We often talk about how Mongolia spent 20 years to make a transition from a centrally planned economy to a market economy. However, if you really think about it, it might come across to your mind that we went around in a huge circle only to get to where we were before – to socialism. During this long roundabout journey, we have seen an enormous expansion of state property, plenty of billionaires who came from the government and increased government control on every economic sector. Furthermore, it has recently been observed that the government is setting the commodity prices. It does not really differ from socialism now, does it?
One third of population of Mongolia is living below the poverty line and our economy has become hugely dependent on our two neighboring countries. The ‘third neighbor’ countries are having less interest in Mongolia and foreign companies are halting their investment. As a consequence, our economy has started to struggle.
Expansion of state property
D.Tsogtbaatar, the newly elected chairman of the State Property Committee, states that there are currently 94 state-owned enterprises and they will all eventually be privatized. It is reported that a total of 37 state-owned enterprises ran deficits last year. Furthermore, 14 of the deficit-ridden enterprises each had a shortfall of more than one billion tugrugs and the total deficit between them reached 50 billion tugrugs. The thermal power plants No.3 and No.4 topped the list with a deficit of more than 8 billion tugrugs both followed by Baganuur coal mine (5 billion), Shivee-Ovoo coal mine (4.2 billion) and MIAT Mongolian Airlines (4.1 billion). Also, the deficit run by the “Ulaanbaatar Railway” Mongolian-Russian joint venture almost reached one billion tugrugs.
The total assets owned by state-owned enterprises in 2013 have amounted to 14 trillion tugrugs, which is equivalent to about 10 billion U.S. dollars. In other words, Mongolian state owned companies own such a huge amount of assets that are as big as the size of our economy. The size of property under state ownership has been multiplied compared to the time when privatization began. It might not be a fact known to everyone that the huge deficits run by the state-owned enterprises that poorly manage this tremendous amount of assets are cove by the revenue collected from all kinds of taxes the private sector and the people pay.
Political parties appoint directors and deputy directors of all these state-owned companies. No one is held accountable for running deficits because they just simply take money out of the public budget to make up for the loss. Therefore, executive management in state-owned enterprises is more focused on increasing the size of their fixed assets and they often produce ‘no profit’ reports after deducting depreciation. Depreciation reduces taxable income, which is likely to reduce the amount of cash paid for income taxes. This reduction in income taxes can be accumulated into a fund that can be used as a source of cash. However, the executive management in our state-owned enterprises has been using this fund for personal use or dedicating it to their political party rather than creating an accumulation.
Another instance where they steal from public property is heat and power distribution. They put restriction on prices and have the government fill the gap created by price-setting through the public budget, which is formed by all kinds of taxes we pay. It allows them to force the power plants and distribution companies to buy equipment and other working capital they supply at expensive rates.
Other means of making money out of state property include selecting one’s own private company to deliver public service, fixing public tenders and deliberately delaying progress in order to demand more money to finish a project.
Suppliers and contractor companies that provide mandatory services within different economic sectors such as conducting environmental assessments, supplying medicine and managing waste water are chosen based on their connection to decision makers at ministries and relevant committees.
Public service in Mongolia costs as much as developed countries in the West, but its quality is not even on par with that of underdeveloped countries in the East.
Reason why state property loses its value
The main reason why this structural flaw associated with state property cannot be fixed is that Mongolian authorities put their personal interests before public interests.
Expansion of state property and increased number of state-owned enterprises benefit the authorities and politicians only. The ultimate goal of businesses and their connections in politics has become finding a way to acquire capital from the public budget to fund their wasteful spending.
In order to bring about a change to the corrupt system that has been dominating our economy and politics for many years, we need to ensure transparency in every line of government operations and carry on the fight against corruption regardless of which political party are dealt with.
Political parties in Mongolia today are indistinguishable in terms of ideology. The only difference they have is how political parties and groups of business organizations can affect the government and its actions. Members in executive management of private companies in Mongolia enter political parties and get appointed to senior positions. It has been going on for so long that the connection between politics and economics has been greatly strengthened. These groups that have both politicians and businessmen at one place have leverage against each other. Therefore, it has become almost impossible to get rid of the existing corruption network.
Neither the past governments nor the current one have been able to hold any of those groups accountable for their illegal actions, which is why Mongolia is failing to develop a long-term development policy.
State property has comprised too much of our economy and politicians have seized the right to take full control of the property including state-owned enterprises no matter how good their management is or how big deficits they run. As a consequence, only a handful of people have gotten extremely wealthy by stealing from public property. Furthermore, domination of state property that belongs to no exact owner has put our economy in a structural crisis. Although we had a similar crisis in 2008, Mongolia managed to overcome the crisis quickly when prices of mineral resources went up on international market.
Solution
The recent discussions suggest that the problems associated with economic decline, weaker tugrug, reduced foreign investment and increased budget deficit could all be solved by replacing the government and making amendments to several laws.
Replacing the government or reappointing some ministers will not produce any fundamental change. Instead, we need to minimize the size of state property and make a change to the existing economic structure that gives its benefits to politicians only. In order to achieve those objectives, government involvement in economy ought to be decreased through privatization of state-owned enterprises. Any other measure taken to solve the above-mentioned problems will not only waste time but also offer a temporary solution only. Majority of shares of state-owned companies needs to be privatized through stock exchange and the rest can be saved for later when it can be sold for expensive rates to make up for deficits.
In order to find a way out of the current economic decline, our parliament is going to convene for an irregular session by mid-September. This plenary session needs to be focused more on the underlying causes of the economic decline and accelerate the privatization of state-owned enterprises as well as the fight against corruption regardless of political party affiliation. Also, the parliament should secure our geopolitical interests and implement a policy to build a narrow gauge railway to the southern border. On top of that, a law that bans members of parliament from holding a ministerial position at the same time needs to be passed and a long term economic policy needs to be carefully discussed and developed. Unless the parliament acts seriously to carry out these tasks, the mid-September session will just be another useless spectacle.
It is time for our economy to undergo a structural change and the government to pursue a policy aimed at privatizing state-owned enterprises. Only then we shall be able to successfully overcome the current economic decline and ensure sustainable development in the coming years.
2013.09.04