STATE-OWNED COMPANIES WILL COMPLETELY CHANGE

2022-05-11


G.Iderkhangai

Thirty-nine state-owned enterprises will be placed under direct public control

The Ministry of Finance and the Government Agency for Policy Coordination on State Property and Regulation (GAPCSP) are very busy with frequent visits to Erdenet and Darkhan. After the Khutul’s “Cement and Lime” plant was taken over by the state, the government renewed the charter of Erdenes Mongol company and terminated the concession agreement with QMC of the Darkhan Metallurgical Plant.

The new management team of Khutul’s “Cement and Lime” State Joint Stock Company promised to launch an IPO in 2023 and turn the company into a listed, publicly controlled and open joint stock company. Before that, the company needs to finish paying all taxes to the government. However, the Darkhan Metallurgical Plant, which wasn’t able to build a mining and metallurgical complex for eight years, is now owned by the state, along with the strategically important Tumurtei, Tumurt-Ovoo and Khustai deposits.

One of the six objectives of the Government’s New Revival Policy is the “Restoration of State Productivity”, which aims to improve the organization and governance of state-owned enterprises. Proposals from the Economic Forum to reduce the Corruption Perceptions Index to double-digits and place state-owned enterprises under direct public control within two years will be consolidated by the government and submitted to Parliament. Prime Minister L. Oyun-Erdene announced his decision to submit the Fiscal Austerity Law (or Budget Austerity) to Parliament at a special Cabinet meeting on 15 April. The Prime Minister expressed his plan to place 39 state-owned enterprises under direct public control (34% of them will launch IPOs), consolidate 10 companies, and liquidate and sell 10 companies with the financial risks that do not require further government involvement under this Law. 

In addition, the management of state-owned companies will be restructured by eliminating the positions of deputy directors and other unnecessary officials. A state-owned company must be competitive. However, top executives appointed by higher management are not able to run the company efficiently and act only on the owner’s orders. According to corporate law, the CEO of Erdenes Mongol, the largest state-owned company, must be appointed by the company’s executive management team, but in fact is appointed by the board of directors as proposed by the government. Therefore, we are moving to a system where a candidate for CEO is not appointed from above but selected transparently, and competes with other candidates, by presenting his/her detailed company development action plan. Thus, keeping state-owned companies away from political pressure will be one of the key results of the “Restoration of State Productivity” policy.
It’s a good thing that the government is rolling up its sleeves to reorganize state-owned companies. The constitutional amendment provided an opportunity to wage a “war” on inefficient state-owned enterprises with deep-rooted bureaucracy and corruption. In other words, the “state public” principle of equal distribution of wealth among citizens is about to be applied in practice.

Today, there are 108 state-owned companies. The shareholders of these companies are represented by seven agencies: the Cabinet Secretariat, the Ministry of Energy, the Ministry of Roads, Transportation and Development (MRTD), the Ministry of Mining and Heavy Industry (MMHI), and the Ministry of Food, Agriculture, and Light Industry (MOFALI), Ministry of Finance, and  Government Agency for Policy Coordination on State Property and Regulation (PCSP). These companies have total receivables of 2.1 trillion MNT, liabilities of 16 trillion, total assets of 51 trillion, of which revenue is 9.7 trillion, expenses are 2.6 trillion, taxes paid are 1.8 trillion and dividends are 173 billion MNT. The net profit is 204 billion MNT. Let’s look at their efficiency. Of the 17 companies under the Cabinet Secretariat, 18% are commercially successful and 82% are unprofitable. Of the 26 companies under the Ministry of Energy, 15% make profit and 85% are unprofitable. Both companies of the MRTD are 100% profitable. Of the three companies owned by the MMHI, 33% are profitable and 67% are unprofitable. Thus, out of a total of 106 companies, 45% make profit and 55% lose money. The fact that companies have only 2% profit margin with a return of only 1%, is extremely unsatisfactory. The question is whether such state-owned companies should continue to operate. According to the PCSP, 39% of the 273 local companies are profitable and 61% are unprofitable.

The total debt of state-owned companies is 51 trillion MNT, and this debt is owed by only a few companies. For instance, out of state-owned enterprises and companies with assets of more than one trillion MNT, Erdenes Mongol owes 14 trillion, Erdenes Tavan Tolgoi owes 14 trillion, Erdenet Corporation owes 5 trillion, the Development Bank has a debt of 4 trillion, the State Bank owes 3 trillion and the Mongolian Railway has a debt of 1.8 trillion MNT.

The largest state-owned company is Erdenes Mongol, which aims to become the future Wealth Fund. With the approval of the company’s charter, a lot of work is being done to reorganize its subsidiaries. The Government is preparing to submit the Law on the National Wealth Fund to Parliament. It’s been 14 years since Erdenes Mongol was established, but only 2-3 of the more than 10 subsidiaries and affiliates operate efficiently. Therefore, Erdenes Mongol urgently needs to adopt  regulations, structures, and standards of the International Wealth Fund. Only in this case, the assets will be managed efficiently and effectively. If the Law on the National Wealth Fund is approved by Parliament, the first step would be to reorganize Erdenes Mongol. The company’s main goal is to improve its governance and become an open and transparent company. As O. Khulan, who came to the management team of the state-owned company from the private sector, pointed out, the company needs to have the right financial system and work for  profit.

Erdenes Mongol plans to operate as a business with a transparently elected, professional board of directors. It also wants to liquidate and consolidate unprofitable and inefficient projects and companies, reduce operating costs, and undergo restructuring. Also, the company is going to fully digitalize its operations and procurement system. In implementing these measures, Erdenes Mongol will reorganize its activities and establish several departments named “Non-ferrous metals”, “Coal and energy”, and “Infrastructure”.

In order to improve the governance and management of state-owned companies, a revised version of the Law on State and Local Property, and a Law on state-owned and partially state-owned companies are being drafted. In the near future, these draft laws will be discussed at a Cabinet meeting and submitted to  Parliament. The Law on State Property has been amended 25 times since 1996, but no key changes were made. In addition, the first law on companies with state and local ownership will be discussed. The draft law on public-private partnership is ready to be discussed by Parliament soon. This law aims to improve corporate governance, support the private sector, and expand the quality and accessibility of public services based on the capacity of the private sector.

The law will help to attract foreign direct investment and expand the market. According to the State Budget Law, 2.6 trillion MNT is expected to be invested this year. If we add up foreign loans and aid, investment projects worth 4.6 trillion MNT will be implemented, which accounts for 10% of the total investment of 80 trillion MNT needed for our country. The public and private sectors are regulated by the Concession Law. 

There are more than 30 forms of public-private partnerships, and according to lawmakers, regulating their partnership only by the Concession Law would limit other opportunities. The current Concession Law puts a lot of pressure on the state budget. The reason is that “construction-transfer” projects cannot be administered by the Budget Law. So it is necessary to jointly implement projects that benefit the private sector and improve public services.

Currently, out of 60 concession projects with a value of 25.5 trillion MNT, 40 projects have a “build-transfer” agreement (total 2.2 trillion MNT) and 20 projects have a “build-operate-transfer” agreement (total capital cost $8.19 billion).    

        
The purpose of the Public-Private Partnership Law is to implement infrastructure and social sector projects that promote economic efficiency and social development. The lawmakers believe that sustainable and efficient implementation of development projects in the long-term will support private sector participation and investment, open business markets for the private sector, increase financial resources, and create an inclusive, transparent, open, sustainable, and accountable partnership. The principle of the partnership agreement is set at a maximum of 30 years. In any case, this law will put an end to short-term “build-transfer” projects that place pressure on the budget, and there will be no wish lists approved.

Today, the only law missing under the New Revival Policy is the law that protects state property rights. No new laws or regulations on public property have been adopted since 1996. The Constitution clearly states that the state recognizes any form of private or public property. In practice, however, corruption is rampant because state property is not protected by law. The 1996 Law on State and Local Property divides state property into “public property” and “state property”, but in reality, this law regulates only state property.

Therefore, it can be said that there are no laws and regulations on public property. This should be taken into account when launching legal reforms in the future. In recent days, every conference, such as the Mongolian Economic Forum and the American Chamber of Commerce in Mongolia (AmCham Mongolia), features speeches and discussions on reorganizing state-owned companies. Readers can read about the positions of the private sector on this issue in this magazine article. 
 

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