Mongolian babies have their first ritual haircut around when they are three years old. This time has now come for a national baby brought to the world in the hot September of 2012, which the Mongolian Government named after Chinggis. The original Chinggis made his own laws, but this poor bond received all its international mercantile authority and validity from Parliament’s Resolution 52 of October of that year.
Three autumns later, the bond is back in public discourse. The Parliament Speaker has announced that they plan a successor to the Chinggis bond, but has omitted to reveal how they plan to redeem the present one, or how its proceeds have been spent, or what its results have been. What matters is floating a new set of bonds worth $2.1 billion in quick time, to prop up the MNT against the USD until the election, and to fund projects that would yield political dividend. However, the people rightly demand a few answers before the next mega public debt is issued.
We know to whom we should direct our questions. They are all well-known names and together they formed the 15-member Chinggis Bond Policy Council, as we might call it. They are, with their official position at the time:
N.Altankhuyag, Prime Minister
N.Batbayar, Economic Development Minister
B.Garamgaibaatar, head of the Standing Committee on the Economy
Ts.Davaasuren, head of the Standing Committee on the Budget
P.Tsagaan, part of the Office of the President
D.Odkhuu, Senior Advisor to Parliament Speaker
N.Zoljargal, President of Mongolbank
D.Bayarsaikhan, of the Financial Regulatory Commission
Ch.Saikhanbileg, Head of the Cabinet Secretariat of the Government
Ch.Ulaan, Minister of Finance
Kh.Battulga, Minister of Industry and Agriculture
Ts.Bayarsaikhan, Minister of Construction and Urban Development
M.Sonompil, Minister of Energy
A.Gansukh, Minister of Roads and Transportation
E.Bat-Uul, Governor of UB.
These 15 are the people who took the final decision on the projects to be financed by Chinggis Bond, after having formulated the criteria for selection, and also putting in place a mechanism to protect the investments from risks. It is significant that the group included ministers entitled to spend the highest amount of money from Chinggis Bond. This means they could select the projects themselves and also decide on how to spend the allocated money.
Before we welcome the new bond, we must know if the Policy Council fulfilled its responsibilities honestly, if the ministers financing their pet projects were keeping an eye on how the money was actually being spent or where it was going. Were the risk-protection buttons ever pressed? Parliament should have an open discussion on these questions about every project.
What was the role of B. Garamgaibaatar and Ts. Davaasuren – respectively head of Parliament’s standing committees on the Economy and the Budget – in projects on which Chinggis Bond funds were spent? Only 15 projects ate up $1.5 billion. The number is small enough, so MPs can do the auditing easily, without tiring their brain or losing focus.
Between 2013 and 2022, payment of interest on the bonds will cost the state budget a total of $615 million. This, added to redemption of the principal on maturity, works out to $2.1 billion. Half of the bond sale receipts was spent on 10 projects that were expected then to make money that would be used to redeem the bonds when the time came. MIAT purchased Boeing aircraft with its allocation and repaid $84 million from its operational revenue. What the other 9 did with the money they spent is now noted as “uncertain”.
Redemption of Chinggis bonds will be done in two instalments, the first in January 2018 and the second in late 2022, the latter perhaps too far away to worry us now. Some of that part of the money -- $660 million -- was earmarked for the Gudamj (Street) project, and for building roads connecting UB to aimag centres, and for reconstruction of Ger districts. This is money meant to be repaid from the State Budget, but the rest of the maturity payment is to come from projects which should be earning enough on their own to repay the investment on them.
Many will clearly not be able to do so, for various reasons, some justified. For example, each of three proposed iron ore processing facilities was given finance for up to one third of the planned total investment, they themselves raising the rest. The plants were completed on time, but have mostly been idle as the market collapsed. The problem is that even legitimate excuses are of no help when bond holders have to be paid. It seems likely that the sales proceeds of the new bond will be used to meet the old debt, but that is not prudent economics. The alternative is to go Argentina’s way.
Now let’s talk of the projects that do not have any acceptable excuse for their non-performance. Heading the list is the 267-km railway from Tavan Tolgoi to carry coal for export – a project Mongolians have talked about for almost their whole life. The total cost was put at $700 million. The National Security Council decided in December 2012 that Chinggis Bond money will be available to meet up to one-third of the estimated cost of projects which would, on completion, generate enough revenue to contribute to the repayments when the bonds matured. $200 million was accordingly allocated by the Mongolian Development Bank for building the Tavan Tolgoi – Gashuunsukhait railway, on the understanding that the project owners would arrange for the rest of the funds needed.
This was given out to be no problem as N.Munkhbat, Director of the Development Bank, certified to the worth of the project and predicted it would recoup the investment costs within 8 years. In fact, however, no investor could be found, until it was announced in March 2013 that South Korea’s Samsung CT would be the general contractor to finish the work.
However, there had been no public tender, nor was there any written agreement. A.Gansukh, who, as Minister of Road and Transportation, was responsible for the project after taking it from Energy Resources Rail LLC (ERR) into state ownership, explained that he was merely honouring a verbal agreement reached between ERR and Samsung CT.
A verbal agreement has no documentary evidence, but in any case there does not seem to have been any. ERR had indeed floated a tender and Samsung C&T had been just one of the shortlisted bidders when it lost control of the railway to A. Gansukh’s team. Gansukh then announced that the terms of the (non-existent) agreement had been re-negotiated. Samsung C&T (now called only Samsung) would not have to install the signalling and communication system or build the terminal building, but even for doing less it was to be paid $45 million more than what ERR had stipulated. Amazing, isn’t it?
The railway project turned out to be the largest recipient of Chinggis bond funds, and this suspicious agreement was how it all started. One wonders what the powerful Policy Council was doing. It was set up for the express purpose of preventing this kind of deals. And the National Security Council guidelines wanted public control over all Chinggis Bond spending by making the Policy Council’s work open to the public. Clause 3.2 of the guidelines is explicit that the Prosecutor’s Office, the Independent Authority against Corruption, and the General Intelligence Agency will be co-operating to ensure that all spending of Chinggis Bond money, selection of the projects and their implementation process would be protected from corruption, misuse of official position, and conflicts of interest.
If these exalted and powerful organizations had done their job honestly, A. Gansukh’s team would not have been able to get $55 million from the Development Bank to pay for dubious consultancy services. There was a clear conflict of interest. Giving Chinggis Bond money for a project run by people who were at the same time trying to set up the Mongolian Railway Infrastructure Company and signing MoUs on that with companies in Hong Kong, was the same as keeping your sheep in the care of wolves.
A feature of the agreement the head of the Mongolian Railway JSC signed with Samsung on building the TavanTolgoi-Gashuunsukhait railway in May 2013 was that the Mongolian Railway had no financial power or authority. $200 million from Development Bank went directly to Samsung CT, as the Ministry wished.
The poor head of the Mongolian Railway signed the agreement and also signed away his financial authority on the orders of his boss A. Gansukh,who was physically not on the scene, responsible for nothing, but no one had any doubt he and Kh. Battulga had set the whole thing up, both being experienced behind-the-scene operators. It is a joke that Gansukh has issued a dare to the Independent Authority Against Corruption to investigate the Tavan Tolgoi-Gashuunsukhait railway project. He may pass every financial audit, saying he never signed any payment but he knew of every single transaction and is morally responsible as the Minister in charge for how $55 million from the Development Bank, and $200 million from the Chinggis Bond were spent without any benefit to the country. The loss is the Mongolian taxpayers’. As Minister for Transportation, he cannot shrug off responsibility for his department officers’ actions, and it is also his administrative failure if a project is found to be so mismanaged.
Despite receiving $200 million from the Mongolian Development Bank, Samsung CT is seen to have paid just $70 million to the sub-contracted 13 Mongolian companies. Nobody is asking questions on where the rest of the money went. As a lawyer, Gansukh would point the finger away from him and direct it to Samsung CT. But he was the ultimate head of the project, and the Minister. Certainly he had a responsibility to see that Chinggis Bond money was being properly spent in a project of his Ministry. How can some leaders talk about a new bond, when the people want to know how the Chinggis Bond money has been spent?
Samsung’s agreement with the Mongolian Railway was to end in September 2015, but it has been extended by a month on the request of the Mongolian side. In the meantime Shenhua of China has been asked to build the 267-km Tavan Tolgoi-Gashuunsukhait railway. If Energy Resources had been allowed to do the job – something it tried on two occasions since 2009 -- 51 percent of the railway would have been transferred to the Government free of charge after 19 years of usage, with a Mongolian company holding the remaining 49%. Now this 49% will be in the hands of Shenhua. The irony is that it is the actions of the same two Mongolian ministers who have always raised the Chinese bogey that have finally led to allowing a Chinese state owned company to own 49 percent of a railway in our territory. There is talk about holdng a formal ceremony to have Shenhua as the successor to Samsung CT in the agreement with the Mongolian Railway. Will that mean a burial of the issue of so much money spent on soil removal along 267 km and a curtain drawn on gross, if not deliberate mismanagement by the Ministry?
Mongolians can only hope that money from the next bond will also not end up as a play thing for politicians. It will be a difficult investment to sell, and the interest rate could very well have to be 8-9 percent while that for the Chinggis bond was between 4.1 percent and 5.1 percent. An indication of this is how the interest or yield on the $500-million bonds issued by Trade and Development Bank in May 2015 was 9.375 percent while that on the Mongolian Government’s $160-million Dim Sum bonds was 7.5 percent. There is no option to offering the high interest, as Mongolia urgently needs money to survive. Another huge burden of public debt will be on us, and it will be said that the economy cannot grow without investment.
No individual in a position of authority and no institution such as Parliament or the Government are making any public statement on how we plan to redeem Chinggis Bonds on maturity, maybe because those in power now fear they may not be there after the next election. The politicians who talk about offering a new bond, the most prominent among them being Parliament Speaker Z.Enkhbold, are those who see themselves in government then. n
L.Bolormaa