Matthieu Le Blan, Head of the EBRD Residence Office in Ulaanbaatar, tells N.Ariuntuya of MMJ why “Mongolia remains very much a land of opportunity”, how the EBRD Board rates the utilisation of the investments made by the bank in Mongolia and what its future strategy and role in the country would be.
As you watch Mongolia pass through a period of deteriorating economic conditions, what do you think of our economic and social prospects?Mongolia has been facing a challenging macroeconomic situation for the past two years, mostly due to the sharp decrease of foreign direct investment (FDI). Mongolian politicians agree that in addition to the depressed commodity prices, there were some self-inflicted wounds such as the changes made in the Foreign Investment Law which deterred many potential investors. Before this, the first attempts to renegotiate the Oyu Tolgoi Investment Agreement in 2011, combined with the moratorium on new mining explorations introduced in 2010, had already damaged the country’s reputation.
However, the Mongolian government has been able to fix many of the issues which, in the long run, will enable the country to take advantage of renewed interest in its exceptional resources. Junior mining companies have difficulties obtaining credit in any country, this is not particular to Mongolian projects. Mongolia remains very much a land of opportunity.
On the social side, the government, international financial institutions (IFIs) and major companies should work together to show that the process begun 25 years ago is still the most valid and efficient way to improve people’s lives. Resource nationalism does not work, a directed economy does not work and pressure on economic freedom doesn’t work. What works is adaptability, an open mind, resourcefulness and ingenuity, all of which can be observed in Mongolia and its people. Combined with its natural resources, the country can only be at an advantage if these fundamental values, which are also shared by the EBRD, continue to be strengthened.
How do you evaluate the performance of Mongolia as far as EBRD involvement is concerned? What is your opinion of the obstacles and opportunities in the Mongolian economic environment?Mongolia remains a success story for the EBRD, in many respects. As a vibrant democracy where policies can be quickly improved and where resources are plentiful, Mongolia’s base for future development is still very robust. The ups and downs of the economy should not hide the long term prospects for the country, which are very good.
However, it would be fair to say that in the short to medium term, there are many challenges.
The first obstacle is to put Mongolia back on the investors’ map. The sharp economic growth of 2011-12 was driven by FDI. This needs to happen again and, based on lessons learned, be managed in a proper way – that is to say, by keeping a good investment climate, creating a sustainable sovereign wealth fund, and by ensuring growth is managed by professionals and not politicians.
The gest obstacle I see for diversification is the lack of human capital. With a small population, it is difficult to create national champions who will be able to export and create value. That is why Mongolia has to focus on import replacements and creating a niche market for Mongolian products. High value-added products will always find their market. Regarding import replacement, even though this trend has greatly improved recently, with positive balance of payment, there is still a lot to be done. Mongolia still imports too much.
The last barrier to economic development is access to capital, not only through commercial banks, but also access to quality equity investors. These are what we would call strategic investors, who not only bring in money, but vital expertise and market knowledge.
Mineral commodity prices have been falling dramatically. Will this cause difficulties in redeeming the Mongolian Bonds, or will there be another bond whose sale proceeds will be used to repay the one that matures? What are the advantages and disadvantages of repaying the bond in this manner?The bond repayment issue is interesting. Many entities of the country, ranging from the government, the Development Bank of Mongolia, to major companies and sometimes commercial banks raised money for these bonds a few years ago. Indeed, many of those bonds will have to be repaid in the next two to three years. This is not a problem, as we can expect refinancing opportunities but obviously, because the world has changed and Mongolian risk is perceived by the markets to be higher than before, we can expect an increase in pricing. This is also a reflection of general uncertainties and a result of poor policies of the past. It’s important to smooth the repayment schedule and adapt it to the important money flows which will happen once OT Phase II starts and, hopefully, junior mining companies see Mongolia as a good place to do business again. Mongolia will achieve this by being credible, not changing policies abruptly and respecting the sanctity of contracts, all of which will be critical in improving the risk perception of the markets and, ultimately, decrease interest rates.
A delegation of the EBRD’s Board of Directors visited Mongolia last September to discuss the implementation of the Bank’s Country Strategy and financial investments. How did the Board evaluate the implementation of its Mongolian projects and programmes?The 10 Board members who visited Mongolia at the end of September 2015 represented nearly half of the shareholders of the EBRD, which shows the level of the Bank’s interest in Mongolia. The main objective of the visit was to assess the relevance and impact of the Bank’s work in the country, given the changes in the macroeconomic situation since we approved our strategy for Mongolia in June 2013. The mission members met with the Prime Minister and his economic team, the Governor of the Central Bank, and our partner banks and clients.
The Board also took the opportunity to go outside of Ulaanbaatar, visiting the nearly completed Moncement project, which will be the most important import replacement project in the country, offering high quality cement to construction and mining companies. From there, the mission drove to OyuTolgoi to have a first-hand view on the scale of that project, its operations and its remarkable environmental and safety standards.
The Board members were impressed by the scope of the Bank’s activities in Mongolia, its status as a trusted partner and its actual achievements. The Board also witnessed the challenges faced by the Bank, particularly in the mining sector. Overall, this mission has paved the way for further cooperation between the EBRD and Mongolia.
Do you expect any changes to the current Country Strategy as a result of the visit? What would be the purpose and structure of the Bank’s future investments?The new strategy process will start in January 2016 but we do not expect fundamental changes in our strategy, just some adjustments to reflect the new economic environment of the country. Mining will remain the engine of economic growth for the foreseeable future, while economic diversification and SME development through direct financing, financial intermediation with local commercial banks and greater support for small businesses will help job creation and production values.
One thing that might be emphasised is the need to support municipal infrastructure in the regions in order to unlock the country internally. Logistics are a major challenge for small businesses trying to access regional centres like Darkhan and Erdenet and, of course, Ulaanbaatar.
Local currency financing is also likely to be deepened, following the depreciation of the Mongolian tugrug (MNT). The EBRD has been developing many instruments to support MNT financing so the new strategy might reflect this attempt in a structured way.
The EBRD is currently one of the largest foreign investors in Mongolia. Please give a brief idea of the number of projects you have so far invested in and the volume of investments.
Since the EBRD opened its Mongolian office in October 2006, we have signed nearly 70 projects, with cumulative investment in excess of $1 billion, mobilising almost twice that amount in co-financing. Today, the portfolio is around $600 million, half of it being in the extractive sector and more than one third in industry, commerce and agribusiness (ICA). In fact,our ICA investments have doubled to reach $200 million since 2013, showing that the Bank is extremely focused on diversification and import replacement.
More than $100 million has been invested with financial institutions, using the network of local commercial banks to finance SMEs.
As well as financial investment, the Bank offers Small Business Support services, where the Bank pays part of a particular consulting service offered by a local consulting company to help small (often micro) businesses. The EBRD is implementing the SME Development Programme financed by the European Union (€3.8 million over five years) which enables more than 60 companies each year to benefit from such support. So, in theory, the EBRD is reaching a significant portion of the Mongolian economy.
What are the main criteria for a project to be considered for EBRD investment?Every EBRD investment must meet sound banking principles, which means that the objectives of a particular investment plan are realistic, reasonable and support the development of a company (at least in the medium-term) or a particular sector (ideally both). But while sound business principles are necessary, we also look for integrity – integrity of the shareholders, the management, the books, and in the way the company conducts business, be it with their competitors, suppliers, customers or the government.
Of course, through its investments, the EBRD is striving to achieve other development objectives, like improvement of environmental standards, gender equality and inclusion.
A good history, a good business and a strong vision are the three criteria that we look for when considering to propose a transaction to our shareholders.
The EBRD has made equity investments in several projects. How have these projects performed?Equity investments are an important part of EBRD financing. The purpose of EBRD equity investments is mostly to operate as an anchor minority shareholder. Also, through equity financing, you can achieve more impact on the strategy of a company, its structure, its overall efficiency and accountability.
The EBRD equity portfolio in Mongolia has been impacted, of course, by the macroeconomic situation of the country, but the companies have paradoxically greatly improved at the same time, being more focused on their key money-generating assets and their development strategy, including export.
The key to a successful equity investment for an investor like the EBRD is adding value and creating the basis for a successful exit once the EBRD’s input is less relevant for a particular company.
EBRD investments in the mining sector have turned risky following the fall in minerals prices, MMC being the most prominent example. How will the Bank respond to the challenge and how do you see the future of the projects?Mongolian mining companies have indeed suffered from the sharp decrease in the price of many commodities, mostly coal, iron and, to a lesser extent, copper. This has hurt the profitability and, most importantly, the cash flows of these companies.These difficult conditions, combined with the fact that many companies have often used excess cash flow from mining to engage in industrial, agribusiness or real estate projects, create a pressure on their balance sheet.
There are two ways to respond to this situation: restructuring of the debt or additional equity. We believe that the time has come to attract foreign investors into the structure of existing mining companies. This equity and the reputation of the investors will help ensure a smooth restructuring of the debts. Being credible, with a clear cost-reduction plan (for example, through better logistics) and a strong track record in transparency and corporate governance is critical to achieve this.
Now the State Bank of Mongolia is listed for privatisation. Is the EBRD a shareholder in it, and if you are, what will you do when it is privatised?The EBRD is not a shareholder of the State Bank. If the bank is privatised, the EBRD will mostly look at the quality of the investor who bought it, its integrity and its development plans. The EBRD is very cautious in engaging with new partner financial institutions in principle. Should privatisation occur, transparency, corporate governance and a conservative approach while being open to developing new forms of financing (such as leasing, factoring or energy efficiency financing) will be our main criteria to see whether or not we can engage more actively with the bank.
There is a rumour that, at the second stage of Oyu Tolgoi financing, a syndicated loan from banks led by the EBRD could be obtained. How likely is this?The second phase of OyuTolgoi is indeed about to restart. As it represents 80 per cent of the value of the mine, this is an important milestone for Mongolia. The recent OyuTolgoi supplier forum was a real success, with 600 companies attending, out of which 400 were Mongolian.
This phase will be financed by a US$4.2 billion loan package. In March 2013, the EBRD Board approved a US$400 million direct loan to OyuTolgoi, supplemented by up to US$800 million syndication, which exactly mirrors the package from other lenders such as the IFC. The EBRD has always supported the project for it represents a game-changer for Mongolia’s future. As such, the EBRD remains committed to financing the second stage of OyuTolgoi. The fact that the Investment Agreement has been clarified, thanks to shareholder’s discussion in Dubai in May, opens the door to further investments in the sector. It shows that Mongolia is mature enough not only to attract such an important company as Rio Tinto but also to play a fair game with major foreign investors. Keeping this credibility is paramount in order to attract further reputable investors, not only in mining, but also in agribusiness, technology or transportation, to help Mongolia capitalise on its massive natural resources.
The Bank has a 25 percent ownership of the 50-MW Salkhit wind power station, which has been operating for a fairly long time now. What is your feedback on the project?Salkhit is an institutional and operational success. It is a completed project and has been operating since June 2013. It is producing electricity and has shown that Mongolian companies, as well as Mongolian authorities, can undertake the most challenging projects when they work as a team. It is the first true PPP of the country and opens the door for many other projects in other sectors.
It is fair to say that the feed-in tariff for renewable energy is, in general, a challenge, as the end-user tariff has suffered from the depreciation of the MNT. But when you take into consideration the external factors of conventional energy production, particularly from coal, then the tariff for wind energy is not so high. The subsidies for coal at the mine, as well as its transport costs, excessive water usage of old CHPs, the necessary grants to maintain the assets and of course, the pollution, make conventional coal power production more expensive in the long run.
Mongolia has a clearly established Renewable Energy Law, which has been further improved recently, with the introduction of a 4-MNT green tariff, and a rationalisation of the structure of the single-buyer model. This policy is a step in the right direction: more energy independence and less reliance on expensive imports. Sustainable development is the way forward, and makes great use of Mongolia’s natural competitive advantages.