B. Tsengel: It’s time to reform state-owned companies

The Mongolian Mining Journal /May.2022/

G.Iderkhangai of The Mongolian Mining Journal, spoke to B. Tsengel, Director of the Government Agency for Policy Coordination on State Property and Regulation (PCSP), about current issues facing state-owned companies.

We will establish a unified reporting mechanism for state-owned and partial state-owned legal entities

No major changes have been made to the Law on State Property since its enactment in 1996. The law is expected to be changed. What principal changes will be made?
First of all, my greetings to the readers of your magazine. Since 1990, Mongolia has moved from a centrally planned to a market economy, allowing many forms of ownership. Subsequently, in 1996, the Law on State and Local Property was adopted. In the 26 years since its enactment, this law  has been amended about 30 times. These changes usually took place hand in hand with changes in other laws and regulations. During past years, major transformation has occurred in the social and economic sectors of our country and, in 2020, the Constitution and other fundamental laws of Mongolia underwent principal changes.

The Constitution of Mongolia stipulates that the people of Mongolia have equal access to the benefits of natural resources and a unified policy on state property will be implemented throughout the country. In line with the Constitution, the Government has developed a revised version of the Law on State and Local Property and the  draft is  gone for approval by the Parliament. Key changes include:   

•    Ensuring that the natural resources are owned by the people and protected by the state;
•    The scope of relations regulated by the law and the persons covered by the law shall be clearly defined and a single terminology shall be determined;
•    State property consists of state property for public use and state’s own property; 
•    Renewing the definition of a state-owned legal entity, establishing its category based on the status of its property rights, legislating organizational and control regulations related to the specifics of each category, and transforming a state-owned enterprise into a state-owned company in accordance with Corporate Law;
•    The shareholders meeting and the Board of Directors of a state-owned or partial state-owned company shall renew the requirements to select, appoint and guide the person to represent the state assets and renew the company’s operational planning and reporting procedures. Enact the legislation to select and conclude the contract with the management of the company through open and competitive selection process; 

The PCSP announced that it will improve the governance of inefficient and cost-intensive state-owned companies, re-organize their operations, and liquidate some of them. Can you provide more information on current work and future plans?
The PCSP, within the scope of its mandate,  has submitted specific proposals to the Government to improve the ownership, governance, and economic efficiency of state-owned companies and enterprises.
We aim to modify and share international best practices in corporate governance to meet Mongolia’s current socio-economic needs, implement centralized and integrated management of state-owned legal entities and enterprises, ensure the independence of board members and executives, organize open tenders, strengthen management skills, and develop an open system for evaluating contract results.

We are also working to build a open and transparent reporting mechanism for state-owned and partially state-owned legal entities, and establish a good governance system with an effective investment and asset management policy supported by proper laws and regulations.

In the future, we will improve the performance of state-owned companies by gradually reducing state ownership in state-owned companies, stimulating the stock market by issuing shares to the public, implementing a share ownership program for employees, adhering to principles of a golden share, and stock market decentralization.

The Khutul Cement and Lime Plant was taken back by the state. The government cancelled the QSC concession agreement with the Darkhan Metallurgical Plant. Erdenes Mongol’s charter was revised to reorganize its subsidiaries. It is clear that these activities aim to improve the operations of state-owned companies. What is the first step to strengthen the efficiency and governance of Erdenes Mongol?
Mongolia is a democracy with a market economy. Since 1990, the government has pursued a policy of liberalizing the economy and supporting public-private partnerships. As you know, during the last 30 years, our social system has changed, and the private sector has come to form the basis of the country’s economy by accounting for more than 80% of our gross domestic product. However, it is common for the public to have negative perceptions and memories of past privatizations and their results. 

In addition, the law enforcement agencies reviewed some privatization and concession agreements signed in 2015, made conclusions and recommendations on violations and non-compliance with relevant laws and regulations, and submitted proposals to the authorities to revoke certain decisions. In this context, the Government of Mongolia and the PCSP revoked some previous decisions and the PCSP is organizing the return of assets and management rights of the Cement and Lime state-owned company and Darkhan Metallurgical Plant to the state.

Khutul LLC (formerly Beizment LLC), which privatized Cement and Lime JSC, and QSC LLC, which operated Darkhan Metallurgical Plant JSC on a concession basis, were managing their entities poorly. This was reflected by their financial reports and operational performance. We will set up a working group to count the company’s inventory, update their business plans and improve their efficiency.

What would be the management of  Khutul Cement and Lime Plant in the future? How to improve the management of the plant?
“Khutul Cement and Lime” State Joint Stock Company produces clinker, cement, and lime and production reached about 700,000 tons of high-quality cement per year at its peak. The plant has well-established operations, its own raw material reserves, a large human resource base, and a successful team that became one of the major players in the construction industry. The company that privatized this plant failed to improve its operations and contribute to the development of Mongolia’s construction sector.

The PCSP, in cooperation with the executive team and miners of the Cement and Lime State Joint Stock Company, aims to provide the company with a long-term strategy and ensure normal operations. We established the company’s board of directors, approved and are implementing a business plan to improve its operations. In the future, we want to openly trade the company’s shares on the stock market and make it a public company.  As you know, the Government of Mongolia is also committed to turning state-owned companies into public companies.

Erdenes Mongol’s charter was recently updated. How do you plan to improve the governance of Mongolia’s largest state-owned company?
The shareholder rights of Erdenes Mongol are exercised by the Government of Mongolia. The government is restructuring the company to improve its efficiency and governance and reorganise its subsidiaries and affiliates. For example, the government recently revised the charter of Erdenes Mongol and re-established its board of directors. In the future, the draft law on the National Wealth Fund and the Development Fund, and the draft law on state and local owned companies will contain the necessary provisions that will help to address the issue of Erdenes Mongol at the level of group companies. 

The Corporate Law is a good, up to date law

What issues will be regulated by the Law on Public-Private Partnerships? Especially what provisions does the law contain to ensure transparency and openness of state-owned companies?
The “Revival Policy” proposed by the Parliament and the Government of Mongolia is a ten-year medium-term program that will create the necessary environment to implement a long-term development policy “Vision 2050” and improve the economy, infrastructure, and government productivity. The “Revival Policy” aims to address six sets of issues limiting Mongolia’s development based on public-private partnership and active support from investors. Under that policy, the Government and the Ministry of Finance have urgently drafted and submitted to Parliament the Law on Public-Private Partnerships. 

The main objective of the draft law is to implement infrastructure projects based on  long-term partnership between the public and private sectors, encourage competition in the service industry by attracting private businesses into the public sector, implement asset management, create financial instruments to meet growing needs, reduce budget constraints in the long-term, and support private sector-based economic growth. 

The draft law also seeks to attract private investment, not just public investment and foreign aid, to finance major infrastructure projects, create a legal framework that complies with international standards to make public services more accessible to people at lower cost, using the skills of private sector. I believe that this law is in line with the objectives set out in the revised draft of the State and Local Property Law.

What is your position on the mechanism for the open selection of directors and board members of state-owned companies?
The Corporate Law of Mongolia was passed in 1999 and revised in 2011 and has been in effect for more than ten years. Personally, I think our Corporate Law is good and meets current needs. Relevant regulatory and professional bodies, such as the Financial Regulatory Commission, are working to ensure implementation of this law. It contains specific provisions for state-owned and locally-owned companies. For example, a state-owned company must have a Board of Directors and select independent members openly and competitively.

The first draft law contains the provision to announce vacancies of state and locally owned company directors and board members (independent and non-independent) and select them on a competitive basis. We are confident that this regulation will fully meet current needs and public wishes too. A state-owned company that conducts business using peoples’ assets must be open and transparent to the public, shareholders, and boards of directors, and executive teams must be financially and ethically accountable.
Therefore, we are working on legal and ethical reforms to bring the selection and appointment criteria of the members of boards of directors and the executive management teams, and the planning and reporting systems of state-owned companies to a whole new level. 

There is talk of selling shares of state-owned companies on the stock market and improving their governance. What are the policies and strategies of the PCSP in this area?
The Parliament and the Government have set a goal to determine the type of ownership of state and local owned companies and improve their governance and efficiency. Under this goal, the PCSP has conducted a number of studies and submitted certain policy proposals. We propose to divide state-owned companies into categories, select the entities the government wants to keep and let the others go, and work with selected companies to build their capacity and expand their operations, as well as run large-scale strategic industrial projects like businesses and improve their efficiency.    

Therefore, we propose to divide state-owned companies into the following four categories based on analysis of their functions, operations, financial indicators, and organizational structure, and offer solutions for each category.
1.    Competitive state-owned legal entities: this category includes about 40 legal entities in the energy and heat production and distribution sector, as well as information and communication, transportation, and logistics entities such as MIAT, Stock Exchange, and Telecommunications. These entities should be transformed into  public joint stock companies initially with a predominance of state ownership. Then the share of state ownership should be gradually reduced and the share of private owners increased. If this solution is successful, open joint-stock companies with improved efficiency will become the main driving force of the stock market, which will have a positive impact on the growth and development of the Mongolian stock market.

2.    State-owned business entities based on national strategies: This category includes mainly state-owned and partially state-owned entities that operate large strategic mineral deposits that play key roles in the country’s economy. The goal is to establish efficient and profitable companies with a cluster structure that supports a value-added and export-oriented production system that is consistent with a national strategy. These companies will have  predominantly state ownership and some private sector investment or, if necessary, become  100% state-owned  or public joint stock companies with a certain share of state ownership.

3.    State-owned legal entities that provide social services: there are many low-profit social services that are not provided by the private sector. Examples include municipal services and public transportation. In many countries, it is common practice to provide public goods with public funding. In this context, it is necessary to have a small number of state-owned companies and local-owned companies that can provide such services. We believe that these companies should be fully state-owned and, if possible, gradually get transferred into active public-private partnerships, with a focus on social benefits while maintaining an appropriate level of profitability.

4.    State-owned legal entities that do not need government regulation: I think we, Mongolians, have chosen the path to a market economy, and have been following this path for a long time, making mistakes, learning lessons and gaining experience. In this system, it is important that the government does not interfere in sectors and industries where private entities compete with each other. The government should not do business and compete with  private entities in areas where they can provide services. Therefore, the government will gradually transfer state and locally owned companies to the private sector by changing the form of ownership.

What needs to be done at the policy level towards state-owned companies. Can you provide more detailed information on this?
The next topic is the governance of state-owned companies. Based on international best practices and recommendations from the World Bank and the Organization for Economic Co-operation and Development, the PCSP recommends that state-owned legal entities and enterprises should be governed by a professional body certified to implement centralized and integrated management. In this case, state-owned companies have an advantage of making profitable investments in the right areas through integrated asset management.

This is widely practiced by many countries such as China, Singapore, Sweden and Norway. We are also working to develop a guideline for restructuring state property, and introduce this to Parliament and Government. Below is the brief summary of this guideline:
1.    The state shall have resources to meet the common interests and needs of its citizens, provide public services, ensure social responsibility, and ensure state participation in strategic deposits, infrastructure, main communication and energy lines, railways, and national roads.
2.    Convert state-owned enterprises into open public companies, register shares in securities trading organizations, and trade a certain percentage of its shares on the stock exchange in order to ensure public participation, develop corporate governance, develop the stock market, increase the value of state-owned legal entities, upgrade technology and attract investment.
3.    Organize a merger of state-owned companies and entities with partial state ownership according to the law. 
4.    There is no doubt that the public, researchers and business people receive information via media channels and express their views and opinions on the topic of changing ownership forms and organizing liquidation processes in an open and transparent manner in accordance with relevant laws and regulations. 
In conclusion, I would like to say that it is time for Mongolia to reconsider its policies and measures on state property taken over the last thirty years and start bold and ambitious reforms. I call on our people to work together to implement these reforms. 

Thank you for your interview.