By E.Saikhantuya
Hall A of Parliament House is where the Standing Committee on the Budget is today discussing matters to do with the Development Bank, after they have passed through the Standing Committee on the Economy and through the MPs’ group of both parties. The proposed bank will play a pivotal role in the country’s economic growth.
The 11 MPs present have just heard a brief introduction to the draft law, and the question and answer session begins. Kh.Badelkhan and O.Chuluunbat ask the Finance Minister for some clarification. Minister of Road, Transportation, Construction and Urban Development Kh.Battulga is busy talking on his mobile phone, while R.Gonchigdorj is fascinated by his laptop, ignoring some other MPs who are sharing a joke.
As the session nears an end, D.Damba-Ochir enters, takes his seat and immediately raises his hand to ask a question, but the chairman takes no notice. The disappointed MP must be wondering why. The Finance Minister’s answer to the question refers to ‘GDP’, ‘CIC’, ‘assets’, ‘balance’, ‘concepts’ and such abbreviations and jargon. Journalists covering the meeting are unhappy that they do not understand much of what he says. After half an hour of “discussion”, it is decided to send the draft law back to the Standing Committee on the Economy. It was the third item on the day’s agenda, and now is time for lunch.
No wonder people know little more about the Development Bank of Mongolia than that it will be owned by the state. Its structure, organization, management and operational principles are expected to be ready by March 2011. The six months since the government approved a resolution on establishing the bank have seen politicians, businessmen and experts give their opinions and views -- some enthusiastic, some wary – on the novel concept. Here I shall give some basic information on the country’s first bank of its kind.
What is a development bank, and why is one needed? Briefly and basically, it is established by the government as a financial institution to provide the kind of capital credit that the private sector cannot get from commercial banks for major long-term social and economic projects. Most of the countries that have one choose to call it a Development Bank and it is generally owned 100% by the Government. Mongolia is treading the same path. The need was more pronounced here as the commercial banks do not have sufficient funds to meet the needs of the mining industry. The Government hopes the bank will play an important role in developing the primary and strategically important sectors in compliance with the country’s policy, promoting value added exports and improving the competitiveness of the country.
Who benefits from the Development Bank?
Analyst Mark Muller says the fate of development banks is never secure. Some of them fulfil the original objectives of establishment, while some of them go bankrupt and some others hover near bankruptcy. The experience of most developing countries having such a bank has not been happy in the 100 years or so since such banks were first established. Muller linked the bad experience with the governance level and mentioned a number of cases to show how the power and capital base of development banks were used to make corrupt decisions, and how initial objectives were gradually forgotten, through ineffective operation. Development banks in most Caribbean countries, Latin America and Africa proved to be unsuccessful and many went bankrupt due to corruption leading to deliberately imprudent decisions. Irresponsible and inefficient use of public funds to finance unworthy projects causes distrust and once the World Bank and other international financial powerhouses refuse support, such banks become unviable. Corruption is the first thing a Development Bank cannot afford.
Examples good and bad
That said, it is time to look at success stories. The Development Bank of Singapore has played a significant role in turning the small city state into a major financial centre. Since its establishment in 1968, it has been funding projects and programmes pivotal for economic growth. Every year it has been expanding its area of operation by establishing branches in different counties, offering fair and reliable financial services. Another notable success has been in Japan. The development bank there was established some 60 years ago and it served as the main model for similar banks in South Korea and China.
Among those taken to be the most unsuccessful examples are the development banks in Thailand, the Bahamas and Barbados. The Thai bank has gone bust. In the Bahamas, the development bank was set up in 1978 by a Government decision. Its original objective was to support and boost primary sectors in the economy such as agriculture, tourism and transport. Over the years, the burden of bad loans issued by a corrupt management has become too heavy and the bank teeters on the edge of bankruptcy. Most other countries usually allow the bank to be privatised at this stage.
Who bears the risks?
The answer is easy. If the development bank fails, it is the Government’s loss. More aptly, it is the taxpayers’ money down the drain. Thus it is most important to make sure during the preparation work that the bank should have a clear policy, rules of business and operational transparency. In our case, MNT16.7 billion of what is essentially the taxpayers’ money was allotted from the 2010 state budget to provide for the bank’s capital, and to meet the costs of registration as a legal entity and of forming a company.
There are many who doubt if the work of the development bank will be transparent. What makes them particularly unhappy is that no expert opinion was sought before formulating the draft law to govern the bank. The media feel that the selection of the management team of the bank is being done almost in a secretive manner. The development banks of South Korea and Japan have submitted bids and indications are that the former is the favourite. Now, both banks are 100% owned by their respective governments and it is a matter of obvious concern that a foreign Government institution is to manage Mongolian development.
The Government last year sent a team to study how the development banks work in Japan, China and Korea. Officials of the Japanese bank were invited to Mongolia to give suggestions and share their experience. At that time, the idea was to study models and there was no talk of handing over management to any foreign state owned bank. It is quite unacceptable that such a bank will have an important say in forming and implementing the economic policy of our independent country. It would make more sense to ask a private professional institution, such as, say, JP Morgan for assistance if we lack internal resources for proper management.
No law yet, but executive board has already been formed
We need a new set of regulations and guidelines for the development bank. A draft law was formulated jointly by the National Development and Reforms Committee and the Ministry of Finance and this is now being considered by the standing committees of Parliament. Strangely, the executive board of the bank has been appointed without waiting for the law to be approved. Finance Minister S.Bayartsogt explained the anomaly by saying time was running out and there was no other way.
The development bank law requires amendments to existing laws. Its draft says the Government should guarantee loans taken for development programs and any project guaranteed by the Government should be funded by the development bank. Both provisions contravene Article 6.3 of the consolidated budgetary law, which prohibits the Government from taking loans on commercial terms for any purpose and also from guaranteeing any such loan.
The chosen board consists of Ch.Khashchuluun, Chairman of the National Development and Reform Committee; B.Darinchuluun, a department director at the Government Secretariat; Kh.Volodya, a department director at the State Property Committee; J.Ganbat, a department director at the Ministry of Finance; B.Enebish, executive director of Erdenes MGL; S.Meyanathan, former World Bank representative in Mongolia; D.Enkhjargal, the Mongolbank representative in London; Peter Morrow, Khan Bank advisor; and L.Bolormaa, executive director of BFAS LLC. Many feel that independent members are under-represented. The authorities’ answer is that all appointments could be reviewed once the development bank law is in force.
Fixing the interest rate for all loans from the development bank will be a tricky problem. Development projects have a claim to long-term credit, as also to pay low interest but such generosity must be kept within limits, as commecial imperatives can be ignored only at the cost of sustainability. The draft law should offer clear guidelines on this.
It is a pity that there should be so much amuity surrounding the development bank. Doubts thrive when there is lack of information. It is not fair to blame MPs, for most of them have as little information as we do. Maybe they were so uninterested when the draft law was being discussed because they had seen the company already established, its board appointed and a management team all but selected, without any reference to the law. The mobile phone, the laptop, the jokes among themselves – all these might well have been their deliberate expression of frustration at the way the whole thing is being handled.