting all relevant agencies and fully automating all trade-related procedures. 120 https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=16763 44 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT VI ATTRACTING AND RETAINING FOREIGN INVESTORS AND INVESTMENT a. Investment policy b. New investment law VI ATTRACTING AND RETAINING FOREIGN INVESTORS AND INVESTMENT a. Investment policy 98. In 2018, under an IFC Advisory project,121 a WBG undeniable success in attracting FDI, notably in team conducted a comprehensive diagnostic the extractive sectors, FDI has not played the role analysis of foreign direct investment: the it could have played in diversifying Mongolia’s “Investment Reform Map for Mongolia” (IRM economy, in strengthening its domestic private 2018).122 While there are clear signs that the sector, or in integrating Mongolia into global value institutional framework for investment will be chains (GVC’s). Confidence of foreign investors reformed, only a few of the significant reforms of has been severely eroded by ambivalent, unclear, the FDI policy framework have been implemented unstable, and sometimes overtly hostile policies. since the publication of the final report in June 2018 A clear priority recommendation is a need for with most of its recommendations still relevant a “reset” in the relationship between Mongolia and applicable. As such, they are cited in this report and foreign investment through a number of with adjustments where appropriate. The overall measures. One recommended measure was the conclusion of the IRM 2018 was that Mongolia adoption of an Investment Policy Statement (IPS) needed to undertake significant reforms in order whose purpose would be to reassure foreign to stimulate private sector investment, particularly investors and explain that Mongolia was open to foreign direct investment (FDI), to achieve more and would like to attract more FDI, to specify the sustainable growth, modernize its private sector, objectives it would like to reach through greater and create more and better jobs, while also starting FDI attraction and to indicate the new sectors the to diversify its economy. The report included government would like to develop with the help many concrete recommendations touching upon of FDI. The IPS would reaffirm the Government several areas critical to investors, both domestic of Mongolia’s commitment to enforce investor and foreign. The key recommendations can be protection and to fully operationalize the Systemic grouped into three priority challenges under which Investor Response Mechanism (SIRM) created in tangible recommendations were formulated. 2018.123 In principle, the IPS could precede and be followed, and in a way ‘implemented’, by a 99. First Priority: Need for a comprehensive new Investment Law. Investment Climate reform program. A clear conclusion of the IRM 2018 was that, despite some 101. To date, these series of recommendations for improvements, both domestic and foreign investors an “investment policy reset" remain, by and continued to face a very challenging business large, very relevant because: environment not conducive to sustainable private sector growth. As such, the first recommendation • An IPS has not been developed and, as a result, was to design and implement a comprehensive it is still unclear what the investment policy of investment climate (IC) reform program, including Mongolia is, what objectives it is pursuing, and but not limited to the improvement of business what type of investment it wants to attract to regulations, the improvement of good governance, reach such objectives. Investor confidence has and the establishment of effective and result- not been restored and, as a result, new investors driven public-private dialogue (PPD) platforms to may be cautious about entering the market and identify priority IC reforms for the private sectors existing investors are equally prudent or in a “wait and provide feedback to the GoM. In many ways, and see” attitude before reinvesting or expanding. these recommendations remain relevant to the Some may even be leaving the country. current political and economic situation and • The SIRM mechanism has been put in place—to the implementation of the NRP. A competitive the credit of the authorities—but is still not fully business climate is equally important for both operationalized and not sufficiently known and domestic and foreign investment and neither the used by investors, perhaps because the GOM IRM 2018 nor the present report suggest favoring has not put its full weight behind the initiative one category of investors over the other. Mongolia and investors have perceived the “lukewarm” will need both foreign and domestic investments nature of governmental backing for the initiative. to grow, diversify, and reach its socio-economic A functional SIRM is more important than ever objectives and a good investment climate will be because retaining already established investors critical to achieving its goals. should be a top priority given the current 100. Second Priority: Need for a new and clear economic slowdown and the depleting foreign Investment Policy. Although Mongolia had some exchange (FX) reserves, among other challenges 121 Mongolia Investment Policy and Agriculture Investment Promotion (IPAIP) Project 122 “Investment Reform Map for Mongolia: A Foundation for a new Investment Policy & Promotion Strategy”, IFC, World Bank Group, June 2018. Available on line at: http://_________________________. 123 A Systemic Investment Response Mechanism (SIRM) is an early warning and tracking mechanism to identify and resolve complaints that arise from government conduct. 46 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT ATTRACTING AND RETAINING FOREIGN INVESTORS AND INVESTMENT VI facing Mongolia in the post-COVID-19 recovery. the authority of the newly formed MED offers a Mongolia needs to adopt a systemic approach, unique opportunity to finally implement these rather than an ad hoc one, in handling investors’ recommendations. The WBG can provide grievances and to produce results, which technical assistance and support to the new will improve existing investors’ confidence agency to be formed, guiding its design but also and contribute to investor retention. The full its strategy, while providing capacity-building in implementation of the already established SIRM, key areas. This would ensure that investment backed by unambiguous political will at the promotion finally receives the attention it highest level possible within the Government, deserves and that foreign investors receive the is in the team’s view, the way to realize these services they need, while giving more emphasis objectives.124 to investment retention (not just to the attraction of new investors) and focusing on sectors that 102. Third Priority: Need for better and stronger offer more potential for Mongolia. Investment Promotion. Investment promotion capabilities have been dramatically eroded over 104. One major disincentive to the development of the past decade through a series of institutional the mining sector from an FDI perspective is the reforms that abrogated and re-created agencies inconsistency in tax treatment of companies in charge of investment promotion, without operating in the extractives business. As a result retaining the expertise that was part of these of the implementation of requirements relating agencies. Mongolia will continue struggling to to a change in beneficial owner, the tax authority attract new investors but also to retain existing has broad discretion over the methodology for investors until these promotion capabilities taxation of businesses looking to encourage are restored. The key recommendations from investment over a 30 percent threshold. This the IRM 2018 report were: a) to re-create or methodology, for example, can include tax of 10 strengthen the investment promotion capacity percent on aggregate exploration expenditure and b) to design and implement an investment even if such expenditure has not resulted in finding promotion strategy that includes 3 pillars: a deposit for development. There are several projects where tax clearance has been provided • An FDI Attraction and Diversification Strategy in the past, but have been reversed on subsequent to focus promotion efforts on new, under- tax audits, resulting in significant liabilities for the developed sectors with potential (Agribusiness, company concerned. Furthermore, exemptions E-commerce, Eco-Tourism, and others). for internal reorganizations or interpretations of double tax treaties that are clear in the legislation • A Linkages Program or initiative to foster are routinely rejected or challenged. Until there connections between FDI and the domestic is a sensible and consistent policy direction in private sector to increase overall in-country value relation to the taxation of extractive businesses, addition, develop or attract new technologies investment into the mining sector will remain and capabilities, and better integrate local firms very high-risk for potential investors. into the supply chains of foreign investors where possible. 105. Key recommendations: • An Investor Aftercare Program to retain existing • Develop a new Investment Policy with an investments, including in the extractives sector, Investment Policy Statement (IPS) that reaffirms by serving their needs. the Government of Mongolia’s commitment to enforce investor protection and fully 103. These recommendations on investment operationalizing the Systemic Investor Response promotion have not been implemented yet, Mechanism (SIRM) created in 2018. or only partially implemented. For instance, elements of a promotion strategy have been • Develop a comprehensive Business Environment developed with the assistance of the above- / Investment Climate reform program. mentioned IFC advisory project, notably in the agribusiness area, but no comprehensive • Re-create or strengthen the investment promotion FDI attraction and diversification strategy has capacity and design and implement an investment been formulated to our knowledge. Similarly, it promotion strategy with KPIs and use tools such does not seem that a comprehensive linkages as an investment tracking tool. program, nor an aftercare program, have been developed by NDA. Therefore, the recent • Implement a consistent and transparent taxation termination of the NDA and the possible creation policy in the minerals and extractives sector. of a new Investment Promotion Agency under 124 A newly approved (May 2022) advisory project by IFC focusing on several dimensions of Mongolia‘s Investment Policy will continue supporting the efforts to fully implement the SIRM, for instance by aligning the SIRM bylaw with the new governmental structure and by providing capacity-building to key agencies involved, while also assisting with communication and outreach on the SIRM mechanism with the investor community. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 47 VI ATTRACTING AND RETAINING FOREIGN INVESTORS AND INVESTMENT b. New Investment Law 106. While the adoption of the revised Investment Law • Does the GoM want to prioritize attracting new is part of the NRP, vital strategic issues remain to investment or retaining existing investment or be clarified because there is no investment policy both? How will it achieve this? statement. In the WBG’s opinion and experience, • What treatment (i.e., level of protection or policy directions come first and the Investment guarantees) does the GoM want to extend to Law second. In other words, the Investment investors? Against which commitments made by Law should serve to implement the investment investors? policy by translating it into specific legal terms that can be enforced by governmental agencies 107. The above questions need clear directions from and to also provide investors legal mechanisms the highest level of government and should not through court or arbitration, if necessary. If the be left to legal drafters to answer or decide on Government cannot, or prefers not to, adopt their own. Once clear directions are set by the an official investment policy statement, it government policymakers can then go about the should nevertheless formulate clear directions legal task of developing an Investment Law that on the objectives of its investment policy and will support the set objectives. This is why an IPS communicate these decisions to the authorities would have been helpful and was recommended in charge of developing the new Investment by the WBG in the IRM 2018 report. Law. Failing these clear policy directions, the 108. There are other issues that a revision of the Government runs the risk that the lawyers current Investment Law could help resolve, tasked with drafting the Investment Law will among which is the minimum capital required either make marginal improvements or not for foreign investors. The WBG, on several make the improvements that are really required. occasions, has suggested that the minimum Or worse, they could propose provisions that investment requirement of US$100,000 is a could go against the policy directions which the significant barrier to investment by foreign small GoM intends to take. To make our point clearer, and medium-sized firms. Many such businesses we provide below a few examples of the policy cannot afford this amount of investment, nor directions that are needed: does such a threshold provide any guarantee • What economic sectors or activities does the that the business will be successful. In addition, GoM want to promote? Why? when a foreign investor wants to invest in a joint- venture or partnership with a domestic investor, • Will all sectors and activities be fully open to the minimum investment requirement can make foreign participation, or will some be restricted it more difficult for the domestic partner to come or reserved to domestic investors? Which ones and why? up with the required participation amount. This will be a key issue because Mongolia, so far, has • What are the results or contributions the GoM not been able to attract green field investments wants from greater foreign participation in and investors are more likely to look for local these sectors? Jobs, exports, capital injection, SME as partners in export-oriented sectors, such technology diffusion, market access, business as honey, meat, cashmere and leather, and IT. and managerial practices, linkages, others? Are The issue of the minimal investment requirement all of these objectives and potential benefits of FDI equally important and needed or are some has been debated in Mongolia for a long time more important and urgent than others? Which and is still undergoing discussions in Parliament. ones? The new Investment Law needs to address the minimum capital requirement, which should be • What will be the role of investment promotion in the same for all and based on the Company Law. these efforts? 109. The revised Investment Law could also • What will be the role of investment incentives strengthen the investors’ protection framework. and what type of incentives will be used? At what cost to the national budget? How will the As discussed in the IRM 2018 report, the cost-efficiency and transparency of the incentive investment regime would benefit from upgrading regime be ensured? How will their alignment the investment protection framework of the and consistency with the investment promotion Investment Law (MIL 2013) to the level of some strategy be ensured? of the most advanced International Investment 48 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT ATTRACTING AND RETAINING FOREIGN INVESTORS AND INVESTMENT VI Agreements (IIA’s) signed by Mongolia, such as 111. Key recommendations: the FIPA concluded with Canada in 2017, and • Define clear policy directions and objectives as the to the level of best international practices.125 At foundation to base the new Investment Law upon, the same time, the IRM 2018 also stressed that ideally through an officially adopted Investment the protection framework, at whatever level it Policy Statement. is set, needs to be effective, ensuring that it is enforceable and enforced in practice. A recurring • Revise current Investment Law in relation to the observation with regard to law and regulations in issues identified in the IRM 2018, for example, the Mongolia is that, more often, it is not their content minimum capital requirement, the strengthening of investment protections etc. which are at issue but rather their implementation and enforcement, and the laws and regulations • Consider offering investment visas to attract governing investment and FDI are no exception. young foreign entrepreneurs and engineers to encourage a faster development of the IT sector. 110. Another issue that could be addressed within the revised Investment Law is the one- dimensional policy on foreign workers’ visas. For instance, the current policy excludes many foreigners, which may be able to significantly contribute to Mongolia’s development in the IT sector. Making it easier for young foreign entrepreneurs and engineers to secure a working visa would encourage a faster development of the country’s IT sector. Projects announced by the government in areas of renovation and upgrading existing airports, power plants etc. would also often require specific skill sets, which are difficult to find within Mongolian’s labor pool. 125 See Chapter II, Section 3 of the IRM 2018, World Bank. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 49 VII FACILITATING ENTREPRENEURSHIP AND ECONOMIC DIVERSIFICATION a. Policy framework for industrial parks b. The new SME Agency: governance and objectives FACILITATING ENTREPRENEURSHIP AND ECONOMIC DIVERSIFICATION VII a. Policy framework for industrial parks 112. Interest in industrial parks has grown of the country; (ii) transfer, introduce and localize substantially in recent decades, many have new, advanced, environmentally friendly and been developed worldwide for the purposes high technologies; (iii) develop industries with of industrial and associated commercial, low environmental impact; (iv) support national infrastructure, and service activities.126 However, and regional social and economic development; industrial parks have both potentially positive (v) create an environment for SMEs development and negative impacts. While they contribute to and contribute to jobs creation; and (vi) develop economic growth and social development, they waste sorting, recycling, disposal, and burial can also cause negative environmental and industries. social impacts, including contributing to climate change, pollution, resource depletion, labor 114. Although the Revised Industrial Park Law issues, and negative impacts on communities. contains many positive changes by expanding Thus, sensitive planning and management are regulations on industrial and technology needed to mitigate negative outcomes and to parks, there could be certain improvements optimise economic, social, and environmental made in line with best international practices gains. The grouping of firms in defined locations and lessons learned.128 The World Bank has offers potential collaborative and efficiency the following remarks regarding the current gains, for instance by implementing circular legislative framework: economy practices. As developing and emerging √ Broader legal framework and status of an economies seek increased industrial output, industrial and technology park: Article 2 of the there is a pressing need to balance economic Revised Industrial Park Law refers to the status growth with environmental and social objectives. of industrial and technology park legislation by referring to the Constitution, the Revised 113. The Law on the Legal Status of Industrial Industrial Park Law and and other legislative acts and Technology Parks was approved by the to be adopted in line with these laws. It does not Parliament on 5 July 2022 (“Revised Industrial specify laws that shall be taken into consideration Park Law”) repealing the Law on the Legal when developing a park or state whether it would Status of Industrial and Technology Parks supersede others laws. Moreover, the law could which was adopted 2009 (“2009 Industrial Park have clearly identify the jurisdictions of other Law”). Under the previous Law on Industrial and ministries regarding industrial/technology parks. Technology Parks, 11 entities received licences In addition, the legal definition of “Industrial and to create a park, yet not a single industrial Technology Park” (Article 4) could have benefitted or technology park has been established in from further review by introducing the overall Mongolia because of insufficient specifications definition of an "industrial park", which could then in the 2009 Industrial Park Law.127 Given be classified into different types of parks, such as the importance for the Government for light Technology Parks, Special Economic Zone, Free manufacturing and technology development, as Trade Zone, Export Processing Zone, Auxiliary industrial area, or Eco-industrial park etc.129 well as SMEs development, the 2009 Industrial Park Law was revised in its entirety. The Revised √ Infrastructure: Article 4.1.5 of the Revised Industrial Park Law states that the purpose of a Industrial Park Law defines a park’s infrastructure park is to: (i) implement national-level projects as “a complex with energy, heat source, fresh and programs to produce imports and export water supply, sewerage and treatment facilities, substitution products, which are significant for roads and railways in the park area”. The the social and economic development of the Revised Industrial Park Law provides that a park country, and improve economic competitiveness management shall implement the development 126 Industrial parks are known by different names and cover industrial areas, industrial zones, industrial investment regions, special economic zones, and industrial corridors, among others. 127 Үйлдвэрлэл, технологийн парк - ХХААХҮЯам (mofa.gov.mn) 128 The following studies present good practices in industrial parks development: UNIDO, World Bank Group, GIZ, MOTIE (2018). A Practi- tioner's Handbook for Eco-Industrial Parks Implementing the International EIP Framework; UNIDO, World Bank Group, GIZ, MOTIE (2019). A Practitioner's Handbook for Eco-Industrial Parks: Implementing the International EIP Framework – Toolbox; The World Bank (2021). Circular Economy in Industrial Parks: Technologies for Competitiveness; UNIDO (2019). International Guidelines for Industrial Parks 129 As an example, in Vietnam, the Decree 82 enacted in 2018 states: Industrial park means an area that is enclosed by definite boundaries, specializes in production of industrial goods and provision of services satisfying the industrial production needs and is established in con- formity with conditions, procedures and processes prescribed in this Decree. Industrial park is classified into different types, such as export processing zone, auxiliary industrial area, eco-industrial park (hereinafter referred to as industrial park), unless each type is otherwise subject to particular regulations. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 51 VII FACILITATING ENTREPRENEURSHIP AND ECONOMIC DIVERSIFICATION plan of the park, construct, possess and ensure compulsory (Article 12): (1) feasibility study: stable operation of the required infrastructure. (2) development plan; (3) technical and The Revised Industrial Park Law could have technological assessment; (4) environmental benefitted from introducing infrastructure impact assessment; (5) list of park units to classification in terms of internal (or on- be contracted, and (6) opinion of the Citizens site) infrastructures and external (or off-site) Representatives Khural of the relevant aimags or infrastructures (i.e., last mile infrastructures), and capital city. The law does not further elaborate list exemplar facilities under each category. Also, the details for each of the above-mentioned the role and responsibilities of the government in documents and provide clarity on all the relevant building off-site infrastructure should have been regulations that should be considered in licensing clearly stated. parks. For example, a feasibility study typically requires a business plan, technical assessment √ Park ownership: Article 5.2 of the Revised and plans, investor market potential, assessment Industrial Park Law defined park typology based of investors’ demand for various utilities and on ownership. It refers to (i) state-owned; (ii) services, financial modeling and projection of municipally owned; (iii) private; and (iv) other funding needed, and economic impacts study. types of parks.. The law could have expanded Moreover, it is critical that the law requires a the classification of parks by including parks sound market demand assessment that proves that are public-private-partnerships (PPP) and that the park design responds to market demand clarify the role of privately owned industrial/ and future development needs. Moreover, in the technology parks, as well as PPPs. In the case case of greenfield (new) industrial parks, the of PPP, references were made in the Revised applicant should be requested to also submit Industrial Park only in general terms. In addition, the site analysis. There should be clarity on the the Revised Industrial Park Law is not clear on process of obtaining an industrial park license, the process by which a public or private park and a clear set of selection criteria applicable would be approved and the criteria that would be to both public and private industrial/technology employed to grant such approval. parks. √ Selection of location: It would be helpful if the law √ Monitoring of environmental impact: The provides specific provisions for how to select Revised Industrial Park Law assigns the duty of (i.e. specific criteria) the location of an industrial monitoring of the park’s environmental impact to or technology park. The Revised Industrial Park Aimag and capital city governors (Article 10.1.1). Law gives decision powers on location of a Nonetheless, monitoring of environmental park to the Citizens Representatives Khural of impact should be primarily the responsibility of aimags and capital city and the Government the Ministry of Environment and Tourism, or any and this could potentially create an overlap. To other environment-related government entities address any concerns, the law or any regulation Overall, roles and responsibilities of various other to be adopted in light of the law should require ministries, agencies and local governments in that the decision on park location shall be relation to industrial parks should be clarified. performed through consultations between the state central administrative body, with aimag/ √ Park management: The Revised Industrial Park capital city governments. Moreover Article 7.1.6. Law provides that organization, governance, declares that the Government decision on the monitoring and operations relation matters shall park’s location shall take into consideration be regulated by the Company Law. It is important “industrialization, long and medium-term to acknowledge that representatives of tenant development and innovation policy, infrastructure firms shall be present on the management development and raw materials, labor forces and structures such as board. This will ensure that market demands and needs ”. Since park location the park represents the interests of the tenants. is critical for its success, further specification Article 13 of the Revised Industrial Park Law could be mandatory. In identifying a location, catalogues management responsibilities, yet best practice recognizes the importance of those are very basic and could benefit from investor interest, economic activity/clusters, further expansion. Considering international proximity to supplies and services, the presence practice, the park management entity should of an appropriately skilled workforce, logistical have included at least the following: (1) property connectivity and cost efficiencies, maximization management, including plot allotments, re- of user access to sustainable and affordable allotments, development, land use monitoring; unitalities, and avoidance of environmentally and (2) utilities, roads, security, including IT security, culturally sensitive areas to name a few.130 and emergency response services/facilities and wastewater treatment plants and operations, √ Park operation licence: To apply to the central as well as waste heat/energy recovery and administrative body for the park’s operation distribution networks; (3) environmental license, the following documentation is 130 UNIDO (2019). International Guidelines for Industrial Parks. 52 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT FACILITATING ENTREPRENEURSHIP AND ECONOMIC DIVERSIFICATION VII monitoring and advisory activities; (4) common EIPs offer businesses the advantages landscaping, buffer zones, street lighting, of traditional industrial parks, while also security surveillance, and street cleaning; using resources more efficiently, improving (5) provision for facilitating services to and productivity, supporting the achievement of between tenant firms (for example, networking, firms’ social responsibility goals, and lowering collaboration, and training opportunities); (6) exposure to climate change risks. In an EIP, engagement with the park’s stakeholders and enterprises get involved in cleaner production, business representatives; (7) PR and community make effective use of natural resources, and participation center/platform/activities. Also, the enter manufacturing cooperation and affiliation law could have indicated a possibility for hiring to tighten industrial symbiosis to promote park management (contracting). economic, environmental, and social efficiency in their enterprises. Opportunities exist in Mongolia 115. The Revised Industrial Park Law provides the to promote EIPs and secure better access to list of incentives offered with regard to the the global value chain. This can be done by operations of a park, among others, including integrating circular economy solutions, as well tax incentives, stabilization certificates and other as green and resilient infrastructure investments subsidies and incentives. Further, the Revised in industrial parks. Mongolia could benefit from Industrial Park Law provides the activities application of the International Framework for prohibited for the parks, which are production of Eco-Industrial Parks that provides a benchmark alcohol beverages, tobacco and drugs. However, with pre-requisites and performance indicators the legislative framework could be reinforced in four performance areas, park management through further expansion and inclusion of and environmental, social, and economic several issues that appear not to be regulated. performance. These are: (1) requirements for tenants and 117. Key recommendations: their benefits and incentives from allocation in the park. In the case of incentives, reference • Strengthen the legislative framework by to respective regulations should be made with addressing the above mentioned issues by way clarification as to which law takes precedent; of amending the Revised Industrial Park Law or (2) clear definition of administration in the law drafting secondary legislation. that will help manage and coordinate efforts on coordinating industrial parks across the country; • Consider adopting the concept of the Eco- (3) clauses related to anti-speculation and Industrial Park, which has become a recognized alternative dispute resolutions. model across the world’s economies. 116. Considering the importance of sustainable growth and the global trend in greening of the global value chain, the Mongolian government could consider application of Eco-Industrial Parks (EIP) methodology in development of its industrial parks.131 An EIP can be defined as “managed industrial areas that promote cross-industry and community collaboration for common benefits related to economic, social, and environmental performance (WBG, UNIDO and GIZ 2021).” 131 For details refer to: UNIDO, World Bank Group, GIZ, MOTIE (2018). A Practitioner's Handbook for Eco-Industrial Parks Implementing the In- ternational EIP Framework; UNIDO, World Bank Group, GIZ, MOTIE (2019). A Practitioner's Handbook for Eco-Industrial Parks: Implementing the International EIP Framework – Toolbox; The World Bank (2021). Circular Economy in Industrial Parks: Technologies for Competitiveness. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 53 VII FACILITATING ENTREPRENEURSHIP AND ECONOMIC DIVERSIFICATION b. The new SME Agency: governance and objectives 118. The 2019 SME Law is the main legal framework development; earmarking the source of funds for the development of SMEs with the purpose required for promoting SMEs; and establishing to promote their growth, including increasing industrial parks and free trade zones. employment and contribution to GDP. The law defines ‘micro’, ‘small’, and ‘medium’ business 120. The SME Development Fund (SMEDF) was owners operating in the production, trade, and established in 2009 to address the challenge services sector, according to the number of of access to finance by SMEs, yet its role has employees and annual income as presented in diminished over the years. SMEDF provided firms the table below. with low-interest loans at 3 percent interest up to five years. However, operations of the SMEDF Enterprise were not adjusted to SME’s needs, as firms could Number of employees Annual sales income not apply for funding when they needed it, yet type Micro less than 10 employees up to 300 million MNT await the Fund´s announcements.133 Table 4 summarizes the details of SMEDF funding. In 300 million – 1 billion Small 10–50 employees the years 2018-2020, SMEDF noted a significant MNT decrease in the total budget and number of Medium 50–200 employees 1.0–2.5 billion MNT financed projects while experiencing an increase Source: 2019 SME Law in applications. The fund addressed a small share of existing needs, as it was able to fund between 119. The 2019 SME Law introduced a number of 14-16 percent of received project applications. provisions for SMEs and provided a governance framework for various types of assistance for Table 4. Number of firms benefiting from the SME SMEs. Key provisions are: Development Fund, 2018-20 • The amount of credit to be granted depends on 2018 2019 2020 the enterprise size based on the annual sales; The total amount of requested 451.2 178.1 83.6 • Credit for micro enterprises is granted from the funding (in million USD) SME Development Fund, while credit for small Number of projects requested and medium enterprises is granted through 1542 2744 1579 funding commercial banks;132 Total funding amount (in million 36.5 17.4 8.0 • The law intends for enterprise owners to register USD) with the government as an SME, in order to Number of funded projects 212 451 249 benefit from the services; Source: Collected from the SME Policy and Planning Division, • A wide array of support measures is envisioned MoFALI, January 2021. for SMEs comprising of training, financial 121. In 2020, the SMEDF was transformed into the support, easy-term credit, financial leasing SME Agency with a limited role in access to services for equipment, tax alleviation, providing business consultancy, promoting clusters, and finance. After the SMEDF was accused in 2020 assistance to access foreign markets; of the lack of transparency in the process of granting loans,134 the SME Agency was created • SMEs engaged in export can benefit from interest following a merger of the SMEDF and the Small subsidies; and Medium Enterprises Unit of the MoFALI. With a reduced budget allocation, the SME • SMEs have obligations, for example,to comply Agency’s direct role in providing finance is limited to standards, to strive for improvement, conduct to loans to micro firms, while the government reporting on loans, and other credit facilities; aims to promote the Credit Guarantee Fund as • Mongolia’s Parliament (Great Khural), is in charge a tool to facilitate SMEs’ access to long-term of SME policy and funding (Article 14); and the funds from commercial banks. The Agency Cabinet has wide-ranging powers including plays however an important role in channeling implementation of the programs contained in and supporting the implementation of donors’ the law, such as approval for zoning in cluster lines of credit. As described by its management, 132 And from 2021 by the SME Agency. 133 Peter J. Morgan and Naoyuki Yoshino (2021). Leveraging SME finance through value chains in CAREC landlocked countries. Asian Devel- opment Bank Institute. 134 https://news.mn/en/794200/ 54 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT FACILITATING ENTREPRENEURSHIP AND ECONOMIC DIVERSIFICATION VII the SME Agency’s loan process is organized centralized effluent treatment plant in the in a way to ensure transparency and fairness, leather sector and streamlined logistics in the with an online application system and four main supply chains. The Agency is accountable for stages of screening and selection of applicants: cluster development in Mongolia, yet it has (i) application screening by a credit officer; (ii) limited knowledge of relevant methodologies selection by a panel of experts; (iii) onsite visits and overall capacity to execute provisions of of the project; and (iv) assessment of project the SME Law on cluster development. The focus feasibility and decision.135 of the SME Agency should therefore be first on liaising with ministries and cities involved 122. Among the SME Agency´s priorities is to in developing clusters, and focus on resolving strengthen its budget, technical capacities bottlenecks in SME’s access to finance and high- and outreach at the regional level. The SME quality professional advisory services through a Agency employs 40 staff yet it suffers from a coordinated approach.137 lack of presence in the rural areas where many of the 68,000 SMEs operate. Moreover, the 124. The SME Agency could also play a role in Agency has confirmed the need for capacity- promoting SMEs access to digital solutions building activities in procurement, market adapted to their specific corporate and business research, and development of new programs, needs. Mongolia needs to accelerate the rate cluster development methodologies and others. of innovation and entrepreneurship to meet its Sustained and predictable government funding aspirations of building a competitive and digital allowing for multiyear budget planning are economy. Digital solutions can lower transaction critical factors to enable the SME Agency to costs (through better access to information, effectively plan and execute its capacity building communication between staff, suppliers, and and its support programs. Budget allocations networks); increase access to domestic and on an ongoing basis are especially important in global markets (reductions in costs of transport relation to hiring and training of a capable staff, and border operations, increased scope for fixed assets, software, the establishment of service trade); enhance access to finance, training, M&E processes, operational costs, and so on. recruitment, government services; and facilitate These fixed costs need to be consistently met innovation through better integration of data and each year to avoid severe impacts on the SME analysis on business operations (OECD 2021). Agency’s ability to perform core duties. On the While the population has eagerly adopted mobile other hand, project costs are variable and hence technology, the diffusion of digital technologies require commitment flexibility and should be more broadly and among SMEs in particular is financed based on the detailed needs of each lagging. Mongolia’s current ecosystem does program and their intended results. not provide adequate support for entrepreneurs and SMEs have difficulty in finding technical and 123. The 2019 SME Law gives explicit attention to managerial skills, risk capital particularly at early supporting cluster development, which would stages, and support organizations such as hubs, require developing the SME Agency´s expertise incubators, accelerators. in cluster development methodologies. The law defines cluster as a “consistent collaboration 125. In this context, the SME Agency could develop of entities in terms of production, service partnerships with the ICT sector to help target, type, field and geographic location and address SMEs' low level of adoption of digital in manners of diversification and combination” solutions, increase their operational resiliency and promotes clusters through provisions of and raise SMEs' digital competencies. Actions an advantageous tax package and financial could aim to (i) develop a digital transformation support; improved access to infrastructure; road map for Mongolian SMEs with business and facilitating cooperation among entities. continuity considerations; (ii) ensure access Importantly, the establishment of SME-based of advisory services to SMEs interested in clusters is supported by industry associations.136 digitalization, (iii) curate common/horizontal A cluster-based approach may be relevant for enterprise applications available in the market light industries (including wool and leather) for use by SMEs, such as those for accounting, as a cost-reduction mechanism through the human resource management, and electronic/ establishment of shared facilities: examples social-commerce. The SME agency could in include the storage of raw materials and a particular focus on SMEs in the tourism industry 135 Consultations on 03.23.2022 held with Mr. Erdenesaikhan, the Director of the SME Agency, and consultations on 11.18.2021 with Ms. Gerelzaya, Head of Policy and Coordination Department, the SME Agency. 136 Consultations with officers of MWCA, January 15, 2021, and MALP, May 19, 2020. 137 Consultations on 03.23.2022 held with Mr. Erdenesaikhan, the Director of the SME Agency. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 55 VII FACILITATING ENTREPRENEURSHIP AND ECONOMIC DIVERSIFICATION that has been decimated by the impact of 127. Key recommendations: COVID-19 as in many other countries but has significant potential to diversify the economy • Determine up front an appropriate budget to and to provide private-sector employment for cover both specified operating costs and program costs over the medium-term to enable efficient Mongolia’s growing number of well-educated, planning. English-speaking youths. 138 • Build the operational capacity of the SME Agency 126. Overall, the SME Agency will need to carefully through knowledge gaps assessment of staff and determine the type of beneficiaries targeted specific courses/training/knowledge exchange in priority, and pilote well-focused support sessions with experts to address deficiencies programs. As the SME Agency is still in the early in the operational capacities revealed in the phase of its development, KPIs and an effective knowledge gaps assessment. M&E system are yet to be defined and will benefit from preliminary returns on the various • Undertake periodic firm surveys and focus groups collaboration programs where the SME Agency is of potential beneficiaries to validate SME needs, getting involved. However, entrepreneurs, SMEs, program design and KPIs. startups, each of these potential beneficiaries • Pilot new programs supporting SMEs requires targeted interventions. In particular, the digitalization and economic diversification, distinction between startups and SMEs needs to incorporating international best practices in be made and integrated into program designs. design, implementation, and program monitoring, Startups—high-risk enterprises purposely built notably in the ICT and the tourism sectors. for high-growth—need inputs and interventions suitably designed for high-risk and high-growth. • Expand the SME Agency´s outreach in the In turn, SMEs are existing firms that follow regions through fostering partnerships with local established business models and seek to grow authorities and international agencies. organically over time, using income or traditional credit to finance their growth. While established SMEs are less likely to grow fast, they remain the main source of private sector activity in many sectors and regions, and therefore policies which improve the productivity of SMEs bring considerable economic benefits. In addition, given the gender gap which has been noted in other research, the SME Agency’s support programs should consider initiatives specifically focused on women-managed businesses (Annex 2 summarizes fiindings regarding gender and the business environment in Mongolia). 138 News.mn. Mongolian tourism sector decimated by Covid-19. https://news.mn/en/796003/ 56 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT ANNEX Annex 1: Overview of the Mongolia 2019 Enterprise Survey Businesses participating in the World Bank Enterprise Surveys are asked for their opinion on the relevance of various business environment elements in a systematic and comparable way. They can rank their response on a 5-step scale from ‘no obstacle’ to ‘very severe obstacle’. Also, from a list of 15 business climate factors, respondents are asked to choose the biggest obstacle to the current operations of their establishment.139 The ES questions for the business regulatory environment aim to cover the biggest obstacle to the current operations of the establishment, regulations, taxes, and trade. The sampling structure of the ES questionnaire only covers manufacturing, retail, and other services. Therefore, a more disaggregated sectoral analysis is not feasible. Firms report corruption, tax rates, access to finance, and political instability as the most important obstacles in their business environment. These factors are barriers to growth and job creation. More than one-third (35 percent) of employers responding to the 2019 Enterprise Survey round identified political instability as the most important obstacle to their current operations. Tax rates and access to finance were mentioned by 17.2 percent and 15.9 percent, respectively, with corruption issues cited by 9 percent for firms, followed by inadequately educated workers (5 percent). According to the size of firms, the constraints were perceived as follows: small firms and large firms confirmed political instability as the biggest constraint for 36.52% and 28% respectively, whereas 28.57% of medium firms perceived tax rates as the biggest constraint to operations (Figure 11). The perceptions of managers among the different size of firms can differ based on the capacity to navigate business environment obstacles: larger firms may have more options to face obstacles, but at the same time they are also more visible and more exposed to failures of the business environment. Figure 11: Constraints to Mongolia’s business environment (in percent) Source: World Bank Enterprise Surveys, Mongolia 2019. Category ‘other constraints’ include labor regulations, transport, access to land, electricity, courts, as well as crime, theft, and disorder. 139 The World Bank Enterprise Surveys cover a country’s non-agricultural economy. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 57 ANNEX Figure 12: Biggest Obstacle in the Business Environment by Firm Size 140 Source: World Bank Enterprise Surveys for Mongolia 2019. Political instability is considered the largest obstacle particularly among retailers (43 percent), firms with foreign ownership (44 percent), and companies 20 years or older (66 percent). Only for manufacturers, exporters, and relatively young employers (operating for ten years or less) is the political situation not the biggest concern. Instead, access to finance is the top obstacle for manufacturers (30 percent of manufacturers) and exporters (42 percent). More than one-third of younger employers see tax rates as their biggest challenge. While concerns regarding the political situation had been voiced in the past, its significance for Mongolia’s private sector has increased substantially since 2009. Similarly, a smaller, but growing share of employers considers corruption the largest obstacle. The share of firms perceiving corruption-related issues as the biggest challenge increased from 4 to 9 percent between 2009-2019. The share of firms identifying tax rates as the main constraint remained relatively constant over time, reaching 17 percent in 2019. Figure 13: Top five business environment constraints: trends over time Source: World Bank Enterprise Surveys for Mongolia 2009, 2013, 2019. Category ‘other obstacles’ include tax administration, practice of the informal sector, business licensing, labor regulations, transport, access to land, electricity, crime, theft, and disorder. The changed view on Mongolia’s business environment is largely confirmed when looking at the severity of individual business climate factors over time. In 2019, one in two firms ranked Mongolia’s political situation/ instability as a major or very severe obstacle, up from 30 percent in 2009. Regarding corruption, there are signs of polarization with the share of firms either having no concerns or rating it as a major or very severe obstacle increasing over time. Heightened concerns regarding political factors and graft are mainly driven by medium-sized and large, established firms (20 years or older), many of them in the retail sector. 140 Small firms are defined with 5-19 employees; medium firms with 20-99 employees and large firms with 100+ employees. 58 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT ANNEX For what concern the business-government relations141, the top three obstacles perceived as a major or very severe obstacle to the current operations are political instability, corruption, and tax rates. Firms interviewed considered political instability (38.33%); corruption (25.28%) and tax rates (17.78%) as very severe obstacles when dealing with government officials and their agencies. On the other hand, firms were strongly satisfied with the functioning of the courts (61.39%); health and hygiene regulations (54.72%), and occupational safety regulation (52.5%) (Figure 14). Figure 14: Biggest Obstacle to Business-Government Relations Source: World Bank Enterprise Surveys for Mongolia 2019. The top three major obstacles in business-government relations were perceived mainly by foreign and small firms. Foreign firms confirmed political instability (63%); corruption (45%), and tax rates (63%) as a major or very severe obstacle. Similarly, small firms perceived political instability (54%) and corruption (39%) as the most severe constraints to the business environment, whereas tax rates (51%) were considered very severe or major obstacle by the majority of medium firms. On average, the time requested by government regulations was not considered a big constraint to the business operation, however, the licensing and permit process is quite lengthy. For example, 55.83% of firms replied that Senior Management142 spent – on average – 10% or less of their time dealing with the requirement requested by government regulations versus 36% of staff spending 50% or more of their time. However, obtaining an operating license and construction permits was considered quite lengthy, taking more than 30 days, from the day of the application to the day it was granted, with 27% and 30% of firms, respectively (Figure 15 (a)). Large firms, which are mostly characterized by foreign ownership, are the most constrained in terms of import licenses and construction permits (Figure 15 (b)). Informal payments to public officials are very low, but more frequent in small firms. The average of informal payments to public officials with regard to customs, taxes, licenses, regulations, services, etc. is 0.5% of total annual sales equivalent to 558,421 MNT. Small firms are more likely to provide informal gifts/payments to public officials with 6% of firms spending more than 5% of annual sales. Small firms are generally characterized by domestic ownership compared to large and foreign firms. 16.9% and 10.29% of firms have used informal payments for obtaining operating licenses and construction permits (Figure 16 (a) & (b)). 141 Questions in the ES asses how establishments, deal with government officials and their agencies. 142 Senior Management includes managers, directors, and officers above direct supervisors of production or sales workers. MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 59 ANNEX Figure 15 (a): Percentage of firms in obtaining Figure 15 (b): Percentage of firms in obtaining permits/licenses permits/licenses by firm size Source: World Bank Enterprise Surveys for Mongolia 2019 Figure 16 (a): Informal Gifts/Payments Requested by Figure 16 (b): Informal Gifts/Payments Requested firm size by type Source: World Bank Enterprise Surveys for Mongolia 2019 In relation to international trade, the average time to clear exports and imports through customs is five days, with larger firms as the most efficient. Although the ES in 2019 counts around 46% of importing143 firms and only 6% of exporting144 firms, 77% of exporting and importing firms take five days or less for exported goods to clear customs and 79.15% for imported goods (Figure 17 (a)). Efficient custom procedures enable businesses to directly export and import goods. Constraints at customs clearance are perceived differently by firm size: the larger the firm, the less days are needed at customs, with medium and large firms taking on average a maximum of one day compared to small firms (Figure 17 (b)). 143 Firms that use inputs of foreign origin. 144 The variable captures the percentage of firms that export directly at least 10% of their total annual sales. 60 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT ANNEX Figure 17 (a): Time to clear customs Figure 17 (b): Time to clear customs by firm size Source: World Bank Enterprise Surveys for Mongolia 2019 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT 61 ANNEX Annex 2: Gender and the Business Environment in Mongolia The regulatory framework in Mongolia promotes gender equality, however, discrimination against women in the labor market remains common. According to the Global Gender Gap report145 Mongolia scores relatively well (a score146 of 0.716) compared to Kyrgyz Republic (a score of 0.681) and Tajikistan (a score of 0.650), lagging behind Lao DPR (a score of 0.750). In 2020, women represented 51% of the total labor force participation while 6.71% of the total female labor force is unemployed.147 According to ILO,148 the inactivity rate149 of women with advanced education is 16% higher than men with the same education level. Women’s rights in the economic sphere are guaranteed by the Law on Promotion of Gender Equality (2011) and the Family Law (1999), particularly when dealing with starting a business. Women are concentrated in employment sectors typically paid through state budgets and the lowest salaries, mainly for support positions in retail and catering, and teaching.150 Because of household and family responsibilities, women are often subject to discriminative practices with respect to recruitment, equal pay for work, and equal work and maternity protection, as well as sexual harassment.151 There is a male predominance in the ownership of housing which prevails in current laws and regulations. Sixty percent of land ownership in Mongolia is held by men, with 33% held by women, with 55% of men and 27% of women having registered their ownership rights.152 According to the National Statistics Office (NSO) of Mongolia, the proportion of women-headed households has decreased from 11.3% in 2008 to 8.1% in 2016.153 As is the case elsewhere, women-headed households are the more vulnerable to poverty. Female heads of households are engaged in unpaid care work which prevents them to undertake employment, particularly in rural and remote areas, where men own three times more than women's homeownership certificates.154 Although the Civil Code recognizes equal ownership rights to immovable property,155 registered assets after marriage are a common property of family members, and the person in whose name this property is officially registered may dispose of those assets without the consent of other family members.156 According to the Enterprise Survey,157 women share many constraints to entrepreneurship with those owned by men, yet their participation in businesses is often informal. According to the Women Business Law indicator for entrepreneurship,158 women improved by 25 points over the last decade and achieved the highest possible score in 2021. After the communist era,159 women became highly educated160 (the labor force with advanced education is 64%161 vs. 76% for women and men respectively in 2020) and aware of their right to start their own business.162 Similarly to men,163 women entrepreneurs face the highest constraints on political instability (30.88%), tax rates (26.27%), access to finance (15.21%), and an inadequately educated workforce (11.52%) (Figure 18). 145 The full report is available at https://www.weforum.org/reports/global-gender-gap-report-2021. 146 The Global Gender Gap score is based on the population-weighted average for 156 countries in 2021. On average, the gap in Mongolia has been reduced by 0.025 points compared to the previous edition of the index in 2006. 147 World Bank Indicators, accessible at: https://data.worldbank.org/indicator/SL.TLF.CACT.FE.ZS?locations=MN 148 Data available at: https://ilostat.ilo.org/data/. 149 This indicator conveys the number of persons of working age outside the labour force (that is, not employed or unemployed) expressed as a percentage of the working-age population. 150 IFC. 2021. SMEs and Women-owned SMEs in Mongolia. 151 IFC. 2021. SMEs and Women-owned SMEs in Mongolia. Initiatives, like the UN Committee on the elimination of discrimination against women (CEDAW), ensure gender-sensitive practices to women employment. 152 ADB. 2018. Measuring asset ownership and entrepreneurship from a gender perspective. Methodology and Results of Pilot Surveys in Georgia, Mongolia, and the Philippines. Manila. 153 Green Climate Fund. 2021. Gender Assessment. 154 ADB. 2018. Measuring asset ownership and entrepreneurship from a gender perspective. Methodology and Results of Pilot Surveys in Georgia, Mongolia, and the Philippines. Manila. 155 Art. 127(2) and 128(1). 156 Green Climate Fund. 2021. Gender Assessment. 157 The World Bank. Enteprise Survey 2019. 158 Data are accessible at https://wbl.worldbank.org/en/wbl. Indicator-level scores are obtained by calculating the unweighted average of the questions within that indicator and scaling the result to 100. 159 During the communist period (from 1924 to 1990), governments provided equal educational opportunities for men and women. 160 According to ILOSTAT, women are almost 10% more educated than men (2010) 161 World Bank Indicators. Available at: https://data.worldbank.org/indicator/SL.TLF.ADVN.MA.ZS?locations=MN 162 Aramand, M. 2011. Women entrepreneurship in Mongolia: the role of culture on entrepreneurial motivaton. Equality, Diversity and Inclu- sion: An International Journal. 163 This finding can be justified by the fact that most of the key business decisions are taken by men and women together (IFC. 2015. 62 MONGOLIA BUSINESS ENVIRONMENT AND COMPETITIVENESS ASSESSMENT ANNEX According to the Global Findex, women164 and men have 95% and 91% access to a financial account, respectively, and women entrepreneurs are protected by the Family Law (Art. 10) and the Law on Promotion of Gender Equality. However, banks are always reluctant to accept collateral and to offer loans to women entrepreneurs165 : loan repayment rates are higher in the case of women entrepreneurs because their business is perceived as riskier than for men. However, this is often because the needs of women entrepreneurs are not sufficiently represented by the Business Women association when dealing with the government166. It is a common phenomenon that women work for family businesses without formalizing their shares in those businesses, leaving women with any share of the business in the case of a divorce167. More women, particularly in rural areas, take on insecure informal work and unpaid family work, and far few women participate in entrepreneurial endeavors compared to men168. Under informality, women scarify their property ownership right in favor of their husbands in order to access finance as a family169. Figure 18: What is the biggest obstacle to the business environment faced by male and female entrepreneurs? Source. World Bank Enterprise Survey 2019. 164 Adults with age 15+. 165 World Bank interviews. The Law on Promotion of Gender Equality Art. 9 prohibits discrimination in access to credit based on gender. 166 World Bank interviews. 167 ADB. 2019. 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