Data Collection Survey on Business Environment and Investment Promotion in … · 2017. 4. 25. · IPSAS International Public Sector Accounting Standards IPP Independent Power Project

3RJR

17-002

Data Collection Survey onBusiness Environment and

Investment Promotion in Mongolia

Mongolia

Final Report

March 2017

Japan Economic Research Institute Inc.Relo Panasonic Excel International Co., Ltd.

JAPAN INTERNATIONAL COOPERATION AGENCY

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Table of Contents List of Figures Abbreviations

Chapter 1 Outlines of Survey ................................................................................................................. 7

1.1 Background and objectives ...................................................................................................... 7

1.2 Survey schedule ....................................................................................................................... 8

Chapter 2 Business Environment ............................................................................................................. 9

2.1 Country overview of Mongolia ............................................................................................... 9

2.2 Macro economy ....................................................................................................................... 9

2.2.1 Economic growth ................................................................................................................. 10

2.2.2 Industrial structure ................................................................................................................ 11

2.2.3 Consumer prices .................................................................................................................. 12

2.2.4 Foreign direct investment (FDI) .......................................................................................... 13

2.2.5 Trade .................................................................................................................................... 14

2.2.6 Public finance ...................................................................................................................... 16

2.2.7 Outlook for Mongolian economy ......................................................................................... 16

2.3 Economic/industry policies and development plan ................................................................ 17

2.3.1 Policy responses by the government of Mongolia................................................................ 17

2.3.2 Overview of the State Industrial Policy ............................................................................... 19

2.3.3 Overview of law on the support of manufacturing industry ................................................. 20

2.3.4 Overview of law on development policy and plan ............................................................... 21

2.3.5 Consideration on Mongolian economic/industrial policy and development plan ................. 25

2.4 Business environment ............................................................................................................ 25

2.4.1 Mongolia’s effort to improve the business environment and investment promotion ............ 25

2.4.2 Doing business in Mongolia by foreign companies ............................................................. 28

2.4.3 Form of foreign companies going into Mongolia and its registration .................................. 29

2.4.4 Employment and labor ......................................................................................................... 30

2.4.5 Tax system and taxation ....................................................................................................... 31

2.4.6 Accounting & auditing ......................................................................................................... 39

2.4.7 Business cost........................................................................................................................ 42

2.4.8 Main issues of business environment in Mongolia .............................................................. 42

2.4.9 Strength and weakness in the Mongolian business environment .......................................... 46

2.4.10 Trend of Chinese & Korean private business ....................................................................... 47

2.5 Industrial trend ...................................................................................................................... 53

2.5.1 Agriculture and processed agricultural products .................................................................. 53

2.5.2 Livestock products ............................................................................................................... 58

2.5.3 Livestock products Leather products ................................................................................... 63

2.5.4 Textile Product ..................................................................................................................... 68

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2.5.5 Wood/wood products (including furniture) and construction materials ............................... 73

2.5.6 Accessories etc. miscellaneous goods .................................................................................. 75

2.5.7 Raw materials for chemicals, drugs and cosmetics .............................................................. 78

2.5.8 Tourism (Travel agents and hotels) ...................................................................................... 80

2.5.9 Software development business ........................................................................................... 83

2.5.10 E-Commerce ........................................................................................................................ 84

2.5.11 Improving supply-chains of Mongolian products ................................................................ 86

2.6 Business trend of Japanese private companies in Mongolia and EPA ................................... 88

2.6.1 Trade situation between Japan and Mongolia ...................................................................... 88

2.6.2 Trend of Japanese companies ............................................................................................... 89

2.6.3 Points of attention and issues on doing business .................................................................. 92

2.6.4 Mongolia-Japan EPA (Economic Partnership Agreement) ................................................... 95

2.6.5 Issues in the EPA ................................................................................................................. 97

Chapter 3 Analysis on JICA’s Operation for Private Sector Development in Mongolia ...................... 99

3.1 Overview of JICA’s operation for private sector development .............................................. 99

3.1.1 Basics of analysis ................................................................................................................. 99

3.1.2 Projects to be analyzed ...................................................................................................... 101

3.2 Review on JICA’s programs and projects in Mongolia .........................................................101

3.2.1 Mongolia-Japan Center for Human Resources Development (MOJC) ............................... 101

3.2.2 Two-Step Loan Project for Small and Medium- Scale Enterprises Development and Environmental Protection ............................................................................................................ 106

3.2.3 Project for Strengthening Mediation System ...................................................................... 114

3.2.4 Project for Capacity Development for Promoting Foreign Direct Investment .................... 115

3.2.5 Project for Capacity Building for PPP in Mongolia ............................................................ 116

3.2.6 Higher Engineering Education Development Project .......................................................... 117

Chapter 4 Recommendations for JICA’s Operation for Private Sector Development in Mongolia .... 121

4.1 Overview of JICA’s operation for private sector development .............................................121

4.2 Policies for each field ...........................................................................................................123

4.3 Recommendations regarding the strategic approach for Mongolia .......................................124

4.3.1 Suggestions and lessons from JICA projects in Mongolia ................................................. 124

4.3.2 Recommendations for JICA’s Strategy for Private Sector Development in Mongolia ....... 125

APPENDIX 1: MNCCI’s List of Mongolian Top 100 Companies ....................................................... 127

APPENDIX 2: Application Forms for Company Registration ............................................................. 130

APPENDIX 3: Outline of MINAC ...................................................................................................... 133

APPENDIX 4: Introduction of Mongolian Companies by MOJC ........................................................ 134

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List of Figures

Figure 1 Map of Mongolia-Japan .................................................................................................. 9

Figure 2 The trend of GDP growth rate and GDP per capita ........................................................ 11

Figure 3 The trend of the composition rate by industry in the nominal GDP and ....................... 12

Figure 4 The trend of investment by country .............................................................................. 13

Figure 5 The trend of investment by sector ................................................................................. 14

Figure 6 The trend of trade in Mongolia (export & import) ........................................................ 14

Figure 7 The situation of trade by major countries...................................................................... 15

Figure 8 The trade balance by major countries ........................................................................... 15

Figure 9 Ministries/agency responsible for industrial policy and development plan ................... 18

Figure 10 Main priority sector in Mongolia ................................................................................ 20

Figure 11 Overview of the system of development policy and plan in Mongolia........................ 23

Figure 12 Short/ Middle term and long term policy in the manufacturing sector ........................ 24

Figure 13 Main indicators related to economic development ...................................................... 25

Figure 14 Overview of the institutions for the information on business environment ................. 27

Figure 15 Organization and personnel related to trade, investment and SME promotion ............ 28

Figure 16 Legal system in Mongolia ........................................................................................... 28

Figure 17 Main laws related to business to be amended in 2015................................................. 29

Figure 18 The trend of unemployment rate in Mongolia ............................................................. 30

Figure 19 Tax system in Mongolia .............................................................................................. 32

Figure 20 Rate of detailed corporate income tax ......................................................................... 33

Figure 21 Tax Treaties of Mongolia ............................................................................................ 34

Figure 22 Useful Life for Depreciation of Fixed assets in Mongolia .......................................... 34

Figure 23 Tax Deductible Carry forward Period ......................................................................... 35

Figure 24 Special Tax in Mongolia ............................................................................................. 37

Figure 25 Special taxes on automobiles ...................................................................................... 37

Figure 26 Rate of Personal income tax ........................................................................................ 38

Figure 27 Social insurance fee burden ratio ................................................................................ 39

Figure 28 Accounting, auditing and taxation in the large companies and SMEs ......................... 40

Figure 29 Overview of Association for CPA & CPTA ................................................................. 41

Figure 30 Comparison of main business costs between Ulaanbaatar and other cities ................. 42

Figure 31 Ranking of major items of business environment in Mongolia ................................... 46

Figure 32 Strength in the business environment in Mongolia ..................................................... 46

Figure 33 Weakness in the business environment in Mongolia ................................................... 47

Figure 34 Number of registered foreign companies in the top 10 countries ................................ 48

Figure 35 Comparison between Chinese business and Korean business ..................................... 50

Figure 36 Demand-supply for foods (in 2006) ............................................................................ 53

Figure 37 Demand-supply for foods (in 2011) ............................................................................ 54

Figure 38 Yields of agricultural products .................................................................................... 54

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Figure 39 Farming areas for agricultural products ...................................................................... 54

Figure 40 Farming areas of agricultural products by region ........................................................ 55

Figure 41 Domestic animals in Mongolia ................................................................................... 58

Figure 42 Domestic animals and their uses ................................................................................. 58

Figure 43 Actual production of raw milk and processed milk ..................................................... 59

Figure 44 Actual production of milk by domestic animal (in 2013) ............................................ 59

Figure 45 Actual production of processed meat .......................................................................... 59

Figure 46 The number of honeybee herds and beekeepers in major provinces (Aimag) ............. 60

Figure 47 Amount of production of honey in Mongolia .............................................................. 60

Figure 48 Amount of Production of leather products .................................................................. 64

Figure 49 Production process of leather ...................................................................................... 64

Figure 50 Amount of production of finished leather products ..................................................... 64

Figure 51 Trend of production of main textile products .............................................................. 68

Figure 52 The process of cashmere manufacturing ..................................................................... 68

Figure 53 A summary of textile products and interview cases .................................................... 71

Figure 54 Trends of production of main wood products and construction materials ................... 73

Figure 55 Trends of production of rock salt and felt products ..................................................... 75

Figure 56 Main usage of the horse body ..................................................................................... 76

Figure 57 Trends of production of pharmaceutical products ....................................................... 78

Figure 58 The numbers of tourists coming to Mongolia by country ........................................... 81

Figure 59 The number of tourists at major national parks and strictly protected areas ............... 82

Figure 60 Features and issues at each step of value chains for representative products .............. 87

Figure 61 Case of efforts to sell Mongolian products to Japan ................................................... 88

Figure 62 The trade situation between Japan and Mongolia ....................................................... 89

Figure 63 The import from Mongolia（breakdown for miscellaneous products etc.） .............. 89

Figure 64 The trend of FDI Amount and company registration number by Japanese Companies in Mongolia .................................................................................................................... 90

Figure 65 Examples of Japanese companies who do business in Mongolia ................................ 91

Figure 66 Comparison of the EPA with the 2002 Investment Treaty ........................................... 97

Figure 67 Outline and results of countries with Japan Centers.................................................. 103

Figure 68 Japan Center Programs in ASEAN Countries ........................................................... 103

Figure 69 Loan outstanding and Loan amount for SMEs in Mongolia ...................................... 107

Figure 70 Average loan interest rate in Mongolia ..................................................................... 107

Figure 71 The trend of composition on each loan term in Mongolia ......................................... 108

Figure 72 The trend of composition on each loan term in Mongolia .......................................... 110

Figure 73 JICA TSL Loan performance by sectors .................................................................... 111

Figure 74 Actual performance of TSL by sectors ....................................................................... 111

Figure 75 The status of TSL user PFIs ....................................................................................... 113

Figure 76 Analysis on JICA’s Operation for Private Sector Development in Mongolia ............ 125

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Abbreviations

ADB Asian Development Bank AEC ASEAN Economic Community APLAC Asia Pacific Laboratory Accreditation Cooperation ASEM Asia-Europe Meeting BIT Bilateral Investment Treaty BOM Bank of Mongolia BOP Base of the Economic Pyramid BOT Build-Operate-Transfer BP Business Platform CHP Combined Heat and Power (Plant) C/P（CP） Counter Part CGF (MCGF) Credit Guarantee Fund of Mongolia CBI Centre for the Promotion of Imports from developing countries CIB Credit Information Bureau CPA Certified Public Accountant CPI Consumer Price Index CPTA Certified Public Tax Accountant CSC Counterpart Steering Committee DAC Development Assistance Committee DBM Development Bank of Mongolia ECA Export Credit Agency EFF Extended Fund Facility EPA Economic Partnership Agreement EUR Currency in EU FAO Food and Agriculture Organization of the United Nations FDI Foreign Direct Investment FIFTA Foreign Investment and Foreign Trade Agency FRC Financial Regulatory Commission GAIPSR General Authority for Intellectual Property and State Registration GASI General Agency for Specialized Inspection GCMS Gas chromatography–mass spectrometry GMP Good Manufacturing Practice GHG Greenhouse gas GHP Good Hygiene Practice HACCP Hazard Analysis and Critical Control Point HPLC High Performance Liquid Chromatography ICSID (Convention) International Centre for Settlement of Investment Disputes (Convention) IFRS International Financial Reporting Standards IFC International Finance Corporation IFI(s) International Financial Institution(s) IIA International Internal Audit IMA Invest Mongolia Agency IMF International Monetary Fund IPA Information-technology Promotion Agency, Japan IPSAS International Public Sector Accounting Standards IPP Independent Power Project ISD(ISDS) Investor State Dispute (Settlement) ISA International Standards on Auditing IWTO International Wool Textile Organization JETRO Japan External Trade Organization JSC Joint Stock Company KOICA Korea International Cooperation Agency KOTRA Korea Trade-Investment Promotion Agency

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KPI Key Performance Indicators KRI Key Risk Indicators LCMS Liquid chromatography–mass spectrometry LDPP Law on Development Policy Planning LLC Limited Liability Company MASM Mongolian Agency for Standardization and Metrology MED Ministry of Economic Development MECS Ministry of Education, Culture and Science and Sports MHPS Mitsubishi Hitachi Power Systems Co, Ltd MINAC Mongolian International and National Arbitration Center MMC Mongolia Mining Corporation MNT Mongolian Tugrik MOCCU Mongolian Confederation of Credit Unions MOE Ministry of Energy MOFALI Ministry of Food, Agriculture and light Industry MOH Ministry of Health MOI Ministry of Industry MOJC Mongolia-Japan Center for Human Resources Development MMHI Ministry of Mining and Heavy Industry MONDEP JICA Survey on the Regional Comprehensive Development in Mongolia MTFF Medium Term Fiscal Framework MUST Mongolia University of Science Technology NEXI Nippon Export and Investment Insurance NDA National Development Agency NPL Non-performing Loan NRLF National Reference Laboratory for Food safety NUM National University of Mongolia OECD Organization for Economic Co-operation and Development OJT/Off-JT On-the-Job Training/Off-the Job Training OSS One-stop Service OT Oyu Tolgoi PFI(s) Participating Financial Institution(s) PFM Public Financial Management PIU Program Implementation Unit PPP Public-Private Partnership PSR Product Specific Rules RDILI Research and Development Institute of Light Industry RT Rio Tinto QVC Qualifying Value Contents RVF Revolving Fund SCVL State Central Veterinary Laboratory SDV 2030 Sustainable Development Vision 2030 SME Small Medium Enterprise TRQ Tariff-Rate Quota TSL Two Step Loan TT Tavantolgoi UNCITRAL United Nations Commission on International Trade Law UNIDO United Nations Industrial Development Organization

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Chapter 1 Outlines of Survey

1.1 Background and objectives

1) Background The economic growth in Mongolia has been remarkable since 2000 and GDP has increased greatly,

but due to recent declines in mineral resource prices, the current Mongolian economy is in a very difficult situation.

It is currently necessary for Mongolia, given the high potential of its economy with the world's largest reserves of minerals, to obtain support from the international community in order to cope with this difficult situation.

Since 1990, the Japanese government has continued to support social infrastructure development and human resource development in the country, and Japan International Cooperation Agency (JICA) has provided various assistance for “Private Sector Development’’ in Mongolia as well. That assistance has been making steady results: in particular, achievements such as the Mongolia Japan Human Resources Development Center (hereinafter referred to as "Japan Center" or "MOJC") and the Two-Step Loan Project for SME Development and Environmental Protection.

Mongolia and Japan’s political and diplomatic relations in recent years have been extremely good and intimate due to the efforts of both countries, and the Mongolia-Japan Economic Partnership Agreement (Mongolia-Japan EPA) was signed in February 2015 (it became effective in June 2016).

Today, both governments are expecting the Mongolia-Japan EPA to stimulate business between Mongolia’s and Japan’s private sectors.

Under the above circumstances, JICA planned to implement the Data Collection Survey on Business Environment and Investment Promotion in Mongolia (the “Survey”). The Survey was started in December 2015 and completed in March 2017.

2) Survey objectives It is necessary to accelerate the entry of Japanese companies into Mongolia in order to increase

business in both countries. This survey was planned in order to provide critical updated information on the investment

environment in Mongolia to Japanese companies and accelerate their entry. The survey is expected to contribute to further promotion of business between Japan and

Mongolia by increasing the Japanese private sector’s awareness about the business environment of

Mongolia and improving the business environment of Mongolia for foreign direct investment It is also essential to accurately analyze the outcomes of JICA’s activities for private sector

development in Mongolia and to reflect the results of the survey in JICA’s planning for future programs in Mongolia.

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1.2 Survey schedule

Nov. and Dec. 2015 Preparation of Inception Report 【1st Survey Mission in Mongolia】 Initial Discussion with MOJC,MNCCI,MOI and IMA

Jan. and Feb. 2016

【2nd Survey Mission in Mongolia】 Workshop with Mongolian private companies on Jan. 15. 2016 in MOJC Workshop with Mongolian private companies on Jan. 19. 2016 in MNCCI Detail discussion with MOI, IMA and other government agencies Survey meetings with Japanese business entities in Mongolia

Mar. and Apr. 2016

【3rd Survey Mission in Mongolia】 Survey meetings with Mongolian private companies Survey meetings with law firms and accounting firms Survey on JICA’s operation in Mongolia

May 2016 Preparation of Interim report Survey meetings with Japanese companies

June-Aug. 2016 11th ASEM in Ulaanbaatar Effectuation of Mongolia-Japan EPA on June 7th 2016 Establishment of New Government

Sep. and Oct. 2016

【4th Survey Mission in Mongolia】 Detail discussion with NDA, MFALI and other government agencies Survey on legal issues Detail discussion with SME Development Fund

Nov. and Dec. 2016

【5th Survey Mission in Mongolia】 Survey in Mining and Heavy Industry in Mongolia Seminars for Business Environment in Mongolia

(Nov.29th in Tokyo and Dec.1st in Osaka)

Jan.-Mar. 2017

【6th Survey Mission in Mongolia】 Feedback Seminar with Mongolian private companies on Jan. 12. 2017 in MOJC Feedback Seminar with Mongolian Government/private companies on Jan. 17.

2017 in cooperation in MNCCI Survey on E-Commerce in Mongolia Detail Survey on inspection organization for the export of Casimir products Detail discussion with Research and Development Institute of Light Industry

(RDILI） Detail discussion with Japanese inspection organization for the import of Casimir

products Preparation of final report and Guide for Business Environment in Mongolia

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Chapter 2 Business Environment 2.1 Country overview of Mongolia

1) Area 1,566,000 km2 2) Population 3,061,000（2015） 3) Capital Ulaanbaatar（Population:1,345,500 in 2015） 4) Ethnic group Mongolian （96%）Kazakhs (4%) 5) Official languages Mongolian 6) Religion Buddhism

Source: JICA Survey Team

Figure 1 Map of Mongolia-Japan 1) Government Republic (Combined use of presidential system and parliamentary

cabinet system) 2) Head of State President ( Tsakhiagiin Elbegdorj) 3) Congress The State Great Khural.

76 Members (4 years term) 4) Cabinet Prime Minister（Jargaltulgyn Erdenebat）

13Ministries with 16 Ministers) 2.2 Macro economy

JICA Survey Team described the recent situation of the macro economy in Mongolia, focusing on the economic growth, industrial structure, consumer prices, foreign direct investment, trade, public finance.

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2.2.1 Economic growth

The Mongolian economy was growing rapidly since 2009 by the increase of foreign direct investment for the large scale mining development such as Oyutorgoi and a real GDP growth rate of Mongolia achieved more than 17% in 2011. However, Mongolian economy has been remarkably decelerating. According to the announcement of state statistics bureau, a real GDP growth rate of Mongolia reduced sharply from 7.9% in 2014 to 2.4% in 2015 (Refer to Figure 2).

The low economic growth rate was continuing in 2016 and dropped to 1.4% due to the decrease of inflation rate in the first half of the year. According to the latest forecast of the economic growth rate announced by IMF in October 2016, it will be declined to 0.0%. Mongolian economy may encounter further harsh situation.

The main reasons to cause this kind of low economic growth rate can be the decrease of foreign direct investment regardless of the revised law on investment in 2013 and law on mining in 2014, a falling price of mining resources in the key sector of Mongolia and the stagnation in the trade for China which is the largest exporting country due to the recession of Chinese economy as well. Besides that, in 2015, a weak activity of non-mining sectors such as agriculture due to the inclement weather affected the Mongolia economy.

The GDP per capita in Mongolia amounted to 4,169USD as of 2014. In comparison with other Asian developing countries except China, Korea and Singapore, Mongolia GDP per capita was the third ranking next to Malaysia (11,055USD) and Thailand (5,898USD) to be deemed as middle advanced nations. And, it was more than that of Indonesia (3,524USD) and Vietnam (2,051USD).

However, since then, GDP per capita has been decreasing to the level of less than 4,000USD due to the low economic growth rate and the decrease of USD conversion caused by the depreciation of Mongolian Tugrik against USD.

If Mongolia will recover the GDP per capita up to more than 4,000USD and keep it sustainable, it might be possible to become a middle advanced country similar to Malaysia and Thailand.

Regarding the disparity of GDP per capita among the region in Mongolia, Orkhon is the highest (6,547USD) and Bayan-Olgii is the lowest (1,549USD), respectively. There is more than 4 times gap between two regions.

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Source: Prepared by the Survey Team using “World Economic Outlook（April and October 2016）IMF”

Figure 2 The trend of GDP growth rate and GDP per capita 2.2.2 Industrial structure

According to the trend of the composition rate by industry in the nominal GDP, the agriculture and livestock farming such as cashmere amounted to more than 30% in the 1990s. However, the weight of mining sector increased in the 2000s and the mining has been the largest sector since 2005 to contribute to the Mongolian economy, accounting for around 20% of the nominal GDP.

The preliminary statistics of the composition rate by industry in the 2015 (Refer to Figure 3) shows that the mining is as large as ever, amounting to 17.0% share of total GDP which is the same as wholesale & retail. And, agriculture (13.6% share) and manufacturing industry (9.7% share) follow them.

On the other hand, according to the trend of the real GDP growth rate by industry, the economic growth of mining sector, which continued to be strong in the past as a key industry, has been slowing tendency due to the decline of resource price. In addition, the economic growth of both agriculture and manufacturing sector has been falling. Furthermore, both wholesale & retail and construction sector were forced to record the negative economic growth in the 2015 prel iminary statistics.

Based on the situation like this, Mongolian government has been attempting to diversify the industry by strengthening the competitiveness of non-mining sector. Especially, the Mongolian economy is expected to face harsh situation for the moment if the export related to mining resources to China will continue to decrease due to a slowdown of Chinese economic growth. For this reason, it is urgent issue for Mongolia to change the structure from the industry to depend for

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the underground resources such as copper, coal, etc. to the industry to utilize the ground resources such as live stocks, agribusiness, etc.

（Unit：%）

Industry 2013 2014 2015（*）

Agriculture, Forestry and Fisheries

13.4 13.3 13.6

Mining 15.9 17.0 17.0

Manufacturing 10.7 10.6 9.7

Electricity, Gas, Air conditioning

1.5 1.6 1.8

Water supply and sewerage

0.4 0.4 0.5

Construction 5.8 5.1 4.7

Wholesale, Retail 18.4 16.9 17.0 Transportation, Warehouse

4.3 4.8 4.8

Hotel, Restaurant 1.2 1.0 1.0

Telecommunication 2.5 2.5 2.5

Finance, Insurance 4.1 4.7 5.0

Real estate 6.2 6.8 6.8

Total 100.0 100.0 100.0

（Unit：%）

Industry 2013 2014 2015（*）

Agriculture, Forestry and Fisheries

19.2 13.7 10.7

Mining 18.5 19.4 13.0

Manufacturing 10.3 4.2 1.3 Electricity, Gas, Air conditioning

5.4 6.2 4.1

Water supply and sewerage

5.6 -0.7 -6.9

Construction 8.0 -4.3 -1.4

Wholesale, Retail 8.9 2.4 -3.6 Transportation, Warehouse

-1.4 14.8 5.7

Hotel, Restaurant 5.0 -10.8 2.4

Telecommunication 14.9 4.7 2.0

Finance, Insurance 30.8 32.6 6.7

Real estate 3.4 3.7 2.6

GDP 11.6 7.9 2.3

（*）Preliminary figures

Source: Prepared by the Survey Team using the data of Mongolian Statistical Yearbook 2015

（Mongolian Statistic Agency）

Figure 3 The trend of the composition rate by industry in the nominal GDP and The trend of the real GDP growth rate by industry

2.2.3 Consumer prices

Mongolian currency, Tugrik (MNT), was depreciated due to the decrease of the export and foreign direct investment since 2013. As a result of it, Mongolian consumer price index (CPI) raised up to 14.9% in July of 2014 because of the increase of imported prices. However, CPI dropped to the level of 7.0% to be targeted by the government in 2015 as the central bank raised the official interest rate twice after July of 2014.

Although MNT continued to be depreciated after that, CPI showed a downward tendency due to the fall of the food price such as meat and decreased to 1.9% in comparison with the ratio of the month in the previous year. As a result, the central bank lowered the official interest rate from 13% to 12% in January 2016 and furthermore from 12% to 10.5% in May 2016. Nevertheless, CPI was 1.6% as of June in 2016 and -0.1% as of September of 2016 compared to the ratio of the month in

Trend of the composition rate by industry in the nominal GDP

Trend of the real GDP growth rate by industry

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the previous year. In response to the decrease of CPI, the central bank raised the official interest rate from 10.5% to 15%, but lowered from 15% to 14% in December 2016. According to the guideline of Mongolia central bank, targeted inflation rate is supposed to be 7 % at the end of 2016. 2.2.4 Foreign direct investment (FDI)

According to the Figure 4 to show the total amounts of foreign direct investment in Mongolia by country, the Netherland is top and China is the second largest at the end of 2013, respectively. These two countries account for more than 50 % of total amount of investments. The Netherland is ranked as a “Tax Haven” country like Luxemburg and the UK Virgin Islands, through which the enterprises and corporations in the world has invested to reduce and exempt various taxes.

It means China is substantially the largest investing country in Mongolia. In addition, although, Korea has gained the influence over Mongolian economy by accelerating its business in Mongolia in recent years, Korea takes the8th place. Besides that, Japan is ranked as 12th place, accounting for about 1.5% of total amount of investments in Mongolia. (Regarding the details of tax treaty in Mongolia, refer to the Figure 21)

（Unit：%、Million US$） No. Country Share Total 2010 2011 2012* 2013* 1 Netherlands 29.7 4,227 232 1,816 1,253 863 2 China 26.4 3,766 176 1,015 243 39 3 Luxemburg 8.1 1,151 25 476 634 6

4 UKVirgin Islands 7.8 1,109 101 610 274 2

5 Singapore 5.1 725 31 402 227 8 6 Canada 3.5 498 147 72 19 7 7 Australia 2.7 385 2 82 96 183 8 Korea 2.7 383 39 55 54 19 9 USA 2.2 308 14 127 63 3

10 Russia 2.1 298 2 58 130 2

Total 112 100.0 14,244 1,026 4,986 3,199 1,219 Source: National Development Agency (former Investment Mongolia Agency)

2012*: Figures at the point time of the fourth quarterly. 2012 figures in the trend of investment by sector at the Figure 5 are the same. 2013*: Figures not to reflect the information on trade balance provided by the Bank of Mongolia2013 figures in the trend of investment by sector at the Figure 5 is the same.

Figure 4 The trend of investment by country

On the other hand, according to the Figure 5 to show the total amounts of foreign direct investment (FDI) in Mongolia by sector, the mining resource including exploitation and search is the largest sector to account for three fourths of total amounts at the end of 2013.

These two sectors amount to more than 90% of total amounts. The amounts of foreign direct investment reached its peak in 2011. However, it has been decreasing due to the drop of the strategic sectors by the implementation of law on the management of foreign direct investment in 2012. In particular, the China’s investment has sharply declined.

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（Unit：%、Million US$）

No. Sector Share Total 2010 2011 2012* 2013* 1 Mining 76.6 7,993 820 4,083 2,218 872 2 Trade services 17.1 1,786 163 621 694 309 3 Transportation 1.5 152 3 7 135 6 4 Finance 0.8 83 13 24 28 18 5 Construction 0.5 57 1 5 48 3 6 Tourism 0.3 35 - 22 12 - 7 Food & beverage 0.3 30 4 5 21 - 8 Telecommunication 0.1 10 - 9 1 - 9 Health & beauty 0.1 10 7 1 1 -

10 Others 2.6 269 14 207 39 9 Total 20 100.0 10,430 1,026 4,986 3,199 1,219

Source: National Development Agency (former Investment Mongolia Agency)

Figure 5 The trend of investment by sector 2.2.5 Trade

The Figure 6 shows the recent trends of trade. Although, the trade has been deficit until 2013, the export was more than import in 2014 and the export was decreased to 19% and import was decreased to 28%, respectively in 2015 compared to the ratio of the previous year. As a result, the trade has been surplus for two years. This is because the import has been remarkably reduced to more than the decrease of the exports due to the sluggish construction and low price of petroleum products.

Source: Mongolian Statistical Yearbook 2015（Mongolian Statistic Agency）

Figure 6 The trend of trade in Mongolia (export & import)

According to the Figure 7 to show the composition rate of export by country in 2015, the share of China is overwhelmingly 84% and Great Britain, Switzerland, Russia and Korea follow the China. Main exported items are mining products such as coal, gold, copper, and gems & precious metals. These items account for more than 80% of total export amounts.

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On the other hand, regarding the composition rate of import by country in 2015, China is 37% and Russia is 27%, respectively. These two countries account for near two thirds of total import amounts. And, Japan (7%) and Korea (7%) follow China and Russia. Main imported items are including mining products (mainly the petroleum products from Russia), machinery/electronics & their parts, automobile & its parts.

In addition, according to the Figure 8 to indicate the trade between Mongolia and main countries in 2014, the trade with only China was surplus. The trade with other countries such as Russia, Japan and Korea was large deficit. One of the characteristics of Mongolian economy is to depend on only China for the trade surplus.


Figure 7 The situation of trade by major countries


Figure 8 The trade balance by major countries

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2.2.6 Public finance

As Mongolia government has survived an economic recession by a public-spending policy, fiscal balance has become rapidly worse since 2011. As a result, rating agencies downgraded the rating of Mongolia in November in 2015 (S&P: B+→B, Fitch: B+→B). In response to the drop of the rating, government has addressed the financial reconstruction by revising law on fiscal stability and newly enacting law on debt management.

The revised law on fiscal stability regulated to decrease the upper limit of “government debt” from 58.3% of GDP in 2015 to 40% in 2018 and to reduce the fiscal deficit including the public expenditure disbursed by Development Bank of Mongolia from 5% of GDP in 2015 to 2% of GDP in 2018. Besides that, the law on debt management regulated to exclude the debt of state-owned enterprises and its debt guaranteed by government from the “government debt”. Also, the debt in the mining, power and railway sector is not included in the “government debt” by the law. In this point, the definition of government debt in Mongolia is different from the public debt defined by IMF.

However, the balance of government debt at the end of 2015 amounted to approximately 7.2 billion USD and exceeded the upper limit of 58.3% of GDP regulated by the revised law on f iscal stability. On the other hand, the situation of domestic bond market in Mongolia was not enough to issue the middle and long term government bond. Thus, the government newly issued a high yield government bond amounted to 500 million USD (maturity 5 years, yield rate 10.875%) in the international market in March of 2016 in terms of cash flow management.

A People’s party new administration has worked on the centralization of information regarding non transparent fiscal/public debt and reduction of increased annual expenditure during the Democratic Party former administration. A new administration enacted the amendment of the revised law on fiscal stability in September 2016 and set the goal of decreasing the ratio of fiscal deficit to GDP to 9.9% in 2017 and 7.5% in 2018. International rating agencies lowered the rating of Mongolia even after the People’s party new administration. To be concrete, Moody’s downgraded from B3 to Caa1 and Fitch downgraded from B to B-, respectively in November 2016. It makes the Mongolian government more difficult to raise the funds from the international market. 2.2.7 Outlook for Mongolian economy

The real GDP growth rate in Mongolia has been continuously falling due to the decrease of foreign direct investment, low price of mineral resources in the world market, the decline of export to China by the speed down of Chinese economy. However, the government of Mongolia reached a consensus on the second phase of Oyutorgoi (OT) copper mining project at the end of 2015. The second phase of OT project is possible to attract new foreign direct investment. As a result, Mongolia economy is expected to get on track for recovery again in the middle and long term.

Thus, IMF forecasts that Mongolia will rock the bottom in the real GDP growth rate in 2016, then will achieve 1% of economic growth rate in 2017, and will turn gradually upward after 2018

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on the assumption that foreign direct investment will be increased and mineral resource price will be raised. However, the government of Mongolia forecasted 3% in the economic growth rate in 2017 by the law on budget enacted in November of 2016 in order to reduce the fiscal deficit and government debt.

It is a challenging issue to consider how to achieve the economic growth rate which is higher than IMF forecasts.

2.3 Economic/industry policies and development plan

2.3.1 Policy responses by the government of Mongolia

1) Background In Mongolia, there has been no concept of “industrial policy” even after starting the transition of

market economy. Instead, the government has so far selected the priority projects and regarded them as an important sector. Specifically, those are including a) manufacturing projects such as metal, coke, coal chemistry to utilize the mining resources, b) agricultural processing projects such as meat, dairy products, textiles, c) infrastructure projects such as power plant, road, water supply, d) new projects except for mining development such as IT, Tourism, environmental protection.

However, about 80% of total amounts of foreign direct investment for 20 years between 1993 and 2012 were development projects related to mining and only 1% was manufacturing projects. Thus, it is an urgent issue for the government to strengthen not only mining sector but also the manufacturing industry in the non-mining sector.

On the other hand, the number of Mongolian enterprises amounts to 60 thousand at moment (about 90% is small and medium enterprises) and the sector related to wholesale & retail, trade, service accounts for around 40% of total. Among them, some of enterprises have been producing, shifting to manufacturing companies such as agro-processing and exporting the products as well since 2012.

Taking into consideration the directions like this, the government has passed the parliament resolutions and new laws one after another since 2015 in order to support the export-oriented and import-substituted companies. Those are; • the resolutions of the State Industrial Policy (in June); • the law on the support of manufacturing industry (in July); • the law on development policy and plan (in December); • the resolution of Mongolia’s Sustainable Development Vision-2030 related to development

policy and plan (in February of 2016). 2) Ministries and agency in charge of industrial policy and development plan in the Mongolian new government

In the former government, Ministry of Industry was responsible for formulating both industrial

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policy and development plan in Mongolia. However, in the new government given by the general election in June of 2016, Ministry of Industry was dissolved and its mission to formulate an industrial policy has been transferred to the Ministry of Mining and Heavy Industry and the Ministry of Food, Agriculture and Light Industry.

Furthermore, the National Development Agency (NDA) to be newly established in the new government has been in charge of formulating development plan and long-term development vision in place of Ministry of Industry. Main role/policy and the sector under the control of new ministries and agency are shown in the Figure 9.

Ministry and Agency Main role and policy Main sector

Ministry of Mining and Heavy Industry Department of Heavy Industry Policy

To continue to support the heavy industry based on the State Industrial Policy and the law on the support of manufacturing industry to be enacted by the former Ministry of Industry.

Heavy industry sectors in the former Ministry of Industry such as petroleum, chemistry, steel etc.

Ministry of Food, Agriculture and Light Industry 1)Department of

Light Industry 2) Department of Small & Medium sized Enterprises (SME) and Cooperative

1) To continue to support the light industry based on the State Industrial Policy and the law on the support of manufacturing industry to be enacted by the former Ministry of Industry.

2) To continue the policy to support SME to be formulated by the former Ministry of Industry

Light industry sectors in the former Ministry of Industry such as textile, garment, leather, wooden products, printing, electronics, etc. and SME sector

National Development Agency (NDA) Development Policy Division, And Sector Development Policy/Coordination Division

To be newly established by the new government to formulate the development investment plan based on law on budget and to formulate 2030 long-term development vision and its action plans.

To decide the priority rank of Development investment plan in Each ministries and agencies and to implement F/S on the priority plans, to disseminate the priority plans for both domestic and international investors


Figure 9 Ministries/agency responsible for industrial policy and development plan

Each ministry continues the policy to support its heavy and light industry based on the state industrial policy to develop the prioritized industry sectors in Mongolia and the law on the support to develop the export oriented and import substituted manufacturing enterprises to be formulated by the former Ministry of Industry in 2015.

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Although, the basic policy to support the industry in the former Ministry of Industry has not been changed and they are still effective in the new ministries, there are further accents regarding the policy measures in the new government.

That is to say, 1) to support the manufacturing sectors with the competitiveness to export the products in the international market, 2) not to raise the various tax rates in general, 3) to revise the government rules and regulations to hinder the promotion of foreign direct investment, 4) to emphasize the industrial cluster in order to strengthen the manufacturing industry.

In this chapter, the JICA Survey Team describes the overview of economic/industrial policy and development plan in Mongolia, focusing on the State Industrial Policy, law on the support of manufacturing industry, law on the development policy and plan, the Mongolia’s Sustainable Development Vision-2030, to be enacted between 2015 and 2016 as follows. Besides that, prior to those policies and plans, Economic Partnership Agreement (EPA) between Mongolia and Japan was concluded in February of 2015 and became effective in June of 2016. As the EPA is an epoch-making matter for Mongolia, JICA Survey Team introduces the EPA in other chapter.

2.3.2 Overview of the State Industrial Policy

1) Purpose and principles The State Industrial Policy was resulted in June of 2015 at the State Great Khural of Mongolia.

The purpose of the policy is to create an industrial and service sector applying advanced high technologies and develop the afore mentioned sector as the priority sector that will provide for the sustainable development of Mongolia. The government adhere the following main principles to implement the above purpose. a) To promote healthy, safe and environmentally friendly manufacturing industry. b) To support the manufacturing industry of export-oriented, import-substituting and competitive

final products in accordance with the international standards. c) To promote and develop economically efficient manufacturing industry based on advanced

high technologies. d) To base the industrial sector development on effective state institutions, scientific and private

sector collaboration.

2) Main measures for priority sectors As the Figure 10 shows, government of Mongolia has listed a total of 58 priority sectors in the

heavy industry and light industry including SME and considers the measures to support them. The following items are the concrete main measures. a) To prepare and improve the legal system in the industrial sector such as the formulation of

national industrial promotion plan. b) To formulate the mapping of location plans of the industrial projects by region. c) To develop the economic special zones and industrial clusters to aim at new accumulated

industries, composing of 4 industrial technology parks and 3 free trade zones in the whole

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country d) To develop and improve human resources in the industrial sectors.

In addition, Ministry of Construction & Urban Housing has become a line ministry for the cement in the heavy industry and the building materials as a result of the restructuring of ministries and agencies in the new government since the June of 2016. And, the new government plans to consider the integration and grouping of some of 58 priority sectors.

Sector Line ministry number Main priority sector

Heavy

industry

Ministry of Mining

and Heavy Industry

16 Oil refining, Coal chemistry, Coke chemistry,

Copper smelting, Metallurgy, Steel, Machinery

Cement (Transfer to Ministry of Construction and

Urban Housing)

Light industry

Ministry of Food, Agriculture and

Light Industry

42 Cashmere, Wool, Leather, Wooden products, Meat, Livestock, Dairy products, Food products,

Bio-technology products (including 23 SME

sectors)

Building materials(Transfer to Ministry of

Construction and Urban Housing)

Total 58 Source: Prepared by the Survey Team based on the interviews with each Ministry

Figure 10 Main priority sector in Mongolia

Among the concrete measures, the government established three free trade zones based on the

law on Free Zones to be legislated in February of 2015 and provided with incentives such as the reduction of corporate income tax, etc. for the companies located in those three zones. Also, the government is promoting a plan of Agro-IT Parks to attract the agro-processing companies as a new industry cluster. This plan is included in the government action plans and is ranked as a top priority project of newly established NDA. NDA plans to select one of Agro-IT Parks as a model of cluster and to provide “one-stop services” for the companies located in the cluster. For this purpose, NDA has finished basic F/S on the model cluster and considers implementing it as a pilot project from now on.

Concrete measures for priority sectors above mentioned are to be implemented in the three phases divided by the government; Phase 1 between 2015 and 2020, Phase 2 between 2020 and 2025, Phase 3 between 2025 and 2030.

2.3.3 Overview of law on the support of manufacturing industry

1) Purpose and principles The law on the support of manufacturing industry was enacted in July of 2015. The purpose of

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the law is to support the development of export-oriented and import-substitutive manufacturing industry of competitive and environment friendly products. The law describes the following main principles to implement the above purpose. a) To support the manufacturing industry to be in compliance with the above mentioned state

industrial policy and green development concept. b) To support the manufacturing industry of domestic products. c) The development of mining resource will not be included in the support stated in the law. d) Foreign business and legal entities based on the law on investment will not be subject to the

support set out in the law.

2) Main measures Taking into account the above purpose and principles of the law, the new government continues

to implement the basic policy for heavy industry in the former administration to protect a domestic industry and promote import-substitution. However, it may be subject to change, depending on the situation of production in the future. The concrete main measures and their progress are as follows. a) To raise the import tax for cement, meat products and honey as scheduled to protect the

domestic producers and plan to expand the items of objective in accordance with their domestic production.

b) To continue to improve the procurement of domestic goods. It is important to revise how to procure the goods from government agencies. The government of Mongolia considers prioritizing the domestic procurement and supplying the goods made in Mongolia on the condition that the price and quality of domestic goods are equal to the foreign one. At present, the number of items of domestic goods amounts to 110. The government plans to expand the items of domestic goods and compile the list of those items.

c) To narrow and emphasize four target projects of heavy industry, although there are many projects of heavy industry to plan to produce the domestic main raw materials. Those projects are including integrated steel manufacturing in Darhan, b) petrochemical plant in the eastern region, c) coal gasification in Baganur, d) copper smelting plant in the southern region.

d) To continue to provide the financial support for the promotion of import substitution such as Two Step Loan (TSL; interest rate 7% to 9%), a credit guarantee for the enterprises facing the lack of

e) Collateral, lease, subsidy for technology development started in the former administration. However, it might be difficult to give a large scale support, taking into consideration the present economic recession.

2.3.4 Overview of law on development policy and plan

1) Background The government had formulated about 400 development policies and plans in Mongolia since

1990, which contained three categories consisting of state, sector and region. Even now, more than

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100 policies and plans in total have been still effective. However, 1) present various development policies and plans are not consistent with each other, 2) these policies and plans are not reflected on the policy and strategy of political party, 3) the goal and indicator of these policies and plans are not clear, 4) there are many policies and plans that cannot confirm and judge whether or not to implement their goal, 5) the financial resources to implement these policies and plans are insufficient, 6) since the general election in June of 2016, new government has not yet established a system to continue the existing policies and plans. Thus, taking into consideration that economic/industrial policies and development plans in Mongolia are difficult to grasp their goals from the view point of foreign investors, the government decided to review the existing development policies and plans.

2) Purpose of law on development policies and plans

Based on the above mentioned background, the parliament took the initiative to legislate the law on development policies and plans in order to rearrange, integrate and restructure the present development policies and plans so that these can establish a consistent and comprehensive system. Main points of the law are as follows. a) To clarify who will formulate the policies and plans and how these will be decided. b) To clarify who will monitor and assess the policies and plans decided in the parliament or

cabinet. c) To continue the implementation of the existing policies and plans. d) To establish an endorsement of funding resources. e) To review the policies and plans, and announce them to people publicly.

3) Classification of development policies and plans As the Figure 11 shows, law on development policies and plans classifies the term of policies

and plans into long term, middle term, short term and stipulates each period, composition of policies and plans, monitoring, approval.

Type Period Composition of policies

and plans Monitoring &

Evaluation Approval

Long term 15-20 years

A: State development vision

Monitoring after 2years Evaluation after 4years

Parliament

Middle term (1)

8-10 years

B: State policy C: Regional policy D: Metropolitan

development vision

Monitoring after 2years Evaluation after 4years except D

B,C: Government D :Local assembly

Middle term (2)

4 years E: Government action plan F: Governor action plan G: Public investment program

Monitoring after 2years Evaluation after 4years for E only.

E:Parliament F:Local assembly G:Government

Middle term (3)

3-5 years

H: State program I: Regional program

H:Monitoring every year I: Monitoring after 2years

H: Government I: Local assembly

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Short term

1 year J: State social economic development guideline K: Regional social economic development guideline

Monitoring every year J:Parliament K: Local assembly

Source: Prepared by the Survey Team using the handout at the study meeting on the law on development policy and plan

held in JICA Mongolia Office

Figure 11 Overview of the system of development policy and plan in Mongolia 4) Actions for implementing and the role of National Development Agency (NDA)

Based on the above mentioned classification of development policies and plans, line ministries are in charge of reviewing and revising the existing long term, middle term and short term development policies and plans by sector. NDA is responsible for putting together those policies and plans reviewed and revised by line ministries and formulating action plans. Besides that, NDA is required to establish the integrated data base system for all of policies and plans and update the system. On the other hand, Ministry of Finance (MOF) reviews the public investment plan and considers how to allocate the funding resources for the development policies and plans after calculating the necessary budget. Policy /Planning Division, Economic Policy Department of MOF is in charge of carrying out comprehensive coordination needed for the procedure.

NDA is to proceed to formulate the development investment plans through the following steps. a) To grasp the national development projects to be planned by each line ministry at first, then

select the important projects contributing to the development of Mongolia, and decide an order of priority.

b) To implement Feasibility Study (F/S) on high priority development investment projects based on law on budget, article 28.

c) To publicize the F/S on the above high priority projects for domestic and foreign investors in collaboration with the public relations division in the NDA and support fund raising for these investors.

5) Development policies and plans regarding the industrial sector Former Ministry of Industry provided major development policies and plans regarding the

manufacturing sector in the short term, middle term and long term and submitted them to Mongolian parliament in order to reflect state industrial policy and law on the support for manufacturing industry as Figure 12 shows. After this, Ministry of Mining and Heavy Industry and Ministry of Food Agriculture and Light Industry are in charge of reviewing these policies and plans.

Category Period Main policy

Short term 2016-2020 To protect the domestic manufacturing industries from the import Products and to promote the import substitution of major raw materials; such as steel, copper, fuel in terms of strengthening the competitive edge of domestic manufacturing industry.

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Category Period Main policy

Middle term 2020-2025 To expand exports and introduce the high technology after strengthening the competitiveness of domestic manufacturing industry. As a result, to develop the manufacturing industry such as heavy chemical industry, industrial machinery.

Long term 2025-2030 To develop the information and service industry. Furthermore, to shift from export oriented to domestic demand oriented economy through the technology development, paying attention to environmental protection.


Figure 12 Short/ Middle term and long term policy in the manufacturing sector

6) Overview of the Mongolia’s Sustainable Development Vision-2030 In response to law on development policies and plans, Mongolian Parliament approved

“Mongolian Sustainable Development Vision -2030” in February of 2016 as the higher ranked long term national development vision. This vision clarified 20 important indicators to be achieved by 2030 composing of a) economic development, b) social development, c) environmental perseverance, d) state governance and raised 43 goals for above 4 areas divided into 3 steps; from 2016 to 2020, from 2021 to 2015, from 2026 to 2030. Among them, main indicators related to economic development are deemed at Figure 13.

There are 7 indicators in the economic development related to 5 sectors for agriculture, tourism, manufacturing, mining, energy/infrastructure and 2 items for economic policy, business environment. Regarding the manufacturing sector, the following three goals are including. a) To develop a value-added export industry by utilizing the advanced technology and technology

innovation b) To develop a food processing industry by introducing the advanced technology and to supply a

healthy and safe food. c) To promote domestic production for chemical industry and petroleum products in accordance

with the international standard.

Main indicators Unit Base level (2014)

Target level (2030)

1 Annual average economic growth % 7.8 6.6

2 Gross national income per capita US$ 4,166 17,500

3 Global competitiveness index rank 104 70

4 Doing business index rank 56 40

5 Environmental performance index rank 111 90

6 Poverty rate % 21.6 0

7 Area of the land with disease free status for international trade certified by World

% 0 60

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Main indicators Unit Base level (2014)

Target level (2030)

Animal Health Organization

8 Number of foreign tourists travelling Million 0.4 2.0

9 Share of the processing sector exports % 17 50

10 Share of main fuel products supplied from domestic production

% 0 100

Source: Mongolian Parliament resolution “Mongolian Sustainable Development Vision -2030”

Figure 13 Main indicators related to economic development

2.3.5 Consideration on Mongolian economic/industrial policy and development plan

During the transition period from a planned economy to a market economy in the beginning of 1990s, the government of Mongolia continued to take a policy to avoid the intervention in the economic activity of private sector as much as possible based on the guideline of World Bank and IMF. In other words, the government played a role in providing support for the private business behind the scenes.

In this respect, the recent rapid formulations of the economic/industrial policies and development plans/long term visions mentioned in this chapter mean that the government launches on emphasizing its initiative on the private business. It can be said to convert the policy direction until now.

However, these economic/industrial policies and development plans/long term visions still seem to be similar to the ideas in the period of planned economy. There are views and opinions that it may be difficult to achieve these policies and plans without giving a concrete structure and measures to implement. Besides that, to be sure, the concept of law on development policy and plan/long term development vision is accepted, but the role and relation between line ministries and NDA are not fully clear in terms of the process to implement the laws and visions. It is expected that top of the government (Chairman of parliament, President, Prime Minister) will coordinate the relevant institutions and implement the laws and visions with strong leadership and responsibility. 2.4 Business environment

2.4.1 Mongolia’s effort to improve the business environment and investment promotion

1) Information on business environment In Mongolia, there are two institutions to provide the information on business environment for

the foreign companies and investors interested in doing business in Mongolia as shown at Figure 14. One is the National Development Agency (NDA) to be newly established by the government after the general election in 2016. The other one is the Mongolian National Chamber of Commerce & Industry (MNCCI) representing the private business. NDA has succeeded to all of operations

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related to the information on business environment provided by Invest Mongolia Agency (IMA) which was dissolved in 2016 to streamline the ministries by the new government.

Provider NDA MNCCI

Name YOUR GUIDE TO INVEST IN MONGOLIA BUSINESS GUIDE FOR FOREIGN

INVESTORS & TRADERS

Latest version 2016 2016

Method Booklet（only English version） NDA website（only English）

To start “Online Investment Guide to Mongolia”（iGuide）in May 2016

The English booklet was published in the past, but it was suspended.

MNCCI website（only English）

Update To update 2015 version in Feb. 2016. To update 2012 version in 2017. Main contents of latest version

Residents procedure in Mongolia Procedure to establish a company Various taxes related to a company

including tax exemption and special economic zone

Business in Mongolia Investment environment such as law on

investment, concession, incentive for investment

Trade

Overview of Mongolia country Investment environment in Mongolia

(economic situation, infrastructure development, banking sector, industry, labor, registration of company, trade transaction, etc.)

Investment to Mongolia (law on investment, tax system, PPP, arbitration, intellectual property rights, etc.)

Trade with Mongolia including EPA between Mongolia and Japan

Annex (restructuring of ministries and government agencies by the new administration)

Overview of organization

The organization of NDA consists of 5 divisions, 1) Development policy, 2) Sector development policy and regulation; 3) Investment integrated policy planning, 4) Information and promotion, 5) Administration and human resources. Among them, NDA succeeded division 3) and 4) from former IMA. The main operations of Investment integrated policy planning division are as follows.

1) To draft the policy to increase the state investment and formulate the necessary policy to attract foreign companies.

2) To implement and respect the bilateral and multilateral international treaty for investment between Mongolia and 43 countries.

3) To carry out the laws and regulations related to the foreign investment and provide foreign company with incentives depending on its amount of investment.

4) To conduct the promotion activity to

MNCCI was established in 1960 to promote trade and investment in the Mongolian business and to provide supports for private sector business. At present, MNCCI is doing the following major activities as a nonprofit organization (NPO) based on the law on NPO. 1) To promote export and SME business. 2) To organize a business mission, an

international exhibition and trade fair. 3) To exchange business and investment

information. 4) To give counseling for public and private

sector. 5) To issue a certificate of origin. 6) To arbitrate a dispute of foreign trade to

manage Mongolian International and National Arbitration Center (MINAC) affiliated with MNCCI. As of April 2014, there are 53 arbitrators including 8 foreigners registered in the MINAC. The procedure of arbitration in MINAC is in

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Provider NDA MNCCI

attract foreign companies and to register liaison offices of foreign government institutions.

On the other hand, the main operations of Information and promotion division are as follows. 1) To collect various data related to the

foreign investment and analyze, compile the data.

2) To provide the advisory service and support for the foreign companies to enter into Mongolia market.

3) To conduct the promotion and information activities to attract the foreign companies.

conformity to international standards. And, a judgment of arbitration made by MINAC can be executed compulsorily in more than 150 countries including Japan.

(Regarding the details of international arbitration in Mongolia, refer to 2.4.9)


Figure 14 Overview of the institutions for the information on business environment

Both NDA and MNCCI are collecting statistics, data, form, procedure, etc. from the relevant ministries and institutions to compile the business information. For example, the state intellectual property right and registration agency which is in charge of registering the enterprises publishes the registration procedures and their necessary forms for foreign companies.

The contents of information to be provided by both NDA and MNCCI are basically similar, but MNCCI includes its activities of mediation & arbitration and introduces Mongolian top 100 companies as well different from NDA. NDA and MNCCI have neither discussed how to provide above mentioned business information nor worked in cooperation with each other.

Taking into consideration the situation of providing business information in Mongolia, it might be difficult to evaluate both NDA and MNCCI who have provided the comprehensive business information due to the lack of important items such as legal system, accounting rule and labor condition. “2016 YOUR GUIDE TO INVEST IN MONGOLIA” by NDA has deleted the information on labor and employment which was described in the 2015 version.

On the other hand, “BUSINESS GUIDE FOR FOREIGN INVESTORS & TRADERS” by MNCCI has not updated the frequent change of tax system every year. Both NDA and MNCCI have provided only English booklet and website. Since there are no Japanese versions, it is inconvenient for Japanese companies to grasp the Mongolia business situation. 2) Organization, personnel and budget related to trade, investment and small & medium sized

enterprise (SME) promotion in the Mongolian government

According to the interview with Ministry of Finance which can have a bird’s eye view of the whole government in Mongolia, organization and personnel related to trade, investment and SME

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promotion are shown at Figure 15. However, it was not possible to grasp the budget of each ministry and agency as the budget has not yet finalized in the parliament.

Area Trade Investment SME promotion

Organization Ministry of Foreign Affairs

National Development Agency (NDA)

Ministry of Food, Agriculture and Light Industry

Personnel(Number of staffs)

10 (in charge of trade)

55 (Total of NDA)

20 ( SME department)

Remarks Response to trade issues including EPA between Mongolia and Japan

NDA is responsible for not only foreign direct investment issues, but also PPP, PIP and concession issues.

SME fund is under the control of SME Department of Ministry of Food, Agriculture and Light Industry.


Figure 15 Organization and personnel related to trade, investment and SME promotion

2.4.2 Doing business in Mongolia by foreign companies

Based on the above mentioned business information to be provided by NDA and MNCCI, JICA Survey Team will describe the overview of main points to note for Japanese companies considering doing business in Mongolia in the future, focusing on legal system, establishment of business base, labor work, accounting & audit and tax system.

1) Legal system

Mongolia legal structure consists of constitution as an apex, law, resolution, decree based on European continental legal system as shown at Figure 16. Those components of legal system will be effective after they are published in the “Magazine of State Information” to be compiled by Ministry of Justice. This magazine is equivalent to an official gazette in Japan. It is possible to subscribe to the magazine for annual 40 USD.

Authority Form Details

Parliament Law Resolution

A bill to be formulated by each ministry Policy, vision and program to be formulated by each ministry

Cabinet Decision Cross-sectional rule, regulation and procedure among ministries Ministry Decree Rule, regulation and procedure related to the jurisdiction of each

ministry Local government

Ordinance Local rule, regulation and procedure to be approved and issued by local parliament


Figure 16 Legal system in Mongolia

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2) Laws related to business Main laws related to business are including company law, law on investment (former law on

foreign investment), law on corporate registration, law on tax, accounting law, law related to labor, law on intellectual property right (law on patent & copyright, law on registration of trademark), law on arbitration, bankruptcy law, law on SME. National Legal Center edited “Business Laws of Mongolia” composed of 70 laws and regulations including the above mentioned 10 laws to be supported by International Finance Institutions and then published an English version in 2008.

However, National Legal Center has never published the updated Business Laws of Mongolia due to the lack of support of International Finance Institutions and government budget, although most of 70 laws and regulations have been amended since 2008. Thus, it is necessary to check individually the latest version of each law. Main laws related to business to be amended in 2015 among aforesaid laws are listed at the Figure 17.

Name of Law Composition of law and recent main amendments, etc.

Law on corporate registration

Main amendments of law in 2015 are the reduction of documents needed to submit, the simplification of process of registration, start of electric registration and the shortening of period of procedure (from more than one month to 10 days).

Law on tax The law consists of law on corporate income tax, law on personal tax, law on value added tax, law on custom, etc. The law on value added tax was amended in 2015 to increase the sales amount to be liable for taxation.

Accounting law The law stipulates accounting principles, preparing of financial statements, accounting standards, claims & obligations of an accountant, etc. The law was amended in 2015 to require the holding companies to submit the consolidated financial statements.

Law related to labor The law consists of labor law, law on employment contract, law on support of employment, law on social insurance, etc. The law on social insurance was amended in 2015 to set up the upper limit of the burden amount by an employer for insurance premium.


Figure 17 Main laws related to business to be amended in 2015

2.4.3 Form of foreign companies going into Mongolia and its registration

The law on investment stipulates that foreign companies must choose the form of either local subsidiary or representative office as their base doing business in Mongolia. At present, a local branch and other forms of business base are not approved by the law. A representative office is regarded as the agent of foreign corporation and is not allowed to conduct sales activities in Mongolia. It means that the foreign company to operate a manufacturing factory in Mongolia must establish the subsidiary. The definition of a local subsidiary is the company to be established and registered in Mongolia, of which the foreign investors hold at least 25 % of total share and pay ten thousand USD as the minimum amount.

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Both local subsidiary and representative office of foreign company have to register in the General Authority for Intellectual Property and State Registration (GAISPER). The foreign company submits the application form to GAISPER and the examination and approval procedure by GAISPER will be completed within 10 business days. There is no need for the foreign company to register the local tax bureau because GAISPER is supposed to share the information of registration with the local tax bureau. 2.4.4 Employment and labor

The Figure 18 shows that the unemployment rate in Mongolia has been shifting around 8%.The main issue in the recent Mongolian labor market is to provide the employment opportunity in response to the increase of high academic qualifications and students studying abroad. To shrink a gap and correct a mismatch between demand of labor and supply of employment is an important policy.

Source: IMF

Figure 18 The trend of unemployment rate in Mongolia The Labor law in Mongolia has strong regulations in comparison with labor law in Japan. It is necessary to pay attention to the details of the law in case of preparing the employment

contract and rules. Main points to be noted in the labor law are as follows. Labor law approves to carry out a side job. Although it is not illegal to regulate the prohibition

of carrying out a side job in the employment rule, the employee are not restrained on the employment rule mentioned before.

Labor law allows a 60 age-limit retirement system, but does not approve of the retirement system under 60 years old.

Labor law allows a premium wage system for overtime work, but the rate of premium wage is higher than that of Japan.

Salary must be paid more than two times per month.

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In case the wage of employee will be decreased as a result of rotating the workplace to avoid harming the health of the employee, the employer is obliged to compensate the difference between the previous wage and present wage for 6 months.

Late-night work is regulated from 10 pm to 6 am. Workers have a large number of annual paid holidays in Mongolia compared to Japan. The

basis to calculate annual paid holidays is the length of his/her continuous service, summing up the length of services in the previous company based on the data book of social insurance.

It is prohibited by the law to dismiss the mother with less than 3 years old child and single father to bring up less than 3 years old child.

It is prohibited by the law to let the pregnant woman, the mother with less than 8 years old child, the single mother and father with less than 16 years old child do late-night work and over time work, to make a business trip.

Pregnant woman can take maternity leave for 120 days, which is longer than Japan. Labor law allows both mother and single father to adopt a newborn baby to give 60 days’

leave. Either mother or father with less than 3 years old child can get a childcare leave. They can

obtain a long period of childcare leave in comparison with Japan. The employer cannot refuse the statement of arbitration by the employees in case of coming

into a collective conflict between labor and management, although it is not necessary to set out the employment rule.

Labor law allows the employer to reduce the salary up to 20 % of average wage for less than 3 month.

Employer’s liability for damages is restricted to pay one month average wage of employee by the law

2.4.5 Tax system and taxation

1) Tax system in Mongolia Tax system in Mongolia was established based on market economy in 1992 at the time of

transition from socialism to capitalism. Since then, the government has been making an effort to continuously improve the tax system in order to fulfill the government public commitment such as the reduction of tax burden for the company making a job creation, the decrease of informal economy, the expansion of foreign direct investment and the development of SME.

Mongolian tax system is largely based on law on tax enacted in 2008. Since then, the government has amended the law several times, reflecting economic situation and policy. The purpose of the law is to legally establish the tax system including creation, imposition, report, payment, collection of taxes and to define the duty of tax payer, the amount of tax payment, and the authority of tax bureau as well.

The government has legislated for the exclusive laws by tax items such as law on corporate income tax, law on personal income tax, law on value added tax, custom law, law on social security

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tax, etc.at the following Figure 19. According to the article 7 of the law on tax to define all of tax items, tax items are largely classified into national taxes (corporate income tax, value added tax, custom), local taxes (personal income tax, real estate tax, land tax), direct taxes (corporate income tax, personal income tax), indirect taxes (value added tax, custom). Among them, the law on value added tax was amended in 2015 to increase the minimum amount of annual sales subject to taxation from 10 million MNT to 50 million MNT for the purpose of reducing the burden of tax for SME.

National / Local Law on tax Tax items

National tax Law on corporate income tax Corporate income tax, dividend income tax, royalty income tax, interests income tax, gamble/lottery income tax, real estate transfer income tax, right transfer income tax, non-resident withholding tax

Custom law Custom Law on value added tax Value added tax Law on commodity tax Commodity tax Law on gasoline/diesel tax Gasoline/diesel tax Law on mineral resource tax Inspection right and mining right cost,

use of mineral resource fee Law on air pollution Air pollution charge Law on water pollution Water pollution charge Law on stamp tax Stamp tax Low on petroleum Petroleum/gas royalty

Local tax Law on personal income tax Personal income tax Law on real estate tax Real estate tax Law on natural resource(plant, water, forest, animal) use tax

Natural resources use fee

Law on automobile tax Automobile tax Law on land use Land use fee Law on social security tax Social security tax Law on individual business tax Individual business tax Law on stamp tax Stamp tax, general mineral use fee Law on gun tax Gun tax Law on capital city tax Capital city tax Law on taxation Dog tax, inheritance/donation tax Law on disposal Disposal charge


Figure 19 Tax system in Mongolia

2) Corporate income tax Law on corporate income tax was adopted on June 29 in 2006. The corporations subject to

paying income tax are a company to be established based on Mongolian law, a resident foreign company which the head office is located in Mongolia and a non-resident foreign company to sell

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directly or through the representative office in Mongolia. The details of corporate income tax are including business income, capital income and income to transfer property. The corporate income tax is imposed by progressive taxation which the tax rate is 10% and 25% and maximum amount of income applicable to the rate of 10% is 3 billion MNT. The following Figure 20 shows the tax rates imposed by the law on corporate income tax.

Details of corporate income Tax rates Annual corporate income less than 3 billion MNT 10% Annual corporate income less than 3 billion MNT 25% Income from dividends 10% Income from royalties 10% Income from gambling and lot 40% Income to transfer real estate(capital gains) 10% Income from interests 10% Income to transfer rights(capital gains) 30% Withholding tax for nonresident 20%


Figure 20 Rate of detailed corporate income tax There is no special capital gains tax in Mongolia. However, for example, in the sale of real estate, 2%

of the gain on sale is taxed. In the case of selling other assets, it is considered as general income and

income tax (10%) is imposed on gains on sales.

The following income earned by non-residents in Mongolia and from Mongolia is subject to

withholding tax (20%). Dividend from companies that are registered in Mongolia and interests/loan guarantee fees incomes

Royalty, financial lease interest income, management fee, rental fee, tangible and intangible asset

usage fee

Sales income in Mongolia, service and service charges

Service charges for direct and electronic services in Mongol ia

3) Tax Treaties As of 2016, Mongolia has tax treaties with twenty-four countries in the world, and within that

range the tax rate is reduced.

Country Signing Date Effectuation Dividend

(%)

Interests

(%)

Royalty

(%) Austria 2004-10-01 2005-01-01 5/10 10 10 Belgium 1995-09-26 2001-01-01 5/15 10 5 Bulgaria 2000-02-28 2004-01-01 10 10 10 Canada 2002-05-27 2003-01-01 5/15 10 5/10 China 1991-08-26 1993-01-01 5 10 10 Czech Republic 1997-02-27 1999-01-01 10 10 10 France 1996-04-18 1999-01-01 5/15 10 5 Germany 1994-08-22 1997-01-01 5/10 10 10

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Country Signing Date Effectuation Dividend

(%)

Interests

(%)

Royalty

(%) Hungary 1994-09-13 1999-01-01 5/15 10 5 India 1994-02-22 1994-01-01 15 15 15 Indonesia 1996-07-02 - 10 10 10 Kazakhstan 1998-03-12 1999-01-01 10 10 10 Korea 1992-04-17 1992-01-01 5 5 10 Kyrgyzstan 1999-12-04 2005-01-01 10 10 10 Malaysia 1995-07-27 1998-01-01 10 10 10 Poland 1997-04-18 2003-01-01 10 10 5 Russia 1995-04-05 1998-01-01 10 10 - Singapore 2002-10-10 2005-01-01 0/5/10 5/10 5 Switzerland 1999-09-20 2002-01-01 5/15 10 5 Turkey 1995-09-12 1997-01-01 10 10 10 UK 1996-04-23 1997-01-01 5/15 10 5 Ukraine 2002-07-01 2007-01-01 10 10 10 Vietnam 1996-05-09 1997-01-01 10 10 10


Figure 21 Tax Treaties of Mongolia

Bilateral foreign tax deduction applies only to the residents of Mongolia. We adopt tax saving method to prevent double taxation. The tax treaty has not yet been concluded between Mongolia and Japan. As there is no comprehensive bilateral tax treaty, foreign investors will take the risk of double taxation between the investor's home country (Japan) and Mongolia.

4) Depreciation and Loss carry forward If the useful life of the property held by the taxpayer is over one year according to the income tax

law, it is subject to depreciation cost calculation. In Mongolia, depreciation is calculated by the straight-line method (the useful life is as follows).

Asset classification Useful Life（years）

Building, construction 40 Vehicles, machinery, equipment 10 Computer, its parts, software 10 Intangible asset whose validity period is unknown 10 Intangible assets with definite validity periods (including exploration rights and mining rights for mineral resources)

Within the validity periods

Other assets 10 Building in industry / technology park 20 Vehicles and machinery for industrial and technology parks 3


Figure 22 Useful Life for Depreciation of Fixed assets in Mongolia Tax losses on entities engaged in certain areas that have high investment amounts and require

long-term recovery can be carried forward and deducted for longer periods than usual. For example, in the field of mineral resource development and infrastructure, the tax credit carryover period is as follows.

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Investment amount (Million MNT) Tax Deductible carry forward period(Year)

0-1,000 4 year 1,000-2,000 5 year 2,000-3,000 6 year 3,000-5,000 7 year

5,000 and more 8 year Source: JICA Survey Team

Figure 23 Tax Deductible Carry forward Period

5) Value Added Tax (VAT) A 10% VAT is imposed on goods and services produced or sold in Mongolia, or imported into

Mongolia. On July 9, 2015, the New Value Added Tax Law was adopted and it came into effect on January 1, 2016. The VAT registration, reporting, taxation, deduction and tax exemption system were improved by the new law.

As a result, taxpayers' tax returns, tax payment accuracy, and risk reduction environment are in place. Due to the fact that the income standard of the VAT taxpayer registration was raised from 10 million MNT to 50 million MNT, especially as many small and medium enterprises were released from VAT tax payment obligations and the overall tax burden was reduced.

It is an advantageous business environment for SMEs. Moreover, it is expected that the informal economy will be reduced by electronically converting the VAT system completely.

It is obliged to register tax payment obligations the following month when sales of 12 consecutive months according to the following items have reached 50 million MNT and pay monthly tax payment.

Services in Mongolia and Selling products Services and Imports for (to) Mongolia Services and Exports from Mongolia

In addition, companies and individuals who have achieved net sales of 50 million MNT can voluntarily apply for taxpayers. Value-added tax assessment of imported goods is determined by imposing tariffs, excise duties and other taxes on specified prices according to the customs law. For goods sold for export from Mongolia it shall be 0%.

6) Customs duties The customs tariff rate of Mongolia is classified into three general categories, an ordinary tax

rate, a special tax rate, and a preferential tariff rate. Also, the customs duty-free products are decided by the customs law and the parliamentary decision.

The special tax rate is applied for the products of the World Trade Organization (WTO) member countries (certificate of origin is required). The special tax rate is 5-40% depending on the product, but most common items are taxed at 5%. The tariff rate of specific products for domestic production protection and restriction of use is high, 15 to 40%.

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The normal tax rate is applied for goods from not in the target country and products without the certificate of origin. The normal tax rate is equivalent to twice the special tax rate.

The preferential tax rate is used according to the international treaty that Mongolia has joined. The preferential tax rate for Japanese goods has been started in accordance with the EPA that

came into force recently. Goods prescribed by the Customs Law and items imported within the scope of a specific case by

parliament / cabinet decision will be tax exempt. Examples of products subject to tax exemption are as follows Equipment / instruments for people with disabilities Products belonging to humanitarian aid Passenger personal accessories Medical blood and organs Gas fuel Wood and seedlings Passenger airplane / parts Vehicle for people with disabilities Tax exempt items under the Mongolian law and international treaties Imported goods related to innovation project (raw materials etc. that cannot be produced in

Mongolia) Oil exploration facility, equipment for extracting petroleum and machinery (initially 5 years) Research / production equipment related to renewable energy Duty-free products including decisions by Parliament and Cabinet decisions

- Equipment imported by small and medium enterprises (SMEs) - Imported goods for aid projects supported by foreign governments,

When exporting, tariffs are not basically imposed, but wood is subject to export tax.

7) Special tax Special taxes are imposed on imports/production/sale in Mongolia of alcoholic beverages,

tobacco, gasoline and diesel fuel, automobiles and production of dedicated machines used for gambling business.

Commodity unit

Tax amount (MNT)

Domestic

Goods Import Goods

Food Alcohol

Alcohol and medicine production, to be sold for hospital and veterinarian

1 liter 1,450 -

To be sold for other purposes 1 liter 14,500 -

Vodka, Liquor Less than 25 degrees 1 liter 2,900 2,900 25 - 40 degrees 1 liter 5,800 5,800 40 degrees or more 1 liter 13,050 13,050

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Commodity unit

Tax amount (MNT)

Domestic

Goods Import Goods

Cognac, whiskey, rum, gin

less than 25 degrees 1 liter 7,250 7,250 25 - 40 degrees 1 liter 14,500 14,500 40 degrees or more 1 liter 17,400 17,400

Mongolia sake made at factory 1 liter 290 -

Wine 1 liter 1 liter 725 725 1 liter 1 liter 6,525 6,525

Beer 1 liter 290 290

Tobacco Cigarette 100 3,480 3,480 Bulk 1KG 2,610 2,610

Gasoline less than 90 octane 1 ton

0 - 15,950 0 – 750,000

90 octane or more 1 ton 0 - 17,400

0 – 750,000

Diesel Oil 1 ton 0 -

21,750 0 – 850,000


Figure 24 Special Tax in Mongolia

The taxes on gasoline and diesel fuel are determined by the Government within the scope of the Figure 24 based on the market price and economic situation.

The Special taxes on automobiles are as follows.

Engine Capacity （cc) Tax based on manufacturing year (elapsed years)

0-3 4-6 7-9 10 more Less than1,500 725,000 1,450,000 2,900,000 8,700,000

1,501 - 2,500 2,175,000 2,900,000 4,350,000 10,150,000

2,501 - 3,500 2,900,000 3,625,000 5,800,000 11,600,000

3,501 – 4,500 6,525,000 7,250,000 9,425,000 15,225,000

Over 4,501 10,150,000 10,875,000 13,050,000 18,850,000


Figure 25 Special taxes on automobiles

In addition, the special tax of the following vehicle is exempted. Products subject to Special Taxes produced in Mongolia for export Hybrid vehicle LPG engine vehicle Electric vehicle

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8) Personal income tax The Personal income tax law has been adopted on June 16, 2006. The personal income tax

includes salary income and real estate income, and the tax rate is set to flat rate of 10%. The Mongolian individual income tax rate is very low compared to other countries. Those who have an address in Mongolia or who live in Mongolia for 183 days or more are considered residents. Others are treated as non-residents. Regardless of the place of income generation, residents are subject to tax only for Mongolia domestic source of income. Income deduction up to the amount corresponding to the amount paid for children and their tuition fee, will be given, for income such as annual salary, bonus etc., up to 84,000 MNT,.

Types of Income Tax Rate

Salary, business income, and dividend 10％

Real estate transferred income 2％

Stock transfer income 5％

Income from gambling/lottery 40％


Figure 26 Rate of Personal income tax The non-taxable income is as follows. Legal pension Travel expenses Insurance revenue Interest payments by bonds of Mongolian Government and DBM Allowance for safety clothes and tools Payment from disaster relief fund Income of persons with disabilities (lost more than 50% of capacity for working) Income from livestock for nomadic people Income from domestic production/sales of equipment and parts for small and medium

enterprises (SME) Income equivalent to purchased renewable energy, heating equipment, equipment, parts

purchased for personal use Income equivalent to purchased personal accommodation (incomes up to 30 million MNT:

once only)

9) Social insurance According to the Social Insurance Law, Mongolian citizens, foreign citizens, stateless people

who are employed by companies, governments, religious organizations and other organizations that work in Mongolia, labor contracts with foreign companies, have to pay social insurance premiums according to the ratio of social insurance premiums. Claims to employees have an upper limit on the minimum wage (240,000 MNT / month from January 1, 2017), but employers have no ceiling on payment. In addition, these expenditures are subject to income deduction.

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Social insurance type Employer burden (%)

Employee burden (%)

Voluntarily insured (%)

Pension insurance 7.0 7.0 10.0 Long-term care insurance 0.8 0.8 1.0 Health insurance 2.0 2.0 1.0 Workers' accident insurance 1.0 ～ 3.0 — — Unemployment insurance 0.2 0.2 0.2

Total 11.0 ～ 13.0 10 11.0 ～ 13.0 Source: JICA Survey Team

Figure 27 Social insurance fee burden ratio

10) Tax collection, declaration and payment Tax collection is managed by the General Department of Taxation. The General Department of

Taxation is a government agency under the supervision of the Ministry of Finance. It has tax offices in Ulaanbaatar city and 21 provinces, the capital city of Ulaanbaatar.

The General Department of Taxation has jurisdiction over the tax collection of most tax items, but customs duties at the time of importing and exporting, tax collection of VAT and special tax is handled by the Customs Authority, and the taxation of social insurance is under the jurisdiction of the Health and Social Insurance Agency.

In Mongolia, it is a system that the tax amount is calculated by itself, and makes a tax return declaration. Tax payment obligor calculates the tax amount for each tax item, declares it in the tax return electronic system, and taxes it by transferring it to the account of national tax and area tax. The tax official in charge of the competent tax office audits the declaration.

In addition, the jurisdiction tax office performs periodic tax inspections.

2.4.6 Accounting & auditing

1) Situation of large companies and SMEs As the Figure 28 points out, there is a difference between large company and SME (defined by

Mongolian law) in the accounting, auditing and taxation, respectively. With regard to accounting, both large company and SME are required to introduce International Financial Accounting Standard (IFAS). However, it is unclear about to what extent they have implemented IFAS. Although, detailed items of accounting law and auditing law have been partly amended since 2016, there has been no change of important items such as accounting standards.

Category Large company SME

Accounting (Accounting law)

Most of large company has introduced IFRS including consolidated financial statements as the accounting law stipulates that all of company should introduce IFRS. IFRS is as same as International Standard and there are no items to be changed in Mongolia.

SME is supposed to introduce simplified version of IFRS. However, it is unclear about how many SMEs has introduced IFRS. IFRS stipulates to adopt an accrual basis. On the other hand, Mongolia’s law on tax stipulates a cash basis. SMEs prepare the financial statements for tax payment. Thus, most of SMEs are presumed to

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Category Large company SME

adopt a cash basis. Auditing (Auditing law)

Listed company, State-owned Enterprise, Bank, Insurance company and foreign company (including SME) are obliged to audit the company based on International Auditing Standard (IAS).

SMEs are not obliged to audit the company based on IAS. Therefore, it is no problem to prepare the financial statements on a cash basis from the view point of audit law.

Taxation (Law on Tax)

Main tax is corporate tax, value added tax, import tax and excise tax. Most of company is accepting from January to December as a settlement term since the term of tax payment adopts the calendar year. Those companies declare the corporate income by February 10 th and pay taxes. Value added tax will be paid by 10th of next month. Personal income tax will be paid through the company based on withholding-tax system. Tax inspection will be conducted every two years according to the law on tax.

The declaration and payment of main taxes for SME is as same as the case of large company. Among them, a part of SME is exempt from the value added tax and no need for complicated procedure due to the amendment of the value added tax law. Tax inspection will be conducted every five years according to the law on tax.

A person in charge of accounting, auditing, taxation

The company hires accountant as a staff. And an audit corporation implements audit. However, it is prohibited for the audit corporation to provide accounting services for the auditing company from the view point of conflict of interest.

SME which cannot afford to hire the accountant as staffs uses the external accountant and tax office. In case of small company, the necessary documents are prepared by the owner of the company.


Figure 28 Accounting, auditing and taxation in the large companies and SMEs

2) Overview of association for Certified Public Accountant (CPA) and association for Certified Public Tax Accountant (CPTA)

It is not an obligation for the foreign company to hire CPA or CPTA and to use an audit corporation. However, most of foreign companies are out-sourcing CPA for their accounting services.

And, individual CPTA has been increasing to contract the preparation of documents related to tax payment. In addition, an audit corporation is entrusted with the accountant’s business. There is no price list for those fees. Charges are decided through the individual negotiation. But, association for CPA and association for CPTA are providing foreign companies with information on CPA and CPTA. The overview of both associations is shown at the Figure 29.

Items Association for CPA Association for CPTA

Establishment 1996 2012 Purpose To clarify the service and responsibility of

CPA and audit corporation. To clarify the service and responsibility of CPTA. Mediator between tax payer and government.

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Items Association for CPA Association for CPTA

Number of members

There are 3,800 CPAs and 140 audit corporations. 700 of 3,800 CPAs work at audit corporations. The rest is mostly working at the company.

There are 1,100 CPTAs and 50 tax corporations

Main operations Training of CPA To issue the license of CPA To formulate and enlighten the legal and

accounting criteria.

To report payment of tax to the government To give an advice for tax payer. To protect the right of tax payer. CPTA is responsible for only services to prepare the documents for tax payment.

Use of CPA and CPTA

Association establishes the database for CPA and is possible to introduce CPA free of charge depending on the request.

The demand for CPTA is expected to increase, following upon the start of declaration of income tax in 2017.


Figure 29 Overview of Association for CPA & CPTA

3) Internal audit JICA carried out the capacity development project to improve internal audit in Mongolia.

Counter part of the JICA project is Ministry of Finance, Department of budget management & risk management, etc.

As a result, Mongolia has become the member of IIA Global (International Internal Audit Global) through the contribution of the counter-part. This membership enables Mongolia to obtain the qualified programs to be provided by IIA Global and to strengthen the internal audit system in Mongolia. In response to the membership of IIA Global, the government amended the rules of internal audit in December 2015. Furthermore, JICA is implementing the project to prepare the draft of the law on internal audit.

Audit system

The current audit law of Mongolia was adopted on June 19, 2015. The following companies and organizations are obligated to be audited according to International Standards on Auditing (ISA). Companies listed on domestic and international stock exchanges Companies applying for listing on domestic and international securities exchanges Companies with audit, issuing securities, issuing lottery tickets, mineral exploration, mineral

resource mining, petroleum product production license State-owned companies, regional governments-owned companies with national and regional

governments Public companies that provide electricity, water purification, heating, etc. Political parties, NGO organizations implementing part of government functions on a contract

basis Special purpose companies and investment funds that are engaged in business in the

commercial banking field Companies and organizations that are required to preparing consolidated financial statements Foreign companies

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Companies whose audit is required by laws and international treaties affiliated with Mongolia

2.4.7 Business cost

1) International comparison of main business costs According to the survey conducted by JETRO (Japan External Trade Organization) on the main business costs in Ulaanbaatar focusing on labor costs (monthly minimum wage, monthly salary of workers & managers), transportation cost (40 ton container, to export to Japan), monthly office rent, electricity cost (business use, KWH), tax rates (corporate income tax, personal income tax) compared to other cities such as Beijing, Chengdu, Jakarta, Hanoi, Yangon, the business costs in Ulaanbaatar are relatively higher in comparison with other cities on the whole as shown the Figure 30.

To be specific, regarding the labor costs, the monthly minimum wage in Ulaanbaatar is low next to Yangon, however, monthly salary of workers is higher than Jakarta, Hanoi, Yangon and monthly salary of managers reaches high level next to Beijing. And, the transportation cost in Ulaanbaatar to export to Japan is highest among 6 cities due to the landlocked country. On the other hand, monthly office rent and personal income tax rate are low compared to other cities. Furthermore, the electricity cost for business use is almost the same as other cities. In addition, in case of the company which annual income is less than 3 billion MNT in Mongolia, corporate income tax rate (10%) is lowest, however, in case of the company which annual income is more than 3 billion MNT, corporate income tax rate (25%) is the same as other countries. （Unit：USD,KWH）

Other cities/ Main costs

Ulaanbaatar

Beijing

Chengdu Jakarta Hanoi Yangon

Monthly labor costs

Minimum wage

Workers salary

Managers salary

96

318

1,231

262

578

1,702

212

488

961

223

257

913

161

181

871

60

127

951

Transportation cost 4,100 460 3,100 800 990 800

Monthly office rent 18 102 35 47 35 70

Electricity cost 0.11 0.12 0.13 0.07 0.12 0.11

Income tax rates Corporate rates

Personal rates

10%, 25%

10%

25%

45%

25%

45%

25%

30%

20%

35%

25%

25% Source: JICA Survey Team

Figure 30 Comparison of main business costs between Ulaanbaatar and other cities

2.4.8 Main issues of business environment in Mongolia

JICA Survey Team will describe the overview of main issues of business environment to be pointed out by Japanese companies doing business now in Mongolia, focusing on legal system,

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credit information, protection of investors and corporate governance

Legal system Although, the government stipulated many rules and regulations related to business laws based on

the above mentioned legal system in Mongolia, it is not enough to implement these rules and regulations. In particular, the legal compliance is not fully implemented despite the rules and regulations including the article to respect it. This is an impediment for foreign companies to do business with Mongolian partners. Besides that, rules and regulations have been frequently changed by the government at that time to be decided by the general election conducted every four years. For example, there was a newly enacted law on regulations for foreign direct investment in the strategic important sectors of mining, finance and telecommunication as well as the law on investment to be amended in 2013. This is also big issue in legal system in Mongolia.

Besides that, the judicial system is complicated and is not easy to access the court. For instance, if there is a legal article against the constitution, it must be deliberated by not the Supreme Court but the Constitutional Court. As a result, when the Constitutional Court considers amending the article, the court recommends the Parliament to review it. And, if the Parliament refuses the recommendation,

The Constitutional Court is authorized to delete the legal article against the constitution. As a specific example, the Constitutional Court decided that the mortgage loan given by banks was unconstitutional in December 2015 and the banks suspended to provide mortgage loan. After that, this problem was solved by reviewing an interpretation of the civil law to regulate the mortgage. It is difficult to make the foreigners known such a judicial system.

Furthermore, although Ministry of Justice is in charge of checking the consistency among the laws, it is not enough to check it. As a matter of fact, it is pointed out that there is a contradiction among rules and regulations related to the right of ownership for land. In addition, it is insufficient for Japanese companies to collect the information on Mongolian laws and to obtain the laws translated into Japanese language.

Credit information It is difficult for Japanese companies to get the reliable credit information on the Mongolian

partners in case of transacting business or establishing joint venture with them. Especially, i t is very tough to obtain the credit information of SME. The lack of reliable credit information is a major barrier for foreign companies to identify the Mongolian business partners.

In Mongolia, the Bank of Mongolia has developed a database named “Credit Information Bureau (CIB)” regarding the credit information of Mongolian companies. CIB was established in 2009 based on the law on credit information to provide the credit information of Mongolian companies in response to the request from a court and prosecutors office. CIB has been collecting the credit information on the corporations and individuals from around 650 CIB members composed of banks, non-banks such as lease and insurance, telecommunication companies. Credit information on Mongolian companies provided by 14 private banks and Development Bank of Mongolia account for 70-80% of total companies registered in Mongolia.

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The members of CIB are available to get the credit information free of charge. However, anyone except for the members of CIB cannot utilize the database. And, CIB depends on the input from the members for the database. The Bank of Mongolia is not responsible for the reliability of information. The article 6 of law on credit information regulates the 20 items of credit information. Main items are including 1) the name of company (Mongolian language, English), 2) Registered number of the company, 3) Registered address, 4) Tax number, 5) Information on the shareholder that occupies more than 25 % of the share, 6) Information on the parent company, subsidiary and affiliated company, 7) Managing director, 8) Type of business, 9) Information on loan ( Date of contract, type of loan, amount, repayment period, interest rate, etc.), 10) Information on non-performing loan, 11) Collateral/guarantor, 12) Registered number of asset, 13) Reason behind the non-performing loan, 14) Result of credit analysis made by lender. However, information on the financial statements (balance sheet, profit & loss statement) is not included into items of CIB database. Tax bureau under the Ministry of Finance is in charge of keeping the information and not disclosed it to the third party. This might be also a great issue of credit information.

At present, there are only limited approaches for the non-members of CIB to get the credit information.

One is to consult with the private banks (CIB member) and to receive the necessary information through the banks. The other is to request the audit corporation to implement a fee-charging due diligence for the specific Mongolian company. The charge for using the audit corporation is various depending on the needs for due diligence. In case of four major audit corporations, the market rate for due diligence is 10 thousand USD at minimum cost and 15-20 thousand USD at maximum cost in common. Recently, Mongolian consultants are providing the matching service between Japanese companies and Mongolian companies at more reasonable fee than four major audit corporations.

This kind of service could also be the way to get the credit information of Mongolian partners.

Investor protection There were some of foreign companies invested in Mongolia to withdraw from Mongolia in the

past due to the poor investor protection defined as breach of contract, lack of regulatory transparency, adverse regulatory changes and arbitrary action by the state, discrimination expropriation, and, majority of investors stated their lack of confidence in the national judicial system. The most of companies brought to an international court, not domestic court, in case of investor-state disputes.

Based on the above mentioned situation, IFC and World Bank group carried out a survey to clarify the mechanism of investor grievances and dissatisfactions for over 70 domestic and foreign firms doing business in Mongolia and to seek for resolutions for them in 2014. This survey was completed in April 2016 and held a public and private seminar jointly with former IMA (present NDA) in May 2016.

The number of participants in the joint seminar amounted to 90. The details were relevant ministries including the secretary of cabinet, industrial associations of important sectors and private companies.

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Participants shared with each other the information on the issues the investors faced in Mongolia in the sector of mining, agribusiness, construction, telecommunication, energy.

The government took the opportunity of the above joint seminar to consider the investor protection. And, since the change of the ruling party in June 2016, the protection of foreign investors has been ranked as one of the priority policy issues in the new government. The government established the Investor Protection Council under the cabinet in July 2016 based on Decree No.10. The purpose of the Council is to prevent from the dispute caused by the investor grievances and dissatisfactions, not to arbitrate the dispute.

Additionally, the Ministry of Justice took the initiative to start up the working group under the Council, consisting of Ministry of Justice, Ministry of Mining and Heavy Industry, National Development Agency and Prosecutors office. The goal of the working group is to clarify the reasons why the foreign investors escaped from Mongolia and to review the legal system in terms of the investor protection to avoid the withdrawal of investors from Mongolia.

Corporate Governance IFC has compiled the situation of corporate governance based on Corporate Governance

Scorecard 2011. This is to score the result of 5 items such as the right of shareholder, information disclosure, transparency, the responsibility of Board of Directors, etc. for the Mongolian listed top 20 companies.

According to the scorecard, the average of score in Mongolia is low compared to other Asian countries.

In particular, information disclosure and the responsibility of Board of Directors are relatively weak. Besides that, there are few institutional investors in Mongolia.

On the other hand, most of SMEs in Mongolia are family business and the concept of corporate governance is still beyond them. However, some of SMEs are interested in the corporate governance. For this reason, IFC implemented the training course of governance for SMEs for the first time in 2016 in Mongolia in collaboration with Mongolia Stock Exchange and Association for Certified Public Accountant.

Evaluation of business environment in Mongolia

Scoring by World Bank group According to “Doing Business 2017” published by World Bank Group in October 2016, total

score of business environment in Mongolia 2017 was slightly raised from 67.31 to 68.15 compared to 2016. On the other hand, total ranking was down from 64 to 66 among 190 countries. The rank of main items of business environment is shown at the Figure 31.

In comparison of the rank in 2016, remarkable rise in rank is “Paying Taxes” (green box), which the procedure of tax payment was improved by introducing E-Tax. However, “Trading across Borders” and “Getting electricity” (both in red line) are not improved and both of the rank are still low.

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Figure 31 Ranking of major items of business environment in Mongolia

2.4.9 Strength and weakness in the Mongolian business environment

Strength and weakness in the business environment in Mongolia will be summarized at the Figure 32 & 33, taking into consideration the above mentioned scoring evaluated by World Bank group and comments made by Japanese companies doing business in Mongolia. This is an only relative analysis. Some items of strength and weakness might be closely connected like two sides of the same coin, depending on type of business. Such cases are noted at the remarks in the Figure 32 and 33. 【Strength】

Items Remarks

Abundant underground & ground resources There are 80 kinds of mineral resources and about 6000 mining deposit. And, 80% of national land area is farmland and pasture.

Pro-Japanese nation The number of Mongolian person studied in Japan amounts to 1,548 in 2014, which is 11th ranking in the world. The number of Mongolian person studied in Japan per 10,000 people amounts to 5.3 which is top ranking in the world.

Emerging market Mongolia is relatively new market, low competition. It is possible to acquire the business chances.

Relatively unrestricted investment environment Corporate income tax rate is low in case of SMEs. EPA between Mongolia and Japan into effect in 2016

Commercialization of underground resources requires a huge amount of investment. And, Farm-land and pasture need land improvement. Manufacture and distribution of agricultural products are also the problem. Japanese language ability of Mongolian people is high, but whether he or she is a competent business person or not is another. China is geographically close to Mongolia. There are already many Chinese companies doing business in Mongolia.


Figure 32 Strength in the business environment in Mongolia

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【Weakness】

Items Remarks

Limited market and population

Logistics It takes high cost and long time for distribution due to the lack of transportation Infrastructure.

Harsh cold winter weather condition Unstable politics and government The lack of a mature economic system and Mongolian

company It includes the lack of credit information and corporate governance.

The price competitiveness of Japanese companies in comparison with Chinese and Korean companies

The number of population in the whole country amounts to only 3 million, but 1.4 million population of Ulaanbaatar city is a good market for SMEs. The products and technology to meet cold area specifications like Hokkaido will be applicable. Chinese and Korean companies are advantageous in terms of price or cost, but Japanese companies have advantageous competitiveness in terms of technology.


Figure 33 Weakness in the business environment in Mongolia

2.4.10 Trend of Chinese & Korean private business

Although, this JICA survey aims to promote trade and investment between Mongolia and Mongolia-Japan depends on China for the economic growth as mentioned before at Macro economy of the chapter 2.2 and also has a strong relationship with Korea. Thus, JICA Survey Team collates the trend of Chinese & Korean private business in this chapter.

1) Presence of Chinese & Korean companies in Mongolia

According to NDA (former IMA), total of registered foreign investors between 1990 and 2015 amounts to 13,351 among 108 countries and the top 10 countries are shown at the Figure 34. This Figure indicates that the largest country into Mongolian market is China accounting for less than 50% of total and the second largest country is Korea accounting for less than 20% of total. It can be said that the presence of Chinese & Korean companies in Mongolia is remarkably great.

In recent years, the number of registered Chinese & Korean companies was the largest in 2011, however, after that, the number of companies from both countries have been decreasing due to the following two reasons. One is the newly enacted law on regulations for foreign direct investment in the strategic important sectors of mining, finance and telecommunication in 2012. The other one is the law on foreign investment to be amended in 2013. Especially, a key amendment of law on investment is to raise the investment amount from 10 thousand USD to 100 thousand USD in case of the investment project which foreign company owns more than 25 % of total share. Taking this opportunity, the number of Chinese companies has been declining from 436 in 2011 to 128 in 2015

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and the number of Korean companies has been declining from 122 in 2011 to 25 in 2015, respectively. (Unit：%, Number of company)

Rank Country Share Total 2011 2012 2013 2014 2015

1 China 49.2 6,567 434 346 166 190 128

2 Korea 17.5 2,334 122 101 65 48 25

3 Russia 6.5 861 34 21 14 13 10

4 Japan 4.2 561 35 39 14 12 10

5 USA 2.3 305. 36 15 8 3 2

6 UK Virgin Islands 2.0 272 67 38 2 9 5

7 Germany 1.5 206 9 16 7 1 2

8 Singapore 1.6 214 31 34 15 7 4

9 Hong Kong 1.4 192 20 18 17 8 0

10 Vietnam 1.2 163 3 2 7 0 0

Total 108 countries 100.0 13,351 933 933 390 335 209

Source: National Development Agency (former Investment Mongolia Agency)

Figure 34 Number of registered foreign companies in the top 10 countries

2) Comparison between Chinese business and Korean business

Figure 35 describes the comparison of situation in Mongolia between Chinese and Korean business. Main items are including the trend of Chinese & Korean companies doing business in Mongolia, major Mongolian strength and weakness from the viewpoint of Chicness & Korean companies doing business in Mongolia, involvement of Chinese & Korean government, etc. The JICA Survey Team put together the following figure based on the interview with Chinese general managers of Mongolian companies and Mongolian general manager experienced in working at a Korean company.

Items China Korea Number of registered companies (former IMA survey)

436 in 2011 → 128 in 2015 Total 6,567 from 1990 to 2015

122 in 2011 → 25 in 2015 Total 2,334 from 1990 to 2015

Number of companies doing business in Mongolia and its trends including non-registered companies

Companies located in Inner Mongolia Autonomous Region in China entered into Mongolian market in 1990s for the first time. After that, the number of Chinese companies has been increasing. Recently, it remains on the same level. The number of Chinese company doing business substantially in Mongolia is estimated to more than 3,000.

The number of Korean companies is estimated to around 2,500. But, more than half of the number is the corps to spread the missionary activities. Real number of companies doing business in Mongolia is not clear. The number of Korean companies tends to decrease due to the revised law on foreign investment in 2013.

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Items China Korea

Chinese or Korean Commerce & industry association in Mongolia and the number of its members

The number of members of Chinese enterprises association in Mongolia amounts to 500. Besides that, there are 7 associations by district in China. Among them, the association of inner Mongolia district companies in China is the largest. The number of its members amounts to 150.

The number of members of Korean commerce & industry association in Mongolia amounts to 200. Besides that, there is a business group to be established by the top 10 Korean companies.

Size of companies doing business in Mongolia

Most of members of associations are small sized companies. The number of large companies including state-owned amounts to around 10.

Most of members of Korean commerce & industry association are SMEs.

Types of investment in Mongolia

Sole investment largely. JV with Mongolian partner is only the case to secure the mining rights and residential lands.

Sole investment largely. JV with Mongolian partner is only the case to obtain the lands owned by Mongolian People

Trends by the type of business in Mongolia

Major business in Mongolia is mining, construction, trade, cashmere & leather, service such as restaurant. Mining, construction and trade account for almost half of the total business. There are not many manufactures. Basically, natural resources (mining, agriculture) are processed in China and then sold in domestic China or exported to other countries. And, the products made in China are imported to Mongolia and sold in Mongolian market. There are many Chinese companies coming from the districts of Fujian, Zhejiang and Inner Mongolia Autonomous Region.

Service (restaurant, bar, café, karaoke, etc.) is top business accounting for about 70% of total. Construction is the second largest, following trade, logistics and agriculture. Main agricultural products are greenhouse vegetables and medical herbs. 10 Korean companies plan to do agribusiness in the special economic zone. Since there is no quarantine agreement between Korea and Mongolia, there are no Korean Companies to export meat, dairy products and honey to Korea. There a few manufactures to produce the plastics and insulating materials. There are not many mining companies due to the lack of mine engineering.

Major Mongolian strength and weakness from the view point of Chinese & Korean companies doing business in Mongolia

Major Mongolian strength a) Low price of materials & minerals b) Relatively unrestricted investment

environment c) Low rate of income tax d) Easy remittance to foreign countries, e) Similarity to Chinese culture including

life style f) Close distance to China g) Development stage different from China

(To introduce the Chinese industry and technology and create a business chance to utilize the gap between China and Mongolia)

h) In Mongolia, cashmere, leather, food Industry is competitive.

Major Mongolian strength a) Low rate of income tax b) Mongolia is relatively new market, low

competition. It is possible to acquire the business chances

c) Mongolian lively willingness to buy in the economic boom

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Items China Korea

Major Mongolian weakness a) Lack of reliability b) (governance, transparency, stability), c) Limited domestic market scale d) (population 3 million) e) Lack of professional human skill f) Lack of infrastructure in rural area g) Increase of recent labor cost more than

the labor productivity

Major Mongolian weakness - Both central and local governments do not

enforce the rules and do not keep the promise.

- It takes long time to proceed the procedure in the court in case of dispute(2years, depending on the case) Large companies such as Samsung are doing business in Mongolia aiming at mega infrastructure projects. The style of big companies is different from the one of SMEs considering the Comparison of strength and weakness in Mongolia.

Involvement of Chinese & Korean government

Chinese government established the Overseas Investment Fund to provide finance for the member companies of Chinese Chamber of Commerce which

Invest in foreign countries and set up the local subsidiaries. However, there are only a few Chinese companies to utilize this fund due to the complicated procedure and strict

Conditions. Besides that, local government has its own

policy to support the specific sectors. For instance, some province provides the low interest loan (interest rate is 6%) for the development of cashmere industry.

Chinese government will not provide the services of business information and

business matching in Mongolia for the Chinese companies doing

Business in Mongolia. Chinese Enterprise association in Mongolia is

providing those services.

The economic relationship between Korean and Mongolia has not been so far active. However, the President of Korea visited Mongolia with Korean companies to participate in the ASEM in July last year. Since then, the relation of both countries has been improving.

KOICA (Korea International Cooperation Agency) has involved with many bilateral cooperation projects in the public sector, but KOTRO (Korea Trade Organization) has implemented a small scale of business matching in the private sector by using the limited budget. In addition, there is only one staff in charge of economic issues at the Embassy of Korea.

It is in the process of establishing a Korea/Mongolia Business Council.

At moment, Members of the Council are 40 Mongolians doing business with

Korea. Koreans will also join it. The Council plans to conduct a business matching between Korean company and Mongolian company different from the one by KOTRO.

There is no trade/economic agreement between Korea and Mongolia at present. However, Korean government has changed its mind to consider the possibility of EPA between Korea and Mongolia owing to the influence of EPA between Japan and Mongolia.


Figure 35 Comparison between Chinese business and Korean business

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3) Overview of Inner Mongolia Autonomous Region and the trend of cashmere industry in the Region

Outlook

Inner Mongolia Autonomous Region was established in 1947 as the same rank of local government like a province by the Chinese government. Inner Mongolia is located at the border of Mongolia. The size of area is 118 thousand square kilometer and the population amounts to around 25 million (at the end of 2013, composition ratio of total China is 1.8%). The capital city is Hohhot with the population of about 2.9million. The number of Mongol tribe amounts to 4.2 million accounting for 17% of total population. Among Mongol tribe, about 3 million people are presumed to speak Mongolian language. In addition, the number of Mongol tribe in total China amounts to about 6 million (2010). It means 70 % of Mongol tribe in China is resident in the Inner Mongolia Autonomous Region.

The share of regional gross production amounts in the Inner Mongolia Autonomous Region is only 3 % of the whole China. However, a regional economy developed rapidly during 2000s and Inner Mongolia achieved high economic growth more than the average of total China. There are some reasons as follows. First, local government developed the industrial structure to utilize the abundant mining resources such as coal, natural gas and rare earth metal, etc. To be concrete, the local government promoted to shift the mining industry from the shipment of raw materials to another province to the processing of raw materials within the area. It means that the mining industry changed into the value added industry. Second, the local government made an effort to shift the agriculture and livestock industry from a traditional industry to a modernized processing industry as an agribusiness. Since then, textile products such as cotton spinning and cashmere, heavy and energy industry to utilize the underground resources have been competitive important sectors in Inner Mongolia Autonomous Region. (This sentence is cited from a book “The Dynamism of Economic Growth and Regional Disparity- Trends of Industrial Structure and Social Change in the Inner Mongolia Autonomous Region-” written and edited in April 2013 by Mr. Yoshio Kawamura, Professor Emeritus, Ryukoku University)

As a result, Inner Mongolia Autonomous Region has remarkably developed the economy more than a neighboring country, Mongolia. Regional gross production amounts in the Inner Mongolia Autonomous Region amounted to about 210 billion USD in 2013, which was equivalent to about 25 times as much as

Mongolia. Furthermore, regional gross production amounts per capita amounted to 10 thousand USD, which is estimated to 2.5 times as much as Mongolia.

Although there not so many tourists from Inner Mongolia Autonomous Region to Mongolia, business trips to Mongolia have been increasing. There are four direct flights and two trains per week from Hohhot to Ulaanbaatar. Inner Mongolia Autonomous Region is close to Mongolia and the culture and language of both countries are almost common. Thus, there are many Chinese doing business in Mongolia.

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Trend of cashmere industry

Inner Mongolia Autonomous Region is a prosperous area to produce cashmere goods to use high quality raw wool. This is why the Region is said to be the center of cashmere production in the world. Trend of cashmere industry in the Inner Mongolia Autonomous Region is as follows.

Production scale Regarding the raw wool for cashmere products in the Inner Mongolia, the share of the raw wool

made in the Inner Mongolia is 80% and the rest of 20% is made in Mongolia. Taking into account 85% of raw wool made in Mongolia is exported to China (largely for the Inner Mongolia), the amount of raw wool for cashmere in the Inner Mongolia is estimated to about 30 times larger than the amount in Mongolia. Thus, there is a big gap of production scale between the Inner Mongolia and Mongolia.

In terms of quality of cashmere, the raw wool for cashmere in the Inner Mongolia is famous for thin, short and white wool stable for high-quality knitted fabric. On the other hand, the raw wool made in Mongolia is thick, long and four color wool which is rated a little lower.

Advantage of cashmere products In the Inner Mongolia Autonomous Region, it is available to obtain the above mentioned good

quality raw wool and to raise the low interest rate finance from the local government. As a result, it is possible for the large companies including state-owned enterprises in the Inner Mongolia to introduce good spinning machines made in Japan and Germany and to manufacture high-quality yarn and knitted products.

Trend of the companies related to cashmere There was largely integrated production from the raw wool to the knit or fabric in the past in the

Inner Mongolia. At present, the trend to divide the manufacturing process in the several areas in China is now spreading. For example, low value added processing of raw wool is remained in the Inner Mongolia as before. On one hand, the yarn in Hebei province and the knit or fabric in the wide area from Shanghai to Guangdong are produced, respectively. In the background, there is no difference of production costs including labor costs taking into account the labor productivity including inspection process between the Inner Mongolia and other areas in China. In addition, the introduction of automatic labor saving machines replaces the skilled workers in the production process.

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2.5 Industrial trend

Product areas taken up in 2.5 are as below.

No Product category Main products

2.5.1 Agricultural product, processed agricultural product

Sea buckthorn, soba (buckwheat), canola oil

2.5.2 Livestock food product Milk, yogurt, cheese, edible meat, meat processed products, honey

2.5.3 Leather products Leather, leather products 2.5.4 Textile products Cashmere raw wool, cashmere product,

yak products, sheep wool, camel products, etc.

2.5.5 Wood and wood products (including furniture), construction materials

Glued laminated timbers, concrete product, etc.

2.5.6 Miscellaneous goods Pet food, health food, rock salt, felting products

2.5.7 Chemical product, pharmaceutical product, and cosmetic materials

Traditional herbal medicine, organic fertilizers, cosmetic materials

2.5.8 Tourism Travel agents, hotels 2.5.9 Software development service Software development for businesses 2.5.10 Electric-Commerce “E-Commerce” such as online shopping

2.5.1 Agriculture and processed agricultural products

1) Products The overall picture of food demands and supplies in Mongolia is as shown below, including

agriculture, processed agriculture products and livestock food products. (Unit：thousand ton)

Production

Import Stock Export

Domestic consumption

Import dependence

(a) (b) (c) (d) (e= a+b+c-d) (b/e)

Grain 139 288 -6 0 421 68.4% Potato 109 36 0 0 146 24.7% Vegetable 71 30 0 0 101 29.7% Fruit 0 68 0 0 69 100.0% Meat 171 1 10 13 170 0.6% Milk 399 10 0 0 409 24% Alcohol 20 14 0 0 34 41.2%

Source: FAOSTAT, FAO

Figure 36 Demand-supply for foods (in 2006)

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(Unit：thousand ton)

Production Import Stock Export Domestic

consumption Import

dependence

(a) (b) (c) (d) (e=a+b+c-d) (b/e)

Grain 445 143 -96 0 505 28.3% Potato 202 17 0 0 219 7.8% Vegetable 91 60 0 0 151 39.7% Fruit 2 78 0 0 80 97.5% Meat 209 5 0 11 203 2.5% Milk 408 10 0 0 418 2.4% Alcohol 72 27 0 0 96 28.1%

Source: FAOSTAT, FAO

Figure 37 Demand-supply for foods (in 2011) First of all, Mongolia highly depends on import products. For example, its dependency rate is

39.7% for vegetable, almost 100 % for fruits, and 28.3% for grain which is the staple diet. Secondly, seeing the trends during the last 5 years despite this tendency, a significant increase in

grain reduced the dependence rate in grain rapidly (68.4% to 28.3%), and self-supply of potato has been almost achieved (dependence rate: 24.7% to 7.8%). (Interviews with related stakeholders indicated that wheat could be nearly self-supplied in recent days).

Thirdly, it is noted that livestock products such as meat and milk can be nearly self-supplied. A production trend and cultivated acreage per agricultural product are as shown below.

(Unit: thousand tons)

2012 2013 2014 Cereal 432.8 350.2 470.0 Wheat 418.8 331.5 439.5 Potato 245.9 191.6 161.5 Vegetable 99.0 101.6 104.9

Source: National Statistic Office of Mongolia

Figure 38 Yields of agricultural products (Unit: thousand ha)

2012 2013 2014 2015 Cereal 306.2 293.3 315.0 390.7 Wheat 297.3 275.6 291.2 361.2 Potato 16.8 15.5 13.2 12.8 Vegetable 7.9 8.3 8.7 7.7 Feed 13.8 14.4 17.0 23.8 Total 642.0 607.1 645.1 796.2


Figure 39 Farming areas for agricultural products

These figures indicate that yields and farming areas remain same over years for wheat and potato. In addition, there is found to be an increase in yields of vegetable. Carrot, cabbage and root stock

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are main farm products among the vegetable. Farming areas of several agricultural products by region are illustrated in the figure below.

(Unit: thousand ha)

Cereal Wheat Potato Vegetable Feed Western region 8.0 7.5 1.5 1.3 3.6 Khangai region 63.2 60.4 2.1 1.3 3.8 Central region 253.0 238.1 8.2 4.3 15.8 (Darhan-Uul) (14.7) (14.5) (0.4) (1.0) (0.1) (Selenge) (153.6) (145.4) (2.9) (2.3) (7.9) (Tuv) (84.8) (78.2) (4.8) (0.8) (7.6) Eastern region 66.4 55.2 0.6 0.3 0.3 Ulaanbaatar 0 0 0.4 0.4 0.4 Total 390.6 361.2 12.8 7.6 23.9


Figure 40 Farming areas of agricultural products by region

According to the above figures, the central region including Selenge province (Aimag) and Tuv province (Aimag) accounts for 65.9 % of the crop acreage for wheat (40.3% only in Sekenge Aimag), which can be said to be a large farm belt. The central region also accounts for 64.1% and 56.6% for potato and vegetable respectively. In large farms where we conducted interviews in this province, state-owned farms during the socialism era were privatized and continue to exist on a larger scale. In the farms taken over from state-owned farm, wheat and buckwheat (soba) are cultivated on the scale of 6,500 ha and 600 ha, respectively. Moreover, there was said to be recently an intention for production of canola (an improved variety of field mustard and raw materials for edible oil) for exportation.

As for fruits, additionally, cultivation of sea buckthorn is active with the strong support of the Government of Myanmar (by providing its seedlings gratuitously). The association of sea buckthorn says that sea buckthorn is grown by farm households (5,800 ha) and also grows in the wild (13,000 ha). It has 500 – 600 members including individuals with processors at 36 places shipping 5,000 tons annually, and the number of members is said to be increasing. Sea buckthorn is a fruit containing various kinds of vitamins, having large demands in and outside Mongolia for healthy drinks such as juices (largely condensed) and edible oil (produced from fruits and seeds). In Mongolia, sea buckthorn is greatly expected to be valuable as: (1) a substitute for other fruits imported; (2) local employment measures; (3) environmental protection through afforestation; and (4) contributions to exportation.

2) Current situations and issues

The following situations and issues are pointed out in the sectors of agriculture and processed agricultural products:

The area of cultivable land is small (the area under cultivation of 525 thousand ha versus the farmland area of 11.5 million ha), suggesting that there may be large room for expanding

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cultivation.

While wheat and potato can be self-supplied within the country, cultivation technologies (e.g. soil analysis and utilization of appropriate fertilizers and herbicides based on it) and agricultural machines need to be introduced for expanding production and improving cultivation efficiency for other crops.

Potato, vegetable and fruits come into the harvesting season all together approximately in September, causing the collapse of the demand-supply balance as seen in the situation where some crops are left in the farmland. In response to the current situations where the country relies on the importation of vegetable and fruits in winter while facing post-harvest losses, people are concerned with the introduction and diffusion of technologies for preservation, drying and processing (freeze drying and power drying), and some food associations are interested in agricultural product processing such as the sixth industrialization of agriculture which takes place in Japan.

Agricultural associations recognize that soba and canola oil would be promising as export commodities. They still have poor performances of exportation to other countries including Japan, and the development of marketing channels in collaboration with companies in partner countries such as Japan is desired.

Companies in and outside Mongolian show lots of interest in sea buckthorn products. Twenty processing companies in the country assembled at an opinion exchange meeting on sea buckthorn sponsored by the government. At the meeting, the following opinions were offered: (i) the increase of production is required; and (ii) processing technologies should be introduced. The sea buckthorn association noted that though companies in Finland, USA and Japan demonstrated the needs for powder processing and freeze-dry processing, no companies in Mongolia have ever started such processing due to the requirements for a large amount of investment in facilities at this moment.

3) Unique cases

Everyday Farm LLC is a business operator for cultivating vegetable (tomatoes, lettuce, spinach and welsh onion) and strawberry, established jointly by a local supermarket and a Japanese company. Their final purpose is to provide farm households with seedlings which are cultivated in greenhouses and sell agricultural crops that they produce to produce stands and the supermarket as an investor, aiming to increase farmer’s incomes. Cultivation know-hows in Japan and cultivation/selling of agricultural products adhering to the safety, freshness, and quality are expected to take root in Mongolia.1

1 Preliminary survey on a program to support the improvement of agricultural producers’ incomes (promotion of BOP business collaboration) (October 2014)

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Eco-Erdene LLC is producing juices and jams made from sea buckthorn, blueberry, and cranberry for selling in and outside Mongolia. This company has utilized sea buckthorn growing in the wild within the country because sea buckthorn materials imported from abroad lack flavor as oil and fat contents are already removed, and products imported from China raise concerns about containing pesticide residues. However, it also utilizes domestically cultivated sea buckthorn because wild products cannot be easily procured these days. This company has the performance of exporting to Japan for over 10 years.

Jivertiin Orgil LLC is a manufacturer dedicated to sea buckthorn juices and oil. They acquired factory equipment by utilizing JICA’s two-step loan (TSL), having a warehouse allowing the cold storage at – 30 °C. The company has lines of products such as plain condensed juices, those with sweet taste, and those six-fold diluted. The price of sea buckthorn juice in Mongolia is 6,500 MNT for a condensed juice (500 ml). Sea buckthorn oil is sold as a healthy drink and sold at a price of 20,000MNT for 100 ml. The company has also exported to Japan as well. The company requested a food inspection company in Japan to analyze product contents with the results of the vitamin E content of up to 172 mg and the content rate of omega-3 fatty acid of up to 27.6 % in 100 g of sea buckthorn oil. Moreover, the company has also exported to South Korea, Taiwan and Vietnam though through indirect exportation.

There are also companies (cases) that: a) perform integrated production from cultivation to juice/oil production in response to the high popularity of sea buckthorn; and b) plan to harvest wild bilberry, cultivate blueberry and export them.

4) Areas which Japanese companies can enter

Based on features/issues of the sectors of agriculture/processed agricultural products in Mongolia and cases of companies’ efforts, the following business areas that Japanese companies are expected to enter can be presented as examples.

No Entry area Points to note

1 Sales of agricultural machines, agricultural support including the guidance in cultivation Periods and regions of

production are limited for agricultural products.

For exporting foods to Japan, procedures based on the Food Sanitation Act and the Plant Protection Act is required.

2 Processing and importing of soba and canola

3 Processing of sea buckthorn (into juices and oil), their import; and their freeze drying and powder drying

4 Guidance on preserving and processing technologies for vegetables and fruits with equipment installation

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2.5.2 Livestock products

1) Products The main uses and number of existing domestic animals are illustrated as follows:

(Unit：thousand animals) Specis of animals

Main uses The number of animals as of 2015

Sheep 1) Meat; 2)raw materials for textile products; and 3) raw materials for leather products

24,943.1

Goat 1) Raw materials for cashmere products; 2) raw materials for leather products; and 3) meat

23,592.9

Cattle 1) Raw materials for dairy products (milk, etc.); 2) meat, and 3) raw materials for leather products

3,780.4

Horse 1) Raw materials for leather products; 2) Meat; and 3) Raw materials for supplements

3,295.3

Camal 1) Raw materials for textile products; and 2) raw materials for dairy products (milk, etc.)

368.0

Yak 1) Raw materials for textile products; and 2) raw materials for dairy products (milk, etc.)

544.5

Pig 1) Meat (for domestic consumers) 33.5 Chicken 1) Meat (for domestic consumers) 805.1


Figure 41 Domestic animals in Mongolia The uses of sheep, goat, catte and horse out of them are illustrated in a schematic diagram below.


Figure 42 Domestic animals and their uses

Goat

Sheep

Cattle

Horse

Meat and raw materials for dairy

products

Raw materials for textile products

Raw materials for leather products

Domestic finished product processing

Semi-finished product processing

Raw materials

Domestic

consumption

Export

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As indicated above, livestock resources are the sources of supplying meat and milk and are also utilized as raw materials for major product areas such as textile and leather. The acutual production of raw milk and processed milk is as shown in Figure 43 below.

(Unit：thousand tons)

2012 2013 2014 2015 Raw milk 588 667 765 874 Processed milk 72.8 63.9 71.1 N.A. (Percentage of milk processing)

12.4% 9.6% 9.3% N.A.


Figure 43 Actual production of raw milk and processed milk

FAO indicates the breakdown of actual raw milk production by domestic animal, showing the production of sheep milk, goat milk and the like besides milk.

(Unit：thousand ton)

Spices of livestock cattle sheep goat camel

Production of raw milk 380.8 41.2 82.3 5.0 Source: FAOSTAT

Figure 44 Actual production of milk by domestic animal (in 2013)

FAO also indicates that the amount of production of butter (made from cow milk) and cheese (made from sheep milk) in 2013 is 650 tons and 2,474 tons, respectively, suggesting that the amount of cheese production is larger.

Actual performance of meat processing is as shown below. (Unit：thousand tons)

2012 2013 2014 (Composition ratio)

Beef 59.7 57.7 54.7 26.2%

Mutton, goat

meat2

123.6 155.0 153.3 73.4%

Pork 0.4 0.5 0.8 0.4%

Total 183.7 213.2 208.8 100.0% Source: National Statistic Office of Mongolia

Figure 45 Actual production of processed meat

The number of honeybee herds, beekeepers and the production of honey which is categorized as a

livestock product are as shown below.

2 While the National Statistic Office of Mongolia sums up sheep meat and goat meat, the statistics of FAO (FAOSTAT)

shows that their actual production in 2013 amounts to 156.5 thousand tons (100 %) with the breakdown into the sheep meat: 92.4 thousand tons (59%) and goat meat: 64.1 thousand tons (41%).

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Aimag The number of herds of honeybees(a)

The number of beekeepers(b) (a)/(b)

Darkhan-Uul 617 72 8.6 Dornod 268 18 14.9 Orkhon 260 14 18.6 Selenge 2,653 169 15.7

(Shaamar soum) (2,065) (113) (18.3) Tuv 261 36 7.3

Khentii 192 38 5.1 Total 4,644 415 11.2

Source: Mongolian Beekeeping Association

Figure 46 The number of honeybee herds and beekeepers in major provinces (Aimag)

(Unit：ton)

2010 2011 2012 2013

Amount of production 11 30 32 39

Source: FAOSTAT

Figure 47 Amount of production of honey in Mongolia

As shown in Figure 46 above, the number of beekeepers in Mongolia is 415 persons, and that of

honeybee herds is 4,644. The number of herds was 5,000 in 1989, but decreased to less than 1,000. However, the number of beekeepers has recently recovered to large extent as more and more

farmers have expected income increases by beekeeping. Business stakeholders estimate the amount of consumption of honey at 500 tons per year and the amount of its domestic production at 100 to 150 tons, whereas the amount of its production in 2013 is 39 tons according to FAO.


Current situations and issues of the food industry including livestock products in Mongolia are as follows: According to the Mongolian Food Industry Association, the number of manufacturers of

beverages and alcoholic drinks, bakeries, and manufacturers and research institutes for dairy products (milk, cheese, and yoghurts) and processed meat products amount to 280 throughout the country, out of which 80 are located in Ulaanbaatar.

The issues of this sector includes: 1) expansion of sales and markets in and outside the country; 2) improvement of the food trading system3 for domestic retail business; 3) a strong

3 In general, the conditions for trading between food processing companies and supermarkets are commonly the

“purchasing with selling” condition (close to “purchase upon sales” at department stores in Japan). Therefore, there are business practices that products past the use-by date and unsold items are returned. In this background, there is a lack of marketing surveys by retail shops, a lack of purchasing management capability (seeking the display only for the shelf space). Improvement of supermarkets’ management is desired for fundamental resolutions.

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request for reformation of the transportation, storage and processing of raw milk because only 71 thousand tons of raw milk are utilized for processing out of the produced raw milk (765 thousand tons), leading to livestock breeders’ production loss; and iv) a need for hygiene control at the production stage (obtaining the GMP (Good Manufacturing Practice), HACCP certification, and obtaining ISO 22000) and enhancement of inspection institutes’ inspection systems for increasing the exportation of mainly processed meat products.

Stockbreeders have been enormously affected by the significant decrease in their domestic animals during the Zud period4. There is a need for securing and storing feedstuffs that are deficient in the depth of winter (organization of dairy farmers as a measure against it and enhancing veterinary systems In addition, meat producers are concerned about the sharp rise of prices as a result of meat shortage (the sharp price drops also occur as a large amount of meat is supplied based on the prediction for the middle of winter, depending on years). On the other hand, milk is less affected by the Zud period as dairy cattle are kept mainly at administration farms near urban areas.

The following points are noted for honey:

Firstly, its productivity is low (amount of production of honey per bee herd is 12 kg/herd in Mongolia while 60 kg/herd in Japan). It is attributed to low levels of beekeeping skills and less sophisticated honey source mediation technologies. In considering its exportation, additionally, the following would be challenges to it: 1) the possibility of producing single flower honey which is popular in Japan (development of honey sources); and 2) Improvement of inspection institutes’ systems of inspecting residual pesticides and antibiotics. Moreover, other issues include the enhancement of storage facilities in basement rooms in winter and the review of existing storage methods, given the fact that a large number of bees were dead in the past severe coldness and draught5.

3) Unique cases

【Milk, yogurt and cheese】 APU Company is a large food manufacturing company engaging mainly in the production of

beverages and dairy products (milk, yoghurt and fresh cream). The company provides support for dairy farmers to stabilize the supply of raw materials, coping with the stabilization of product qualities and surplus milk by performing the preferential buying from dairy farmers that ensures the stable supply of raw milk throughout the year and utilizes milking machines at a high price. It also carries out an education program on dairy farming management. As for milk products, it productizes milk with diversified oil and fat contents and milk for long

4 Causes of zud include freezing of the surface of accumulated snow in addition to severe winter coldness. 5 In response to this issue, the “Generation of Rural Income through Beekeeping Development” is cur rently

implemented under the JICA Partnership Program. The circumstance of the project was also broadcasted at the NHK World in September 2016. Regarding the description of IV), we referred to the interview with the Japan Association for International Collaboration of Agriculture and Forestry that is in charge of the project at the Japanese side.

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preservation and develops yoghurt products by adding calcium and protein. The company has just started the selling for overseas markets in addition to the expansion of domestic selling of resulting high-quality milk and yoghurt In addition, it also considers the butter production as a long-term challenge to coping with surplus milk in summer.

“Mongolian Artisan Cheese makers Union LLC (MACU)” is a distribution company established in

2015 by an American president who has worked in China and Mongolia for a long time for the

purpose of spreading Mongolian cheese internationally. The company acts as a sales agent for 7

unique cheese manufacturing crafts (small scale cheese plant), including: (i) a cheese craft located in Tuv Aimag which is managed by a Mongolian pioneer who learned production technologies

from a Dutch cheese company and has 20 years of experiences; (ii) a craft owned by a French

living in Mongolia after married; (iii) a cheese craft for producing yak milk as raw materials with

the guidance of a Swiss craftsperson; and (iv) a craft in Ulaanbaatar that started production in 2016

with the guidance by an Austrian. The company has the performance of supplying cheese to

high-class restaurants and supermarkets located in Ulaanbaatar and are currently preparing for exportation to Russia and China. It received the “Silk Road Award” in 2016 from MNCCI which

highly appreciated their unique efforts.

【Milk, Meat processing and production of meat products】 Makh Market LLC is a company that processes a total of 100 kinds of products including

dressed meat (beef, mutton and goat meat), semi-finished products (as meat balls, “buuz”, and dumpling) and finished products (hams and sausages). It is enumerated as one of the largest companies in Mongolia together with another company as a company which has an integrated processing line from slaughtering to production. They are awarded the prize of “Leading Food Manufacturer.” The company is keen on training of employees involved in food hygiene, and receives certifications of HACCP and ISO 22000 in 2111 and 2014, respectively on the basis of GMP (Good Manufacturing Practice), GHP (Good Hygiene Practice). As a result, it passed the inspection conducted by the Chinese authority (Chinese Inspection Quarantine) that lifted a ban on the import of meat products from Mongolia6, already starting the shipping of beef, goat meat and processed mutton meat (to Beijing and inner Mongolia) in April, 2016.

Khaan Khuns LLC is a manufacturer of “buuz”, a representative Mongolian food and also runs restaurants. The company has introduced processing equipment by utilizing JICA’s two-step loans. (It introduced the equipment for buuz and dumpling at the first phase, tripling its production capacity and the equipment for noodles at the second phase). They expanded capacity threefold to manufacture buuz and. It is also considering the exportation to Northeastern China having large demands for meat products in the future after a ban was lifted on importing processed meat product in China. The company is willing to purchase processing equipment made in Japan which has high productivity in starting mass production of

6 Nowadays exports of raw meat to China are temporarily prohibited due to foot-and-mouth disease that occurred again

in September 2016.

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export-oriented products, and is considering its access to Japanese markets where the importation is actually impossible (for meat and processed meat products made from even-toed ungulates) now in the long term.

【Honey】 Mihachi LLC is a beekeeping and honey production company owned by a Japanese living in

Mongolia, starting its production in 2015. It has increased the number of herds to 100 until now. It aims at shipping to Japan by enhance the productivity, acquiring beekeeping skills in Japan and making efforts to increase the sugar content. It is said to have approached to the stage securing the profitability with the assumption of production costs in Mongolia and planned unit prices for purchase at the Japanese company side through the negotiations with them until now, scheduled to start the shipping to Japan in 2016 at the earliest.

Javharant Monostai LLC is attempting to control qualities of honey shipped by farmers in Selenge Aimag and make an integrated product brand of honey, having an experience in exhibiting honey at an exhibition in Japan. It is said to appeal its good quality to Japanese companies as its favorable point.

4) Business areas where Japanese companies can enter

Based on features/issues of the sector of livestock farming/livestock products and promising cases of companies, the following business areas that Japanese companies are expected to enter can be presented as examples:


1 Facilities for storing and producing milk and yogurt, import and selling of yoghurt and butter

・As for as exporting of food products to Japan, procedures under the Food Sanitation Act and the Plant Protection Act are required.

・ Currently, the importation is actually impossible for meat and processed meat products made from even-toed ungulates.

2 Import and selling of cheese

3 Assistance in honey production technologies and import/selling

4 Import and selling of processed meat products (limited to horse meat and its product for the time being)

2.5.3 Livestock products Leather products 1) Products

The figure below summarizes the amount of production of leather products by domestic animal. As illustrated in it, sheep and goat skin accounts for 89.5 % in quntity.

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(Unit：million pieces)

2012 2013 2014 2015 (Composition ratio)

Sheep skin 3.7 5.2 5.0 7.4 48.7%

Goat skin 4.0 4.7 4.3 6.2 40.8%

Cow hide 0.5 0.5 0.4 0.7 4.6%

Horse hide 0.2 0.2 0.2 0.4 2.6%

Total 8.6 11.0 10.2 15.2 100.0%

Source: National Statistic Office of Mongolia and Mongolian Association of Leather Industry

Figure 48 Amount of Production of leather products

The production process of leather is illustrated below.7


Figure 49 Production process of leather

Referring to the industrial production statistics, production trends of finished leather products are as shown below.

Unit 2012 2013 2014 2015

Leather boots, shoes Thousand pairs 18.3 26.5 49.3 70.6

Leather coats Thousand pieces 13.9 11.0 12.1 10.1

Leather jackets Thousand pieces 8.3 9.0 7.9 5.6

Skin coats Thousand pieces 9.0 16.8 14.2 10.2 Source: National Statistic Office of Mongolia and Mongolian Association of Leather Industry

Figure 50 Amount of production of finished leather products


Number of members joining the Mongolian Association of Leather Industry is 136 companies, and there are 700 traders of raw skin and hide. The marketing size of raw skin and hide

7 We referred to the “Program Guide” by the Tokyo Metropolitan Leather Technology Center.

Raw

hide/skin

Preparation (beam house) process

(Soaking - Bating)

Tanning process

(Wet blue)

Shaving, pre-fat liquoring, re-tanning, and drying

process

Finishing process

(dyeing, coating,

etc.)

Leather

product

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reaches to the amount of 150 billion MNT. Seeing processing performances by process, semi-finished process (until the tanning process) produced 8-10 million pieces, whereas the number of processed pieces until the finished process as leather products is nothing but 1 million pieces. In other words, most are exported in the form of semi-finished products, whereas few of the products after the crust process with higher added values have been exported. On the other hand, there are manufacturers of shoes, bags and coats that use finished leather products made in Mongolia and imported ones.

The leather industry in Mongolia started in 1934 when leather processing machines were introduced from Soviet Union. Mongolia engaged in manufacturing leather products in a stable manner under the COMECON regime during the socialism era. However, the production dropped dramatically after the country moved to market-oriented economy, and recovered from 2003 when export of semi-finished products started to China.

It appears that there are the following issues: Firstly, the quality of raw skin and hide in Mongolia was evaluated to be low (especially

for caw hide) because: (i) grazing animals are easily exposed to parasites, (ii) manual work brings about blemishes due to the low rate of mechanization in a slaughtering process; and (iii) exporting processes are susceptible to damages. As a result, it is pointed out that some of the leather products are less competitive to those in other countries as high-grade raw materials.

Secondly, many of the leather products that have ever exported are those at the tanning stage before the finishing process and the crust stage due to the lack of technologies for the finishing process.

Thirdly, poor designing capabilities are pointed out for finished products such as bags and shoes in addition to the above problems of leather materials.

Challenges to the industry include: (i) to improve the quality of skin and hide with the support from veterinarians; and (ii) to improve processing technologies for better qualities of semi-finished and finished products. The Government of Mongolia took action to improve the quality of raw skin/hide and so on by assigning three veterinarians and livestock breeding engineers in each of the 330 districts (soum) within the country, but it cannot yet meet the needs for coping with livestock diseases because technical levels of veterinarians and livestock engineers assigned to the field are still low.

There have ever been surveys and inquiries by Japanese companies, but few of them led to the conclusion of business negotiations. The following points are made concerning dealings with Japan. Dealings already exist in sheep and goat hides (semi-processed products), shoes and bags.

However, quantities of exports are small and dealings are not continuous. The background to such conditions is as follows: concerning ① leather, Japanese

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companies have demand for crust processed and final processed leather rather than wet blue, and they have pointed out the need to improve the state of damage of Mongolian leather, the chemicals that are used in it, and the level of processing (shaping, drying, and finishing processes). Moreover, concerning ② shoes and bags, companies that have exhibited products at exhibitions in Japan have been told by Japanese enterprises that they need to reduce the odor of the leather and make bags easier to open and use, and overall it is necessary to improve processing methods and refine the designs.

3) Unique cases

Mon-Ireedui LLC undertakes the process until semi-finished product processing at a factory located within an industrial complex for leather in Ulaanbaatar City. It has two factories there, engaging mainly in the processing from the receipt of raw skin to tanning process (wet blue). Many of the processing machines are made by a manufacturer of leather processing machines in Hebei Province of China, and this factory has the production capacity of 4,000 pieces per day. While 102 persons are hired during the peak season for receiving raw skin/hide (November to March), only about 20 persons are employed for other periods, implying that their business fluctuates seasonally to large extent.8. The company said that parasites during the grazing, damages by plants, and blemishes still occurring during the slaughter process as 95 % of it was performed manually and rough handling was done during the busy season though they were largely reduced then as compared with earlier periods. It is also considering the export of sheep and goat skins after “crust processing” (drying after tanning), which suffers less blemishes than cow skin.

Khos Az LLC is a shoe maker located at an industrial complex where leather product manufacturers assemble in Ulaanbaatar City. Its president learned the designing of shoes and their manufacturing technologies in in the Czech Republic. The number of shoe manufacturers is about 100 companies in total in Mongolia. However, large Mongolian shoe manufacturers are only two to three companies, including this company, because 95 % of the shoes for men and women are dominated by Chinese products in domestic markets of Mongolia. The company has built its basis of business by focusing on safety shoes and shoes for military and kids. It recently engages in 1) the development of leather materials with attention to their safety and air absorption by leather; and 2) the increase of commodity items for child shoes, also starting the direct management of retail shops. Its equipment is made mainly in Czech, Taiwan and China, among which it relies particularly on machines made in Taiwan. We heard about the opinion that the training of technicians on leather should also be added in planning the development of industrial human resources in Mongolia.

8 According to the Mongolian Association of Leather Industry, 64 % of the yearly slaughters occurs between September

and December.

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Orchid LLC is a small bag manufacturing company that deals with a wide range of small to large bags made from cow hide, goat skin and sheep skin. Although it has utilized leather made in China (by a Chinese corporate body of an Italian company), the company is considering the utilization of leather made in Mongolia after verifying its improved quality, because it has been improved with the government assistance. The integrated production is achieved at its factory during the course of planning – cutting – sewing – finishing. Its good quality is appreciated despite its small production, and it has established a display corner at a department store in Ulaanbaatar. It has received assistance as a company intended for the leather industry revival project by the former Ministry of Industry, planning to construct a new factory (1,000 m2) this time. It will consider the exportation to Japan on a full scale after constructing the factory with the recognition that it needs to deal with strenuous quality demands by the Japanese side, the refinement of designs and exquisite manufacturing.

Apart from it, another bag manufacturer producing small to large bags offered an opinion that they would like to engage gradually in manufacturing high-quality products, considering that: (1) the quality of Mongolian leather products has been improved; and (2) the tariff rate will be reduced as the EPA came into effect.


Based on features/issues of leather industry in Mongolia and cases of companies’ efforts, the following business areas that Japanese companies are expected to enter can be presented as examples:


1 Cow-skin leather (Crust processing - finished leather products)

Potential for raw materials for jacket and car sheets

2 Sheep and goat skins(Ditto) Raw leather materials for shoes and bags

3 Import of final processed goods(shoes, clothing, and small articles)

Close collaboration with Japanese companies are essential for designing, etc.

5) Reference information (Information from in Japan companies/organizations)

As for the leather made in Mongolia, 1) As it is said that cow leather has a big problem with its raw hide, it will not be adequate for highly fashionable areas such as shoes and bags, but it may be possible to be used as raw materials for jumpers and car sheets; 2) Sheep and goat skins having fewer problems with raw hide can be considered for exportation after crust processing (shaved and dried after tanning); and 4) it can also be exported as finished leather products. For Case 3), close collaboration with Japanese companies as users are essential. They said that markets would be larger if finished processing was aimed at, not only a crust processing stage.

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2.5.4 Textile Product

1) Product

Production trends of main textile products are as shown below. Product Unit 2012 2013 2014 2015

Raw cashmere (Greasy

cashmere) for export

ton 3,597.8 4,070.2 4,035.4 4,988.2

Knitted cashmere product thousand pieces 795.6 932.9 954.4 829.3

Wool product thousand m 314.9 243.0 322.4 N.A.

Carpet thousand m2 915.8 852.9 743.6 680.1

Camel filature ton 11.6 9.9 6.7 0.4

Camel blanket thousand m 8.2 14.7 18.5 23.0 Source: National Statistic Office of Mongolia

Figure 51 Trend of production of main textile products

As shown in the above figure, typical textile products are comprised of cashmere products, carpets (made of sheep wool), felts (made of sheep wool or camel wool) and camel blankets. Then the manufacturing process of cashmere products as typical textile products is as shown below.

Processing

type Process

Integrated processing

type

Primary processing: (1) Purchase of raw cashmere ⇒ (2) Visual identification of color and quality ⇒ (3) Washing ⇒ (4) Dehairing: remove hair from raw wool, picking up only finished hair; Yield ratio: 48 %) Secondary processing: (1) Dehairing ⇒ (2) Dying ⇒ (3) Spinning ⇒ (4) Yarn ⇒ Yarn dying Tertiary processing: (1) Yarn ⇒ Textile processing ⇒ Blanket, shawl (2) Yarn ⇒ Knitting ⇒ Knit product ⇒ Sweater

Partial manufacturing

type

Purchase of raw wool ⇒Textile processing ⇒ Blanket, shawl ⇒Knitting ⇒ Knit product ⇒ Sweater

Specialized dehair

processing type

(1) Purchase of raw wool⇒(2) Visual identification of color and quality⇒(3) Washing ⇒ (4) Dehairing: ⇒ Domestic sales, export (mainly to China)

Source: Prepared by the survey team based on various materials

Figure 52 The process of cashmere manufacturing

2) Current situations and issues of the industry

The following points are noted for cashmere manufacturing: The industry estimates the amount of producing raw cashmere wool in China at 10 thousand

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tons in China in 2009 and that in Mongolia at about 6 thousand tons.9 Figure 51 shows that the export of raw wool from Mongolia amounts to 4 thousand tons, meaning 2 thousand tons for domestic uses (the proportion of raw wool export: about 70 %).

There are quite a few companies engaging in three processes from purchasing raw wool to manufacturing finished products in the cashmere industry. Among them, about ten companies adopt the integrated manufacturing type whereas the large majority of companies adopt the partial manufacturing type (e.g. about 260 companies perform the knitting).

This industry is characterized by the fact that all of the raw materials are domestically produced. Cashmere made in Mongolia has thicker and longer fibers than that in China (Its details are described below).

85% of dehaired cashmere (only for the primary processing) is exported mainly to China, which results in the low rate of processing into products after dehaired (e.g. raw yarn and finished products). This would be attributed to insufficient companies’ production capacities, technical levels, and marketing abilities. The facto that Chinese raw yarn flows into Mongolia also enervates the textile industry in Mongolia.

The biggest issue is to strengthen and improve product manufacturing capacities (quality, productivity) in Mongolia. Many of the interviewed companies still utilize deteriorated Russian-made spinning, finishing and gig machines. There is an opinion that the inability of producing finer and thinner cashmere raw yarn with a higher demand at an international market makes Mongolian products fall behind Chinese products in competition. In order to satisfy customer needs for higher-quality products, it is important for Mongolian companies to introduce state-of-the-art textile technologies, particularly spinning technologies.

High fund-raising costs are pointed out in addition to companies’ insufficient earning capacities as a background for stagnant investment in equipment. Reflecting these circumstances, policy-driven financing with the government assistance and capital investment by utilizing the JICA’s TSL are also active Increased export of products by utilizing these facilities are expected.

As for export, there is a need for: (1) obtaining information and knowledge as to custom clearance procedures, permission and approvals, etc.; and (2) specializing an exhibition intended for activating businesses between foreign countries and Mongolia. Development of human resources that can deal with demands for designs in destination countries for export is also solicited.

In order to catch up with international quality standards for Mongolian products, it is the urgently necessary to improve hardware (testing equipment) and software (human resource development) aspects at textile research institutes undertaking product testing.

9 Japan Chemical Fibers Association” ”Fiber Handbook” (2016)

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The interviews revealed that after the EPA between Mongolia and Japan came into effect in June

2016, the following effects appeared:

Export to Japan that was started in 2015 is continued in 2016 with the addition of new orders;

Business negotiations with Japanese companies have been in progress since the effectuation of EPA. There is a talk from a trading Japanese company that its order will be increased on condition of introducing a spinning machine made in Japan.

The effectuation of EPA has contributed to the expansion of export. Sales until August this year show a 25 % increase from the previous year with a prospect for future orders, and thus annual cumulative sales are expected to reach a 30 % increase from the previous year.

3) Unique cases (as to main products and companies’ efforts for export)

Case Feature of product Effort for export

Goyo LLC A company for integrated manufacturing of cashmere products, one of the large companies in Mongolia. It deals broadly with cashmere products, wool-kit products and textile products. It is recently engaging in the development of new products through the mixed spinning of several colors of yarn.

It has long experiences in export to Russia and Europe, but less export to Japan.

Custom duties have been a bottleneck for exportation to Japan in price competition with Chinese products, but increased orders are expected after the effectuation of EPA, including the sales of OEM to Japanese companies.

Mongol Textile LLC

Product line: (i) wool, yak, cashmere and camel made shawls, blanckets and mufflers; and also (ii) products mixed with textile fablic, fablic mixed with textile and knit.

It has experiences in exporting yak and camel products to Germany and South Korea.

Because there were few opportunities to understand overseas market needs, (1) opportunities should be increased for ensuring the matching to the needs by providing samples; and (2) there is a desire for mastering excellent designing abilities and spinning technologies (especially finishing processes) in Japan.

Cashmere Holding LLC

Product line: (i) textile products (e.g. mufflers and shawls), knittted products (e.g. sweaters, mufflers, and hats)

It has placed an order to a Japanese company for a finishing process of a coat (textile fabric).

It is also planning to sell its cashmere products to a Mongolian company that opened an online shop for Japanese customers.

Issues for exporting to Japan in the whole industry include: (1) the lack of efforts for collecting information on Japanese markets; (2) Poor product competitiveness derived from problems of raw yarn quality; and (3) poor price competitiveness.

Sor Cashmere LLC It produces raw yarn of cashmere, yak and Exporting of raw yarn (camel), dehaired

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Case Feature of product Effort for export

camel and manufactures kit products on its own account. In addition, it undertakes the integrated production from raw yarn, allowing the provision of dehaired products and raw yarn.

products (cashmere and camel) to Japan was already decided.

Business negotiations are in progress on condition of introducing spinning machines made in Japan.

Snow Field LLC Cashmere sweater, coat, and cashmere yearn (receiving an order from a Japanese company)

It has sold its products through mail orders, retail premises (department stores), and textile wholesale dealers in Japan, building considerable human networks in Japan based on its long experiences.

Bayalag Ulzii LLC It domestically sells or exports (to Italy and UK) yak products and hard-to-find white cashmere (after dehaired). Yak and baby cashmere are sold as its finished productes (hats, sweaters, and scarfs) after processing on its own account. It is one of the largest producers for yak products.

It is willing to develop commodities accommodated to markets in Japan, considering the establishment of a corporate body in Japan jointly with a Japanese company for distributing and marketing with a view to increasing its export.

Mongol Oims LLC It produces socks (their raw yarn includes cotton yearn, wool and cashmere). Domestic demands for socks are dominated overwhelmingly by cotton, while wool and cashmere are mainly to satisfy demands for exporting to Japan and other countries.

It started the trading to Japan in 2013. The record of exporting to Japan contributes to improving its brand.


Figure 53 A summary of textile products and interview cases

4) Business areas where Japanese companies can enter Based on features/issues of textile product industry in Mongolia and cases of companies’ efforts,

the following business areas that Japanese companies are expected to enter can be presented as examples:

No Entry area Point to note 1 Export of textile machines and technical

guidance: Demanded machines include: (i) spinning machines; (ii) weaving machines; (iii) knitting machines; (iv) sewing machines, (v) dyeing machines; and (vi) finishing machines.

Many deteriorated Russian machines are still existent at large and mid-sized manufacturers.

On the other hand, the business expansion of Germany (kitting machines) and Italy (spinning machines) are also observed.

2 Import of cashmere yarn for use as raw materials Technical guidance by Japanese users is required. 3 Importing and selling of cashmere products (knit

and textile products) While already having experiences in importation, it is

expected to further increase the importation after the EPA put into effect.

However, it still lacks abilities for product planning, and its collaboration with the Japanese side is to be desired.

4 Other products than cashmere (yak and camel products)

Their diffusion is expected in the future. It has experiences in exporting to Europe.

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5) Reference information (Overseas evaluation of Mongolian cashmere, etc.)

The result of collecting and comparing Mongolian and Chinese (mainly in Inner Mongolia) cashmere yarn shows that the Mongolian cashmere is has a thickness of 16-17 μ (Chinese: 15-16 μ in thickness) and a length of 40 mm (Chinese: 38 mm long), and its color is largely brown and grey with the 10 % white color where 90 % of Chinese produce cashmere has a white color.10 Generally, thinner, longer and white cashmere with broader dyeing tends to be preferred. The Mongolian products have the thick and long features, finished into firm products with its texture preferred, but in terms of prices they are said to be cheaper than Chinese products (made in Inner Mongolia) as the thickness is a big factor for pricing (about 15,000 yen per kg). In order to prove the high quality of Mongolian products, it is necessary to 1) perform thorough quality control; and 2) become an accreditation body of the international certification body by nurturing inspection institutes in Mongolia. It is pointed out that such efforts will result in guaranteeing the export of yarn and the quality of processed products, leading to the improved trust by the export destination country.

In order to ensure the traceability in the Mongolian cashmere industry, the Project for Strengthening the Asian Industry Bases – “Report of the Survey of a Certification System and the Feasibility of Quality Control Implementation for Mongolian Cashmere”11 recommends as the methods of Japan’s cooperation: 1) Establishment of a raw material trading center; 2) quality control (dispatch of experts); 3) inspection of raw wool; and 4) expansion of efforts that contribute to the “improvement of technological capabilities at each process” and the “improvement of planning capabilities” at the stage where the above improvements are in progress.

According to stakeholders of the Japanese textile industry, the fact that the spinning equipment in Mongolia is deteriorated and cannot produce fine-grained yarns leads to the low quality of cashmere products, and thus supporting the introduction of the latest spinning machines (funds and technologies) is an urgent issue. In addition, people tend to rely on their experiences for adjusting the number of revolutions of the spinning machine, and it is necessary to transfer Japan's experience and expertise to Mongolia through dispatching engineers. Also in order to resolve the shortage of technicians for flat knitting machines, support for practical curriculum training will be initiated on the "knit" processing in collaboration with the University of Science and Technology (scheduled to start in autumn 2016).

10 An interview with the General Incorporated Foundation: KE'KEN Textile Testing & Certification Center 11 Nomura Research Institute, Ltd. (February, 2009)

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2.5.5 Wood/wood products (including furniture) and construction materials

1) Product

Amount of investment and manufactured

products

Unit Amount of production 2012 2013 2014 2015

Investment for domestic construction million MNT 1,307,864 1,102.839 1,146,557 447,166

Amount of house construction

ditto 389,418 856,903 1,430,863 N.A.

Newly constructed apartments

number of rooms 11,413 18,012 22,546 N.A.

Increase in housing stocks

thousand m2 531 906 1,604 N.A.

Cement thousand tons 349.4 258.8 411.3 410.1 Concrete and mortar thousand m3 176.2 317.8 432.6 129.0

Brick made of clay million pieces 44.5 66.5 58.9 41.5

Timber thousand m3 14.2 9.8 16.4 15.2 Wooden door and window thousand m2 7.6 12.4 14.6 7.8

Amount of imported construction materials million USD 279 336 330 N.A.


Figure 54 Trends of production of main wood products and construction materials

As shown in the above figure, production of construction materials (wooden doors and windows, cement, etc.) tends to have increased in the context of the significant increase in house construction until 2014. In addition, many of the construction materials are still procured through the importation from abroad. In 2015, however, public investment decreased drastically due to the influence of economic recession and investment in houses appears to have decreased significantly, and thus production outputs of various construction materials show declines.

2) Current situations and issue

The following points can be noted: Owing to the economic slump, public investment and investment in private housing shows

significant decreases. Therefore, construction industries ask the government to launch a project for constructing 1,000 houses in each province (Aimag), advance a gel restoration plan, and promote housing loans for encouraging the selling of houses totally or more than 50 % completed in Ulaanbaatar.

Large factories are operated for cement (from one factory in the past to five factories) with their production capacities coming to meet recent domestic demands. Conversely, more than

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80 % of the steel frame and the reinforcing steel as well as most of the paint, boards, cables, floor materials and pipes are said to be imported from China and South Korea.

When considering the production of construction materials in Mongolia, they face the price competition with imported products. In the area of processing construction materials, small and mid-sized companies are found to initiate a movement toward receiving the capital investment and the technical assistance by foreign companies including Japanese ones, but they face difficulties in fund raising for acquiring introduced technologies and investments.

As for wood products, there is a movement toward dealing with their export to Japan in the future.

3) Unique cases

MC log house LLC is a manufacturer for 1) members for furniture manufactureres and 2) window frames and doors for log houses, one of the few companies shipping components to furniture manufacturers in Mongolia. Used lumber is Russian lumber (sugi (cedar) and red pine) and domestic lumber. Tree felling was prohibitted for conserving forest resources in Mongolia in the past, but the recent change of the policy to liberalize the utilization of domestic lumber is a driving force behind its business promotion. Its factory is located in the outskirt of Ulaanbaatar. It has dry warehouses and processing and finishing facilities, installing machines for cutting, laminated wood processing and laminating, made mainly in Taiwan, and started to manufacture loghouse members in 2016 in addition to funiture members that had already been started. This company is interested in entering Japanese markets where laminaed wood is imported from Russia and China, but has yet to conduct sufficient surveys of their needs, prices and levels of demands for product qualities. It has expectations for collaborating with Japanese bodies (furniture manufacturers and loghouse manufactureres), mastering laminated wood technologies in Japan, and their support for Mongolian human resource development.

Premium Concrete LLC is a company for manufacturing ready-mixed concrete, established by its

president who has studied in US. It has seven factories (3 in Ulaanbaatar, 3 at a construction site

for a new airport and 1 at a construction site for a wind power station in a local area), holding a

share of 15 – 18 % of the domestic market (where there exist 100 companies in the industry, out of

which 10 are large companies). This company adopted the performance management by introducing the KPI (key performance indicator), constituting the eight-director system including

two external directors despite the LLC (limited liability company) and making efforts to gain trust

by large companies placing orders to it. It also conducts staff training by dispatching employees to

Korean companiees and those in Beijing as orderes for short terms. Batcher plants are made mainly

in Italy, China and South Korea. It has also received regular technical advice from a professor of

Tohoku University in Japan to use part of fly ash generated by power stations as raw materials for cement with an visit to ready-mixed concrete factories actually using fly ash in Japan.

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Metroplast LLC is an manufacturer for manufacturing plastic window frames. Window frames composed mainly of polyvinyl chloride resin are utilized as small window frames for apartment houses (at maximum 2.5 m in length). There are three companies in the same business including this company in Mongolia, holding a market share of 20 %. Eighty percent of the plastic wind frames are imported from China, Germany and Russia, and in order to survive the competition with imported products, it seems essential to; 1) improve extrusion molding technologies (window-frame processing methods); 2) acquire business management knowhows; and 3) acquire mold nmanufacturing technologies for which it relies on China nowadays.


Based on features/issues of construction material/wood product industries in Mongolia and cases of companies’ efforts, the following business areas that Japanese companies are expected to enter can be presented as examples:

No Entry area Points to note 1 Guidance on technologies for producing

construction materials and production It is necessary to pay attention to investment size

and profit management accommodated to market size for investment on site.

2 Import of wood products such as glued laminated timbers

Distinction from Russian and Chinese products is required.

3 1) Utilizing resources specific to Mongolia for materials

2) Development and import of materials such as insulating materials

Fund investment is required for joint development.

2.5.6 Accessories etc. miscellaneous goods

1) Products

Miscellaneous goods Feature 1 Pet food Dog food using horse meat as ingredients 2 Health food Health supplements using horse oil and bone as ingredients 3 Rock salt For food, etc. 4 Felt product For slippers, souvenirs

The change in the amount of production of rock salt and felt products are shown below.

Product Unit Amount of production 2012 2013 2014 2015

Rock salt ton 569.2 657.6 1,378.4 1,685.6 Felt thousand meters 254.1 178.1 163.1 164.0 Felt boot thousand pairs 34.1 21.0 10.8 13.0


Figure 55 Trends of production of rock salt and felt products

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Mining of rock salt is permitted only for some operators, but the amount of production of rock salt has increased due to increased demands in and outside the country. By contrast, production of felt products tends to decline, and there is a movement toward finding out new opportunities besides general uses such as shoes.

In addition, the interview result shows the following usage of each site of the horse body in general:

Main site of the horse body

Meat Horse 0il Small intestine bone hamstring

Usage Food, pet food (raw meat, boiled meat)

Raw materials for cosmetics

Ingredients for producing sausage

Calcium supplement

Pet food

Source: Survey team

Figure 56 Main usage of the horse body


Companies have performed product planning and marketing by utilizing domestic resources in Mongolia for each product, whereas they face the following challenges particularly in considering their exportation:

Processed livestock products made in Mongolia needs to meet the quarantine criteria in Japan and other counties, and there is a need of capital investment and penetration of quality control into companies including and hygiene standards for this purpose, but only a few companies can satisfy it.

According to interviews, government permission and an export quota are required in order to export rock salt, only a few companies including this one have acquired such export quotas. In cases where competition exists with Mongolian and other country’s products in export markets, the challenges concern how far differentiation with rivals can be realized and how far new product-plans can be effected in order to sustain exports.

3) Unique cases

Precom LLC is a subsidiary of a company engaged in meat processing and exporting of small intestines of sheep for sausage processing to Switzerland (the majority of its sales). The company started to process horse meat and expanded dog food businesses using horse meat six years ago. It sells dog food to Japan for the time being, but it aims to export horse meat to Japan ultimately. Its factory is located in the vicinity of its head office. It is aware of obtaining the HACCP (planning to obtain a certificate from SGS, Inc.), and has already introduced the HACCP management system and the SSOP (Sanitary Standard Operation Procedure). It also focuses on hygiene control in each process (hashing ⇒ crushing/stirring ⇒ vacuum packing ⇒ boiling), and machines made in Japan have been installed for some processes(TSL is utilized for capital investment financing). This company is supported by a consulting company

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(Konnekt, Inc.) which advices on marketing to companies that desire the exporting mainly to Japan for expanding marketing channels in Japan. Given the fact that the company gained the support from end users (pet fans) when participating in an exhibition in 2015 for the first time and that a distributor talked about the possibility of purchasing with the existence of stocks on the spot (for example, 10,000 pieces (80 g/piece), unit price for retail sales: 280 yen), it was decided that Konnekt, Inc. would establish another corporate body in Japan to explore marketing channels, already starting the trading with four companies. Once again the company made a presentation at an exhibition held in April 2016, finding that users’ reactions continued to be good.

Monchemo LLC is one of the exhibiting companies at the industrial exhibition held in Tokyo in

2015. Their main products include: (i) supplements made of horse bones; (ii) horse oil using horse

fat beneath the skin as raw materials for cosmetics; and (iii) fat supplement from pine nuts. This

company has gained various awards from the state government as its product development have

been highly appreciated until now, also obtaining overseas trademark rights. It was said that horse oil and pine nuts were highly appreciated, and particularly that a comestic company made a

consultation for purchaing horse oil as raw materials. Japanese companies are characterized by

their high-level demands for product qualities, posing high barriers to entry as compared with

Korean companies that it trade with in other cases. Neverheless, this company started to work on

obtaining the GMP (Good Manufaturing Practice) and ISO, thinking that its acuisition of such

qualifications would ensure the future expansion of markets for comestic and pharmaeutial companies.

Sun Sound LLC purchases rock salt from a collecting company at Davst Soum (in Uvs Aimag near

Russia) that is its collection site in Mongolia, and export it to Taiwan and South Korea. After

removing soil from the collected rock salt, the company sells it as: 1) masses in conveniently sized

packets; 2) as plates in thin sheets (for penetrating tastes into cooking materials on the rock salt by igniting from the bottom); and 3) as table salt. It has already shipped its samples to Japan, and sold

souvenirs to Japanese tourists in Mongolia.

Nooson Zangilaa Cooperative Union is organized with 12 cooperatives manually making wool products and a NGO as a body for supporting handicraft skills. Each of the cooperatives performs its own business activiteies individually, and also join this organization to aim at: 1) integrating the procurement of raw materials; 2) introducing purchaser (sales destinations and supporting the product planning; and 3) unifying brands. Its main products are felt products (sheet products manufactured by compressing sheep wool in the form of thin sheets), including: 1) slipperies (retail price: 25 – 45 thousand MNT); 2) souvenirs (coasters, stuffed animals, and gels; retail price: 10 – 18 thousand MNT); and 3) kitchenwares (dishmats and chair cushons): they are “eco-friendly” and “hand-made,” appreaited by children and elders as warm materials. As for its marketing channels, the organization sells its products at its member stores domestially, and has overseas sale routes in Japan, Australia and some European

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coounries. Its trading in Japan was started given the opportunity of its participation in the JETRO exhibition four years ago, and it was said to give instrucions to cooperatives for each product, receiving demands for colors, designs, and qualities.


Based on features/issues of other miscellaneous goods/services in Mongolia and cases of companies’ efforts, the following business areas that Japanese companies are expected to enter can be presented as examples:

No Entry area Points to note 1 Import and selling of various

miscellaneous goods ・The hygiene standard similar to that for importing edible horse meat is

provided for importing pet foods made from Mongolian horse meat in Japan12, and it is required to meet this standard.

・In importing them as raw materials for supplements and cosmetics, it is necessary to keep in mind that there is a need for undergoing various hygiene inspections and taking procedures for importation.

2.5.7 Raw materials for chemicals, drugs and cosmetics

1) Products

Product Feature

1 Organic fertilizer Use of wasted livestock resources (bones) 2 Cosmetic Soaps, skin care products and essential oil by utilization

domestic livestock resources 3 Traditional herbal medicine Use of domestic herbs

Out of them, production records of pharmaceutical products are shown below. Product Unit Amount of production

2012 2013 2014 2015

Liquid formulation ton 2,579.2 3,699.8 3,151.9 2,935.8

Tablet thousand packs 13,314.9 14,318.2 12,568.2 6,811.6

Traditional herbal medicine thousand MNT 57,971.9 73,554.0 127,253.7 155,553.6


Figure 57 Trends of production of pharmaceutical products

The amount of production of traditional herbal medicine is growing rapidly among pharmaceutical products, though its selling amount is small. It is supposed to be backed by the increase of drug stores, including the case company (Monos Pharma LLC).

12 Quarantine Station, Ministry of Agriculture, Forestry and Fisheries: “Animal Health Standard for Importing Horse

Meat from Mongolia”

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2) Current situation and issues

Companies are utilizing domestic resources (livestock resources and medicinal plants) as thouse for miscellaneous goods and developing products with a focus on dealing with environmental problems. However, the issues described below are pointed out for their production and selling.

A large amount of investment may be required for raw material processing facilities such as boilers causing difficulties in fund raising. In this respect, there are found to be cases where TSL is utilized or investment funds are desired from abroad.

There are high interests in utilizing medicinal plants as raw materials in Mongolia at the domestic and international levels, but harvesting of some medicinal plants in Mongolia comes to be controlled for resource protection.

3) Unique cases

Monos Pharma LLC is a large phermaceitical company which manufactures: 1) drugs under the lisences agreed with companies in Germany, Russia, China, etc.; and 2) drugs by using medicinal plants in Mongolian as raw materials. For 1), it sells 65 kinds of drugs, importing chemical feedstock as raw materials from China. For 2), it sells 20 kinds of drugs, and harvest medicinal plants at its herb farms or purchase wild plants within the country. It utilizes 16 kinds of medicinal plants including licorice.

It also produces pharmaceuticals by using medicinal plants as raw materials and drugs that are effective for protecting women’s skins and nails or that increase immunities by using sea buckthorn (chatsargan) as raw materials. It is said to receive a Japanese company’s offer for importing medicinal plants and pharmaceutical products using them from Mongolia.

Apart from them, there are companies that plan to produce organic fertilizeers using bones discarded at meat processing plants, meat markets, restaurants, etc. as raw materials and that produce soaps, skincare products and essential oil from raw materials such as sheep oil, yak oil, rock salt made in Mongolia, medicinal plants, and sea buckthorn oil.


No Field of Entry Important Points to Consider 1 Organic fertilizer manufacturing

technology – Guidance and installation

Massive plant investment is required in some cases, and funding investment is needed in cases of joint development.

2 Import of medicinal herbs, manufacture of pharmaceuticals

As is described in 5) below, care is required concerning the fact that export of native licorice is prohibited from the viewpoint of environmental protection.

3 Import of cosmetics and cosmetic materials

If importing as cosmetics and cosmetic materials, care is required concerning the fact that sanitary inspection and import procedures are needed and Japanese enterprises (users) require a high level of quality.

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5) Reference information (About licorice)

Medicinal plants in Mongolia, licorice among others have attracted companies in Mongolia and other countries including Japan as raw materials for traditional herbal medicine, and plant researchers in Mongolia13 has provided us with the following information14:

There are a total of 3,000 species of plants in Mongolia, out of which 800 species have ever been studied as useful plants (including medicinal plants). The factor that severe weather conditions result in giving plants a lot of nutrition is a background behind the fact that many medicinal plants are found in Mongolia. An important medicinal plant is licorice among them. There are five kinds of licorice in Mongolia, but only Uralensis is actually used there. Uralensis contains a large amount of glycyrrhizin. Glycyrrhin (medicinal effects for digestive ulcer, etc.) in licorice of Mongolia is above the standard of Japanese Pharmacopoeia (2.5 %) (licorice collected in the southern part : 6 % or more; in the northeastern part: ranging between 2 % and 12 %). It is also said that the liquorice root contains a lot of protein, which is effective for treating horses and restoring health.

Since licorice has high utility value as a pharmaceutical, it has been overharvested for exporting since 1986. In addition, climate change and an increase in the number of livestock (especially goats eat the root of licorice completely) have also caused a sharp decrease in the annual growth volume (for example, the growth amount in Bogd Soum (District) in Bayankhongor Aimag (Province) decreased from 6,800 tons in 1985 to 1,260 tons in 2009). For this reason, it is said that the government has prohibited the collection of licorice for export (around 2010). Nevertheless, the growth amount as of 2015 has decreased to 1,050 tons. In this context, a research and cultivation project aimed at restoring nature and raising farm households’ incomes through artificial cultivation of licorice were implemented during the period of 2010 - 2015, but it was terminated in 2015 for the moment. Thus a new project “Research and field guidance to increase licorice cultivation” is being considered by Mongolian and Japanese researchers.

2.5.8 Tourism (Travel agents and hotels)

1) Products and services

International tourism provides significant economic benefits to developing countries with valuable foreign currencies and through creating employment in the tourism industry. In this sense, sightseeing tours to Mongolia from abroad can be positioned similarly to the exportation of Mongolian products. Tourism statistics are shown below.

13 Dr. I. Tuvshintogtokh: Mongol Academy of Science, belonging to the General and Experimental BiologyInstitute 14 The following contents are based on the paper of Dr. Yukihiro Shoyama, Nagasaki International University:

“Investigation of Resources in Mongolia” (“Nagasaki International University Review 12”) and the interview with Dr. I. Tuvshintogtokh.

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(Unit: person)

2013 2014 (Composition ratio) 2015 (Composition

ratio) Visitor 512,205 505,686 467,231 Tourist 417,815 392,844 100% 386,204 100% (China) N.A. 157,561 40.1 145,029 37.6 (Russia) N.A. 73,055 18.6 70,668 18.3 (South Korea) N.A. 45,476 11.6 47,213 12.2 (Japan) N.A. 18,282 4.7 19,277 5.0 (Kazakstan) N.A. 13,562 3.5 14,434 3.7 (USA) N.A. 13,987 3.6 14,420 3.7 (Germany) N.A. 9,551 2.4 8,992 2.3 (France) N.A. 7,733 2.0 7,989 2.1

Source: Ministry of Environment, Green Development and Tourism

Figure 58 The numbers of tourists coming to Mongolia by country

The above statistis illuminates the following characteristics:

The number of tourists is somewhat decreasing from 417,000 persons in 2013.

Tourists from China makes up 38%, followed by those from Russia (18%) and South Korea (12%).

Tourists from Japan amounted to 19,000 persons (5 %), and increased in 2015 when the total number of tourists decreased , though they were still at a low level in number.

Seeing the monthly districution of the number of toursits, the country received them largely in July and August, accounting for about 30 % of the yearly tourists. Conversely extremely few tourists come to Mongolia in January and February. It leads to low-level operation of accmmodations in winter and seasonal hire of employees (declines in royalty and finally hospitality), becoming a factor of instability in business operation.

In Mongolia, there are the following sites as the areas designnated under the Law on Protected Areas: 12 strictly protected areas; 16 national parks; 16 nature reserves; and 6 national and histroic monuments.15. Among these representative tourism sites, Terelj and Hustai are located in the suberb of Ulaanbaatar. These sites are included in many tour programs as located within a distance of one day trip, where gel camps, tourist camps and hotel facilites are developed.

Terelj is within the Gorkhi-Terelj National Park at a distance of 50 - 60 km from Ulaanbaatar. This national paark is also adjacent to the Strictly Protected area of Khan Khentii. Hustai is within the Khustain Nuruu National Park at a distance of 90 km from Ulaanbaatar, known as the site where wild horses (Takhi) can be found. Figure 59 sows the number of toursits at major national parks and strictly protecte areas.

15 Shagdar. SH “A Hundred Routes Through Mongolia” (2013)

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(Unit:perdon)

No Tourism site Aimag

(Province) 2013 2014

1 Gorkhi-Terelj national park Tuv 64,384 112,500 2 Special protected area of Bogd Khan

mountain Tuv 33,400 37,866

3 Khuvsgul natural park Khuvsgul 28,761 24,700 4 Orkhon natural park Uvurkhangai 13,092 13,999 5 Khangai Nuruu natural park Arkhangai 10,642 14,584 6 State protected area of Khan Khentii Tuv、Khentii、

Selenge 859 10,158

7 State protected area of Uvs Lake Uvs 5,466 7,940 8 Khustain Nuruu National Park Tuv 6,727 7,375

Source: Mongolian Tourism Association

Figure 59 The number of tourists at major national parks and strictly protected areas


The government (the Ministry of Environment - Green Development and Tourism) formulated a national tourism development plan in June, 2015, which contains: (i) the improvement of tourism infrastructures; (ii) tourism development by taking advantage of local characteristics; (iii) surveys of tourism and development of information systems (dissemination of tourism information); (iv) building of human resource capacities; (v) marketing for foreign countries; and (vi) enrichment of domestic tourism for Mongolians

Meanwhile, an industry organization (Mongolian Tourism Association which 110 travel agents and 20 hotels join) points out the following issues to be addressed: (i) insufficient development of statistics related to the number of tourists; (ii) a need for human resource development (e.g. improvement of hospitality at hotels and employee education at tourist camps); and (iii) public relations for increased inbound tourists.

As for human resource development, the association has training programs for tourist guides, interpreters, middle-level managers. In addition, the CBI (Centre for the Promotion of Imports from Developing Countries) based in the Netherlands has provided support for tour operators since 2011, by which over 200 persons have been educated.

3) Unique cases

Tsolmon Travelis LLC is a travel agent that has a long business history, intended mainly for inbound guests from Western Europe (especially Germany). It targeted Japanese whose characters are similar to those of German people (punctual and well-ordered), participating in an exhibition in Japan (sponsored by the JATA) as the Mongolian Tourism Association last year for making business negotiations. This company has tourist camps in Terelj and elsewhere,

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run a farm to provide overnight guests with organic vegetables, and resolve their complaints about toilets by installing sewage circulation facilities on its own account. In addition, its strength is also that it conducts its own training of accommodation staff and tour guides (in terms of languages and knowledge). The industry segment and companies mentioned the need to improve the hospitality, and there is a case of education at a hotel school as an effort by the industry.

Juulchin World Tours established a school for hotel management and employee training (School of Hospitality and Tourism Mastery) in 2013 (its operation started in 2014). It was authorized by the Ministry of Labor as a professional school in 2015, and it newly started in September 2016 in collaboration with a school based in Switzerland to enhance course programs. Its main course aims to train staff in various sections such as the reception at hotels and tourist camps, cleaning, cooking, and services, and its sub-course will train tourism guides, drivers, and tour managers. This school is fully aware of poor hospitality in Mongolia, but it will need time to take effect in this aspect, and thus has a request for 1) support for capacity building through guidance to staff of hotels and the like on the hospitality culture and contents of its practice in Japan; and 2) interactions with hotel schools in Japan.

4) Business areas where Japanese companies can enter Based on features/issues of tourism industry in Mongolia and cases of companies’ efforts, the

following business areas that Japanese companies are expected to enter can be presented as examples:

No Entry area Points to note 1 Selling of tourism programs

to Mongolia Securing of accommodations in summer is a challenge as

tourists come altogether in this season. Provision of satisfactory services for Japanese tourists is another issue.

2 Collaboration with tourism agents in Mongolia

Joint development of tourism sites and provision of/assistance in Japanese-style service know-hows

2.5.9 Software development business

1) Products and services

The industry association (Mongolia Software Association) has 53 member companies. The member companies can develop various kinds of software, active especially in developing business software for mining, health and education industries. Large companies are good at ERP packages and small and mid-sized companies are at mobile software. There are 800 graduates from departments related to computer science at universities in Mongolia every year. The number of employed engineers is 17,000 persons, and many engineers work abroad, including in Japan and western countries.


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The association takes up the following points as advantages to Mongolian companies: (i) capability of quick response to requests by borderers (including high language abilities); (ii) having high levels of development technologies; and (iii) lower wage levels (as compared with product levels). The companies have experiences in trading with foreign companies such as receiving an order from a Japanese company for developing software to be used between airports in Japan and receiving an order from U.S. companies.

Many Mongolian computer engineers are working at Japanese companies, and if they can take advantage of their experiences in Mongolia, their relationship with Japanese companies could be strengthened. However, the recognized challenge would be whether or not they can share design philosophy and make smooth communications, as described below.

3) Unique cases

There are several companies involved in large software development and production of original ERP packages and venture companies for mobile software.


Based on features/issues of software development business in Mongolia and cases of companies’ efforts, the following business areas that Japanese companies are expected to enter can be presented as examples:

No Entry area Points to note 1 Outsourcing of

computer programs It will not be successful unless design philosophies and element

incorporation methods of both parties are consistent and communications are smooth.

Because there are engineers coming back from Japan, joint business can be implemented with them.

2.5.10 E-Commerce

Currently, concerning “E-Commerce” such as online shopping, which is rapidly expanding in China and other Asian countries, the EPA between Japan and Mongolia also includes related provisions for the E-Commerce. The situation concerning E-Commerce in Mongolia is as follows.

1) Current status of E-Commerce in Mongolia According to the statistics of the Telecommunications Regulatory Agency, the number of mobile

phone owners in Mongolia was 1.74 million in 2009, but as of the end of June 2016 it has already exceeded the population of Mongolia. Among them, the number of smart phone owners exceeds 2 million. According to the same statistics, the number of Internet users reached 2.51 million as of the end of June 2016, of which 91% of users are connected to the Internet via mobile phones.

However, the number of accesses to the online shopping site is still small, one digit less compared with the access of the main news site, and at the main site barely reaching 200,000 / month.

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Regarding electronic transactions, there were no concrete statistical data, and as a result of hearing with communications and online shopping participants, the following conditions were clarified

On-line transactions are mainly mediated by face-to-face transactions without funds settlement. And such face-to-face transactions are used mainly for individual-to-individual transactions, and the main target items are second-hand goods with used real estate (apartment purchase), used car, old clothes.

The face-to-face transactions are mainly conducted via the Internet mainly because of the following three main reasons. Payment settlement is inconvenient (credit card spread is still low in Mongolia ) In Mongolia the delivery / home delivery system is underdeveloped (the address system is not

sufficiently maintained) Customers are not used to the On-line Shopping

2) Issues of the Online Shopping in Mongol

Issues related to the settlement of purchasing The bank accounts denominated in foreign currencies account for less than 10% of the total

number of accounts. Bank accounts in foreign currencies are opened according to international rules, so they can be used on overseas online shopping web pages, but in the case of bank accounts denominated in Mongolian currency, the Mongolian address system is not in place, so the card's billing address it is almost the case that the written address is not stated. For that reason, in order to recognize the card user, it will be recognized in additional items other than the address. Mongolian commercial banks frequently use numbers other than card PINs such as e-PIN, e-Token, etc.

It is necessary to separately set new accounts at the bank's window after opening an account. Many consumers dislike this labor and said that payment is not being done on Mongolian online shopping

Issues related to delivery/ home delivery system In Mongolia, delivery/ home delivery system is underdeveloped because the address system is

generally not functioning. The address system is indispensable for delivery/ home delivery of e-commerce (online shopping), but since the address system is not maintained in Mongolia, the delivery service is not popular due to problems such as the inability to efficiently specify the addressee Is the current situation.

Issues related to business practice Consumers in Mongolia are not accustomed to conducting trades electronically on settlement. In addition to the above problem hindering the activation of electronic trading, the frequent

occurrence of malicious contractors is not only consumers but also concerns of the Government side.

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3) Prospects of E-Commerce business and possibility of entering Japanese companies The potential market size of Mongolian e-commerce business is considered to be significant.

Mongolia relies on imports for many daily necessaries, but consumer preferences diversify, and i t is becoming a situation that cannot be satisfied with the product selection of shops dealing with spot. Also, due to factors such as the improvement of purchasing power of rural consumers, the future of e-commerce project in Mongolia is positively considered.

Even with the self-help efforts of private enterprises in Mongolia, both of these issues will be solved and it will be a full-fledged opening of electronic trading, but it is presumed that it will take a sometime to overcome the problem.

Also, in Mongolia, "Japanese brands" boasts a very high profile, it might be “Business Chance” for Japanese online-shopping companies to start their E-Commerce business by collaborating with local Mongolian companies to secure first place in the market. 2.5.11 Improving supply-chains of Mongolian products

1) Representative value chains of products

Features and issues in each step The figure below summarizes features and issues of each step of value chains (procurement of

raw materials, processing, domestic and selling and exporting) that are shown in each item of products for processed agricultural products, livestock food products, leather products and textile products as representative products in Mongolia.

Value Chain

Product Raw material Processing Sales, export

Agricultural products

Most of the raw materials are abundant and cheap. There are challenges to cultivation and preservation.

To expand its productions of fruit juice and oil Needs for powder-drying, freeze-dry processing, and preserving/processing facilities Preservation/processing facilities have not yet been

developed

High potential with needs from abroad

Livestock food products

Raw materials are abundant and cheap. Depend on the import for subsidiary materials. Distribution and preserving systems have not yet been undeveloped.

Processing equipment is introduced from Europe, South Korea and China. Japanese equipment has not yet been commonly used, but there are interests in it. Fuel and heating costs are high.

Export of yogurt, butter and cheese is expected. Honey is at the stage of initiating export.

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Value Chain

Leather products

Raw materials are abundant, but the challenge is the improvement of their quality (blemishes at the stages of raw skin and slaughter due to parasites)

Export of semi-products (up to wet blue) is dominant (with low added values). Crust processing is increasing little by little. Tanning with organic materials is at the implementation stage.

There is a potential for crust processing of sheep skin and goat skin which have relatively fewer blemishes. Designing abilities have not yet been developed for bags and shoes.

Textile products mainly cashmere products

Raw wool is abundant, Susceptible to the competition with Chinese trading companies in purchasing them. Major colors are grey and brown, while white is very rare.

Export of raw and dehaired wools are dominant. The quality of yarn is an issue. Insufficient investment in spinning/weaving machines. Training of engineers is delayed.

Design development for Japan is left behind. The EPA with Japan came into effect with an expectation for increased export.

Source:JICA Survey Team

Figure 60 Features and issues at each step of value chains for representative products

2) Cases contributing to the increase of export (from Mongolia to Japan, etc.)

As illustrated in the columns of selling and export in the value chain shown in Figure 61, Mongolian companies’ efforts to deal with export to foreign counteies including Japan can contribute to the increase of added values. The following efforts can be presented as an example of efforts for increasing the export to Japan:

Company Business type Product line, idea, and challenge

Takarajima Japan Co.,Ltd.

Store sale Event sale Mail order

【Line of products】 Goods made from sea buckthorn (juice, cosmetics and health food), they can be

divided into mufflers, stolls, felt slippers, wool socks, caps using yak/camel wool and so on.

【Marketing channel】 In addition to selling at its own stores and event sales at department stores in the

Kanto region (about 30 stores), utilized for mail orders (cooperative associations (Co-op)) and presents for hometown tax payers to loal governments.

【Feature and issue】 This company make efforts to explore commodities by visiting Mongolian

companies regularly. Because Mongolian companies’ production costs are high and they are less

advantagenous to distribution costs, selling prices of commodities need to be set higher forcibly in Japan. For this reason, the company achieve their selling by asking consumers to accept addes values such as: (1) quality and health; and (2) providing information on Mongolian culture.

Landex LLC (in Mongolia)

Online shop 【Line of products】:Clothes (for ladies, men and kids), mainly mufflers, stolls. Leather purses (made of cow skin or sheep leather) are being developed. 【Marketing channel】:Opens an online shop at a site of a major online shopping site apart from cargo business as its main business. 【Featureand issue】: Development of high-quality commodities with hogh user needs; (ii) fund

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Company Business type Product line, idea, and challenge

raising (support by the fund-raising company is necesssary for finaning) is a challenge. In terms of profitability, moreover, the company is struggling with price setting while taking transportation costs and commissions into account.

As part of solving the problem, the company conducts market research for narrowing down commodities as a result and planning products of mufflers and stools utilizing Scottish designers.

Kato Transport, Co., Ltd.

Transport The company takes the following measures to increase commodity distribution : Matching of Japanese companies eager to handle Mongolian products and

Mongolian companies (e.g. sea buckthorn wine and sea buckthorn oil) Proposal for installing simple storage materials at the UB airport in order to

solve the problem that the frozen storage facility has not yet been installed there, which is an obstacle to freight transportation to Japan for perishable goods, etc.


Figure 61 Case of efforts to sell Mongolian products to Japan

2.6 Business trend of Japanese private companies in Mongolia and EPA

In October 2016, the Prime Minister Mr. Erdenebat visited Japan and held a summit with the Prime Minister Mr. Abe. At the summit, the two leaders reconfirmed that the two countries’ economic and trade relationship will deepen as a result of steadily implementing the Mongolia-Japan EPA, which took effect in June this year and it is expected that further ties will be strengthened in future economic relations between Japan and Mongolia.

2.6.1 Trade situation between Japan and Mongolia Looking at the trade situation between Japan and Mongolia, The export from Japan to Mongolia is

overwhelmingly surplus. In terms of items, machineries and transportation equipment account for the majority and many of which are automobiles. The export of automobiles from Japan to Mongolia has been stagnant due to recent tough economic situation in Mongolia.

Regarding the import from Mongolia in 2015, the import value of copper ores which is 4.36 billion Yen and this import pushed up the total import value, but the trend of import from Mongolia has not changed except this special factor. On the other hand, although the import value of textile products, metal products and semiconductors is small, the value of these products tends to increase.

http://www.mofa.go.jp/press/release/press3e_000062.html

http://www.mofa.go.jp/press/release/press3e_000062.html

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Source: Compiled by the survey team based on the trade statistic by MOF Japan

Figure 62 The trade situation between Japan and Mongolia

Source: Compiled by Research team based on the trade statistic by MOF Japan

Figure 63 The import from Mongolia（breakdown for miscellaneous products etc.）

2.6.2 Trend of Japanese companies

The Figure 64 shows the trend of the value on the direct investment by Japanese companies and the number of the registration in Mongolia. The accumulated value of Direct Investment by Japanese companies is 66.2 million US$ from 1990 to 2013. There was a large investment of 46.6 million USD in 2008. The value of direct investment from Japanese companies drastically decreased in 2009. However, the value of direct investment from Japanese companies has gradually increased from 2009 to 2012 thanks to the growth of Mongolian economy, the hike of the resource price and so on. The value of direct investment from Japanese companies decreased in 2013 again. Although the data of 2014 and 2015 are not disclosed, it can be considered that the direct

Export to Mongolia Unit: 100 million yen

Item 2006 2011 2012 2013 2014 20152015

(Jan -Mar)

2016

(Jan-Mar)

Machinery & Transport equipment 111.0 218.3 233.2 247.8 291.7 262.7 60.6 53.6

　（ Automobile） 59.4 143.6 125.3 190.1 211.0 204.6 45.4 39.6

Manufactured Goods 6.7 21.0 14.1 22.7 32.8 19.9 3.8 4.0

Chemicals 0.4 1.7 5.2 5.3 3.5 5.8 0.7 0.5

Food & Live animals 0.1 0.7 8.0 6.3 7.9 4.6 1.3 1.0

Crude materals, Inedible 0.8 0.9 1.0 1.1 1.0 1.7 0.4 0.1

Mineral fuels 0.5 0.6 0.4 0.7 0.3 1.0 0.1 0.0

Others 4.0 13.7 13.4 9.2 8.7 9.0 2.0 1.5

Total 123.5 256.9 275.3 293.0 345.7 304.8 69.0 60.8

（ Total except Machinery & Transport equipment) 12.5 38.6 42.1 45.2 54.0 42.1 8.4 7.1

Import from Mongolia Unit: 100 million yen

Item 2006 2011 2012 2013 2014 20152015

(Jan -Mar)

2016

(Jan-Mar)

Crude materals, Inedible 6.4 5.1 5.3 4.5 6.3 50.0 35.8 1.2

（ Copper ore） 0.0 0.0 0.0 0.0 0.0 43.6 33.5 0.0


Miscellaneous articles 1.8 1.5 2.4 2.1 2.9 4.1 0.1 0.1


Food & Live animals 0.4 0.1 0.1 0.1 0.1 0.3 0.0 0.3

Others 0.7 6.5 11.5 6.9 2.1 2.3 1.4 0.0

Total 9.8 14.0 20.6 18.6 18.1 65.1 38.1 3.8

（ Total except cppper ore ） 9.8 14.0 20.6 18.6 18.1 21.5 4.6 3.8

Unit: 100 million yen

Item 2006 2011 2012 2013 2014 20152015

(Jan -Mar)

2016

(Jan-Mar)

Miscellaneous articles 1.8 1.5 2.4 2.1 2.9 4.1 0.1 0.1

Clothing and accessories 1.6 1.4 2.4 2.0 2.8 3.9 0.0 0.0


　Textile yarn, fabric 0.3 0.1 0.2 0.7 0.7 1.9 0.1 0.2

　No ferrous metals 0.0 0.0 0.0 0.0 0.0 0.7 0.0 0.0

　Manufactures of metals 0.0 0.1 0.2 0.1 1.1 1.5 0.2 0.7


　Power generating Machine 0.1 0.7 0.9 0.8 1.2 1.5 0.4 0.4

　Semiconductors etc 0.0 0.0 0.0 3.3 3.6 2.4 0.0 0.7

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investment by Japanese companies is stagnating due to the slump of Mongolian economy, sluggish of resource prices and so on.

The total registration number of Japanese companies in Mongolia is 561 from 1990 to August, 2015 (Retreat is not taken into account). At least more than 20 Japanese companies register in Mongolia every year until 2012, but less than 15 companies since 2013.

Source: Compiled by the survey team based on the data of the former IMA

Figure 64 The trend of FDI Amount and company registration number by Japanese Companies in Mongolia

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Examples of Japanese companies who do business in Mongolia are as follows. Sector Japanese Company Summary

Communication Sumitomo Corporation, KDDI

Established in 1995 with a capital of 9 million US $ by Newcom Group 36% (Mongolian company), Sumitomo Corporation 34%, KDDI 30%. The first mobile phone communication service was started in Mongolia. This company is the largest mobile phone operator in Mongolia In March 2016; KDDI raised the shareholding ratio from 30% to more than 50% and made it a consolidated subsidiary.

Bank Sawada Holding Khan Bank is currently the largest commercial bank in Mongolia. Sawada Holding acquired shares of it in 2003.

Manufacturing Sankou-Seiki Sankou Seiki is an aluminum processing company and head quarter locates in Saitama Prefecture. Sankou Seiki established 3 subsidiary companies in Mongolia. “Sankou Tech Mongolia” is in charge of cutting work by machining centers. “Sankou Marketing Mongolia” is in charge of sales and service of office equipment. “Sankou Solar Mongolia” is in charge of manufacturing and sales of solar panels.

Manufacturing Shibasaki Seisakusyo

Shibasaki Seisakusyo is the auto-parts processing company. It established a subsidiary company in Mongolia in 2005. It transferred production of injection pump parts for diesel engines whose domestic production is no longer profitable from Japan to Mongolia.

Construction Aizawa Concrete Corporation

Aizawa Concrete Corporation established AIZAWA Mongol LLC in Mongolia in 2009. It constructed a first tower type plant in Mongolia.

Construction Izumi Garden Izumi Garden established a consulting company for supporting Japanese company who want to expand business in Mongolia and started a garden maintenance work at Ulaanbaatar since 2010.

Construction Takagumi Takagumi who is a construction company at Asahikawa started business on house built for sale in Mongolia.

Construction Keiseimasaki construction company

Keiseimasaki Construction company affiliated with Local mansion developers and established 100% subsidiary company whose name is Hoshi Mongol in Mongolia in 2010.

Retail Can Do “Can Do” who operates 100 Yen shop in Japan affiliates with Nomin Department store who is one of the major department stores and develops retail stores in Mongolia. Price of all products is 3,499 MNT and it sales products made in Japan.

Agriculture Farmdo “Farmdo” who produces and sells agricultural products in Japan established a Joint venture company, “Everyday Farm”, with Bridge corporation who is one of the major companies in Mongolia in October 2012. It operates super markets and produces and sells a lot of vegetable and fruits such as strawberry, cucumber, potato, blueberry, cabbage, Japanese radishes, and carrot and so on. Additionally, it plans to set up solar energy equipment on its farm and launch the solar power business in Mongolia domestic market.


Figure 65 Examples of Japanese companies who do business in Mongolia

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Investments by construction and related industries whose headquarters locate in Hokkaido are outstanding except investment to mines by major companies. The reason is that it is easy to utilize technologies cultivated in Hokkaido which has the similar climate with Mongolia. On the other hand, there is no outstanding case in the manufacturing and retail sector. The reason is that there are some logistical issues in Mongolia although the distance from Japan to Mongolia is close and also the market size in Mongolia is quite small. Many cases of doing business in Mongolia in the manufacturing sector largely resulted from human connections that were built through receiving Mongolian trainees. On the other hand, there are few companies who executed feasibility studies, compared the investment climate of Mongolia with it of other countries and finally decided to do business in Mongolia.

However, in the retail sector, the market size is small compared to other countries but Mongolians have a certain purchasing power judging from GDP per capita of Mongolia which is 4,115 US$ (2014) and competitors are relatively few. Some companies such as “Can Do” find a business opportunity in these situations and it can be said that companies who are interest in Mongolian market will increase from now on. 2.6.3 Points of attention and issues on doing business

1) Notes and issues for business in Mongolia Although it can be said that Japanese companies’ advance to Mongolia is sluggish compared to

ASEAN countries where Japanese companies have aggressively expanded in recent years, bottle-necks that Japanese companies do business in Mongolia and with Mongolian companies are as follows (these opinions were answered by Japanese companies by interviews or/and questionnaires.

Bottle-necks on doing business in Mongolia Political situation Human Resources, logistics Tax and Finance Investment system/Investment preference Lack of information on Mongolia Manufacturing Cost

The most common answer is “Political system and Situation”. In Mongolia, every time the political system is changed, the law and the top of the government and public offices have changed and then consistent operations have not been done, so there are opinions that foreign companies such as Japanese companies cannot invest in peace of mind from not only Japanese companies but also Mongolian companies.

There are some companies who answered “Human Resources, Logistics”. Mongolia is a landlocked country and the main transportation mode from Mongolia to Japan is truck and railway

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until Tianjin port. Logistics lead time takes around 1 month from Japan to Mongolia and also customs and transshipment in the border area between China and Mongolia, especially, transportation from Mongolia to China need much time. Also, the situation of road pavement is not good and there are plenty of issues on domestic logistics.

Some companies answered that “Tax and Finance”, “Investment system/Investment preference” are issues.

Bottle-necks on Mongolian Companies Lack of company information (credit information) Business customs Difficulties in finding good companies Non-sufficient skill and quality Cost of products and manufacturing cost Small market size/possible sales volume The lack of understanding on Japanese market Others (Delivery time, clear and fair accounting system and audit system, moral, planning,

competitive awareness, consciousness of lending and borrowing and consciousness of contract and promise, etc.)

The most common answer on the bottle-neck to Mongolian company is “lack of company information (credit information)”. Although this result relates “difficulty in finding good companies”, it is difficult for Japanese companies who consider doing business in/with Mongolia to get information on Mongolian companies because PR activities on Mongolian companies in Japan are not enough.

Additionally, it is difficult to get correct information on a Mongolian company due to difficulty of utilizing credit information agency in Mongolia (generally only financial institutions are able to access this information), lack of information and incredibility on financial information of a Mongolian company. However, these situations is common in not only Mongolia but also other emerging countries, therefore, it can be said that it is necessary how to improve these situations.

Expected supports from Japanese government and related organizations Japanese companies who have already done business in Mongolia express their opinions for

business promotion between Japan and Mongolia as follows based on the bottle-necks on Mongolia and Mongolian companies

【Proposal on improvement of information providing service on investment】 Providing correct and useful Mongolian information to Japanese companies Dispatching Japanese advisor/consultant to Mongolia Setting up a business platform to push Japanese company to do business in Mongolia such

as JETRO office 【Proposal on improvement of Investment climates】

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Improvement on logistics routes from Japan via China/Russia to Mongolia. Support for not only transportation by trains and airs but also transportation by trucks for the purpose of frequent transportation.

Support for Japanese expatriates in Mongolia (work on Mongolian government and industries, tax, VISA, etc.)

Early conclusion of the bilateral tax treaty

【Proposal on Trade promotion】 Mitigation of criteria of insurance underwriting by NEXI

【Political system and situation】 Exclusion of corruption, impartial management of law including judicial authorities,

prohibition of intervention and mediation to government approved businesses by politicians (legal system improvement, legal spirit)

Transparency of the bidding system of public works and process from bidding to successful bidding

Stabilization of policy and governmental authorities (The personnel affairs of the government office has changed drastically every election and then works related to public works delay and so on.)

Transparency of policy implementation Enhancement of the“rule of law” (present Mongolia is the rule of men)

【Improvement of Investment environment】 Establishment of the new representative office of the investment promote agency by

Mongolian government in Japan. Development of laws and design of investment incentive schemes for introduction of

foreign investment Improvement of trade and investment environment such as infrastructures and mitigation

of systems and so on In order to promote the business of both countries and increase investment from Japan, it

is important to listen to the opinions of existing investors from Japan and to improve relations with investors from Japan.

Human resource development and thorough education for customs officers and other public officers

In particular, it can be seen that Japanese investors have a lot of complaints about the political situation and system in Mongolia. Based on these voices, the new government set up the cabinet investment protection committee according to the prime minister order No.48 in August, 2016. This committee was set up to confirm what kind of pressures investors were received from the governmental agencies, ministries, police, tax office and so on to investors and what kind of problems occurred. The committee intensively surveyed issues as follows from August 30, 2016 to 30 September, 2016.

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The kind of laws, procedures and regulations regarding investment and operations in Mongolia.

Statistics and contents of commercial disputes involving investors, business persons and companies.

A case that an employee working in a foreign company was banned from departing from Mongolia.

Amount of loss of investors, business persons and companies suffered from illegal acts by civil servants.

Contents of pressures by governmental agencies, ministries and agencies, contents of unethical behavior s by the civil servants.

2.6.4 Mongolia-Japan EPA (Economic Partnership Agreement)

In February 2015, the Economic Partnership Agreement (EPA) between Japan and Mongolia was signed. It is particularly significant that Mongolia has concluded the first economic partnership agreement with Japan. As for Mongolian side's expectation, by expanding exports to Japan, activating economic partnership and further strengthening the construction of "strategic partnership with Japan". In June 2016, the EPA became effective.

1) Major content of EPA

Trade from Japan to Mongolia

Automobiles and automobile parts:

Tariffs are eliminated on the same day as the effectuation of EPA for automobiles (4,500 cc or less) within 3 years of manufacturing.

The most of the other cars and parts are eliminated tariff within 10 years.

Tariffs for vehicles 7 to 9 years after production are eliminated after 10 years, while tariffs of 5% are maintained for vehicles with 10 years or more after production

Automobiles with displacement of 4,500 cc or more (eg, Land Cruiser) are strongly popular among Mongolian wealthy people, and it seems that 5% tariff does not affect purchasing power so much.

Recently, it is considered that the issue of EPA does not affect sales, as the used cars (particularly the Prius) popular among the middle class and lower classes are considered environmentally at present and tariffs are exempted.

Truck and Construction Machinery:

Construction machinery immediately eliminates tariffs. The tariffs on other machinery will be eliminated within 10 years. It is said that constructions made of Korean or Chinese made with less initial

investment are almost used for construction, and it is speculated that the elimination of tariffs will only result in limited effect, while, most of Japan 's construction machines (Komatsu, Hitachi) are used for mining.

Agriculture, Forestry and Fishery Products

Items for which immediate tariffs are eliminated are cut flowers, apples, etc.

Items for which tariffs are eliminated within five years are seedlings, miso etc.

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Alcoholic Beverages:

Immediate tariffs are eliminated

Currently, except for medical equipment, integrated circuits and hybrid vehicles, tariffs are uniformly 5%, but approximately 50% of the export value is assumed to be tax free from effectuation of the EPA on the same day, and within 10 years about 96%.

Trade from Mongolia to Japan

Copper ore:

There is no tariff on copper ore at this time as it is zero and tariff is zero in China, the main market of copper ore in Mongolia, so it does not affect the trade of copper ore.

Agricultural, forestry and fishery products and derivatives

Agriculture, forestry and fishery products are gradually eliminated tariffs within 10 years.

Cashmere products

The past Japanese tariff on cashmere products was 10.9%, and the immediate elimination on the same day as the effectuation of EPA, it will work favorably for Mongolian cashmere products.

In cashmere production, Mongolia occupies one third of the world market, with the rest being China. However, despite this superiority, it is thought that the elimination of Japanese tariffs will not bring about short-term effects, as it has not been able to compete with Chinese products due to cost and quality.

Meanwhile, if Mongolian cashmere industry could improve in technology with introduction of Japanese updated machines, it is expected that the EPA could highly contribute for the increase of its export.

Except the exports of cashmere, the exports of other Mongolian products such as agricultural, forestry and fishery products are very limited at this time. For that reason, short-term effects can not be expected, but the effects in the medium to long term is highlly expected.

Investment-related regulations

In addition to the various provisions for the trade mentioned above, the EPA covers many fields of business, including the aspect of the investment. Regarding investment-related provisions (Chapter 10) in the EPA, grant of domestic treatment and most-favored-nation treatment at the stage of investment permission, prohibition of governmental/political intervention on technology licensing agreement (prohibition of royalty regulation: first in Japan EPA) and equitable treatment in all fields; including resolution of disputes between investors and the state (ISD clause).

Basically, the provision of the ISD clause is in compliance with the Mongolia-Japan Investment Treaty, which came into effect in March 2002, and there is no major change point. The comparison of the EPA with the 2002 Investment Treaty is summarized as follows.

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Agreement name (effective date) Mongolia-Japan

Investment Treaty （March 2002）

Mongolia-Japan EPA (June 2016)

National treatment (NT） Entry stage × ○ After entry ○ ○

Most Favored Nation Treatment（MFN）

Entry stage ○ ○ After entry ○ ○

Prohibition of technology transfer request × △ （Some are included in Chapter 12 "Intellectual

Property"） Fair and Equitable Treatment △ ○

Obligation to observe promises (Treaty of Umbrella)

× ○

Dispute settlement (country investors) (ISD clause)

○ ○

Dispute settlement (Gov. vs Gov.) ○ ○

○ → Regulation provided, △ → Partially prescribed, × → No regulation

Source: Embassy of Mongolia in Japan

Figure 66 Comparison of the EPA with the 2002 Investment Treaty

Other regulations

The EPA also has arrangements based on international standards for E-Commerce (Chapter 9) and intellectual property (Chapter 12), which are increasingly interested in recent years.

2.6.5 Issues in the EPA

The contributions of EPA is expected to further strengthen strategic partnership between the two countries. However, the current export items from Mongolia to Japan are very limited except pre-refining copper ore due to the less value and lower quality of Mongolian products, while Mongolia imports final products from Japan, including automobiles, construction machineries etc.

In order to realize increase of the export from Mongolia to Japan, it is necessary to make Mongolian products with higher-value-added and high-quality. It seems to be appropriate measure to utilize Japanese technologies and investments through the closer business collaboration between Japan and Mongolian private sector.

Initial effects after entering of EPA into force As a result of the EPA between Japan and Mongolia entering into force in June 2016, the

following initial effects are being made. It is some opinions of Mongolian textile exporters such as cashmere. New orders were added after entering of EPA into force. Business negotiations for Japan have been in progress.

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From a Japanese company with a deal there is a talk of an increase in orders given the introduction of Japanese spinning machines.

Sales for this year will increase by 25% from the previous year in August 2016 and there is also a possibility of receiving orders thereafter, expecting an annual increase of 30% from the previous year.

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Chapter 3 Analysis on JICA’s Operation for Private Sector Development in Mongolia

JICA understands that the private sector serves as the driving force for economic growth in

developing countries. Strong and comprehensive economic growth can be realized when private companies in various fields, including SMEs, achieve dynamic growth and development and create higher added value.

3.1 Overview of JICA’s operation for private sector development

3.1.1 Basics of analysis

While a wide range of factors, including macroeconomic stability, infrastructure development, and improved basic education, constitute important elements of private-sector development, JICA focuses on the following fields: 1) developing policies and institutions for improving the business environment; 2) promoting trade and investment; 3) improving the competitiveness of local companies; and 4) promoting local economies and industries.

1) Developing policies and institutions for improving the business environment

JICA assists with policy and institutional development so that developing countries will be able to achieve an environment conducive to the activities of private companies and realize the development of industries that serve as an engine for development.

Industrial promotion policy

Industrial promotion policy is a principal pillar for national development in developing countries. JICA's assistance in drawing up industrial policies focuses on various aspects, promoting trade and investment, improving the competitiveness of local companies, or promoting local economies and industries depending on the situation in the partner country.

Developing business laws and institutions

JICA assists with the development and operational improvement of legislative and institutional infrastructure for business activities, including economic laws such as the enterprise law and the competition law, intellectual property systems, standards and conformity assessment systems (standardization, certification, and measurement standards), tax administration, and financial systems.

2) Promoting trade and investment

The field of trade and investment focuses on benefitting from economic globalization.

Promoting investment

In direct investment in 2014, 55.5% of investment went to emerging and developing countries;

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thus, developing countries are becoming even more attractive as an investment destination for foreign companies. There are moves on the part of developing countries to take advantage of foreign direct investment (FDI) as an engine for economic growth and to promote domestic industries by developing supply chains in cooperation with foreign companies.

Promoting trade

Imports and exports of emerging and developing countries account for 40.3% in export value and 39.6% in import value of total global trade in 2013. It is obvious that trade plays an important role in economic development in developing countries.

For furthering trade, it is essential to simplify and facilitate trade-related procedures, including customs, as well as to improve access to foreign markets by companies in developing countries.

3) Improving the competitiveness of local companies

JICA is engaged in strengthening support services for companies and developing industrial human resources to improve the competitiveness of local companies, especially SMEs, which account for the predominant proportion, that support economic growth in developing countries.

Strengthening support services for companies

From the point of view of heightening the competitiveness of companies, assistance could be provided addressing management resources within companies: labor, technology, capital, and information. Because assistance in these areas, which is aimed mainly at SMEs, tends to be provided through intermediary public/private support organizations, much of JICA's assistance targets improving the functions of these support organizations.

Developing industrial human resources

Assistance for developing industrial human resources focuses on measures to boost the competitiveness of companies utilizing Japan's know-how in this area. JICA cooperates with government institutions, educational institutions, and other entities in various countries that provide such support for human resources development. The goal of the cooperation is to enable companies to acquire and improve the know-how necessary for business activities, such as business and production management and manufacturing technology.

4) Promoting local economies and industries

As the economies of developing countries grow, regional disparities have become a major issue in an increasing number of developing countries. In order to spread the benefits of economic growth widely to local residents, JICA supports industrial development benefitting local areas by effectively utilizing the special characteristics and resources of local areas.

Specifically, JICA assists in developing a mechanism for providing guidance and advice on various issues such as basic business knowledge (accounting, etc.), exploration and utilization of

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local resources, improvement of quality and productivity, food sanitation, packaging/design, and marketing/sales promotion. This effort contributes to creating attractive products.

JICA cooperates with advertising and promotions for targeted tourists and with developing tourism products that make use of the special characteristics of local resources and thus benefit the region.

3.1.2 Projects to be analyzed

For the development of the private sector, a wide range of factors such as macroeconomic stabilization, infrastructure development, and enhancement of basic education are important.

JICA provides supports in the following fields and conducted numerous projects in the above-mentioned fields in Mongolia; the following major projects are reviewed in this survey.

Fields Projects 1) Developing Policies and

Institutions for Improving the Business Environment

Two-Step Loan Project for SMEs Development and Environmental Protection (TSL Loan)

Project for Strengthening Mediation System

2) Promoting Trade and Investment

Project for Capacity Development for Promoting Foreign Direct Investment

Project for Capacity Building of PPP(Public-Private Partnership) in Mongolia

3) Improving the Competitiveness of Local Companies

Mongolia-Japan Center for Human Resources Development

Higher Engineering Education Development Project

3.2 Review on JICA’s programs and projects in Mongolia

3.2.1 Mongolia-Japan Center for Human Resources Development (MOJC)

In this day and age of economic globalization, a core policy to develop the private sector will be

“improvement of company competitive capabilities.” Within that core, support for corporate management resources, that is, “human resources,” “goods,” “capital,” and “information” are thought to be most important. Especially in Mongolia, where more than 90% of all corporations are small and medium-sized enterprises (SMEs), the Mongolia-Japan Center for Human Resources Project (MOJC Project), which works mainly with local SMEs to help improve their competitiveness, is a very important program indeed.

In training corporate personnel, the MOJC Project feels programs that make use of the best of Japanese knowhow to improve corporate competitive capabilities are most important. In recent years, as the MOJC Project has promoted Mongolian corporations and also contributed to the activities of Japanese corporations in Mongolia, expectations of mutual profit for both Mongolia and Japan have arisen.

With various business trainings based on the method of Japanese-style management, MOJC Project programs train corporate personnel in Mongolia. The Mongolia Kaizen Association, which

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is an organization of alumni, is also very active, and local corporation personnel networks are gradually growing. The MOJC’s storehouse of knowledge and networks concerning local Mongolian corporations will certainly be of assistance to and cooperation with Japanese companies entering Mongolian markets.

For this survey, we chose the “Project for Enhanced Function of Mongolia-Japan Center for Human Resources Development for Capacity Development and Networking of Business Persons” (hereinafter MOJC Enhanced Function Project) for research and analysis as detailed below. 1) Project Outline

The MOJC Enhanced Function Project has been implemented from April 2015 to April 2020. The counterpart organization is the National University of Mongolia (NUM) and the organization undertaking the project is MOJC.

The project’s objective is set as “MOJC becomes the center of development and networking of business human resources,” with three results envisioned as detailed below.

System to implement and improve the business services is established, whose contents are practical, consistent with needs of private sector including SMEs, and contribute to improvement of business performances of private sector including SMEs.

System to network between Mongolian and Japanese human resources mainly in business field is developed.

The institutional structure to manage the MOJC’s operation is strengthened.

2) Comparison of MOJC with Japan Centers in other countries MOJC was established in 2002 and in 14 years of operations, approximately 15,000 people have

attended its business courses, and it contributes to human resource development for industry in Mongolia. Japan Center has 10 centers in 9 countries (Vietnam has two centers, one in Hanoi and the other one in Ho Chi Minh City).

Outlines of each country’s center follows: Japan Center

Pop. （10,000）

GDP Growth

Per capita GDP

Main industries

Year est. C/P Org.

No. attending

BC

Cambodia 1,554 7.0% 1,139US$ Services, Agriculture, Mfg.

2006 Royal Univ. of Phnom Penh 19,626

Vietnam 9,157 6.5% 2,170US$

Agriculture, Forestry, Fisheries, Mining, Lt. Industry

2002 Foreign Trade University

Hanoi 21,051

HCMC 14,777

Myanmar 5,184 8.5% 1,268US$ Agriculture 2013 UMFCCI 2,826

Laos 702 7.5% 1,785US$ Services, Ind., Ag. 2001 Nat’l Univ. of

Laos (NUOL) 12,726

Mongolia 296 3.5% 4,197US$

Mining, Livestock, Distribution/ Lt. Industry

2002 Nat’l Univ. of Mongolia 13,375

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Japan Center

Pop. （10,000）

GDP Growth

Per capita GDP

Main industries

Year est. C/P Org.

No. attending

BC

Uzbekistan 3,097 6.8% 2,129US$

Cotton Textiles/ Food Products/ Machinery/ Gold/ Oil/ Natural gas

2001

Ministry of Foreign Economic Relations, Investment, and Trade

10,500

Kyrgyzstan 597 2.0% 1,197US$ Agriculture & Livestock/ Mining

2004

Kyrgyz Nat’l Univ. Named after Jusup Balasagyn (KHY)

11,061

Kazakhstan 1,768 1.5% 11,028US$

Mining/Ag./ Metallurgy, Metal working

2002 Narxoz University 8,224

Ukraine 4,274 -9.1% 2,108US$

Services/ Mining/Ag., Forestry & Fisheries/ Construction

2006 Kyiv Polytechnic Institute (KPI) 5,651


Figure 67 Outline and results of countries with Japan Centers In recent years and using ODA, our country has considerably strengthened its support for

small-to-medium size companies expanding their business overseas. The function of Japan Centers is not only to develop human resources, but also to expand our offerings of business services to Japanese corporations.

The systems that should be noted at Japan Centers in ASEAN countries are shown below. Last year, the ASEAN Economic Community (AEC) was established, and in the fierce competition in ASEAN markets, the Japan Centers four countries are implementing the following systems.

Cambodia

Holds courses for young entrepreneurs and training programs for specialists and management. Holds business forums and exchange meetings to help course graduates to make networks. Further, there is a business exhibition area in each center where information and PR from Japanese companies are posted.

Vietnam Aims to strengthen functions that will help small-to-medium size and support industries develop human resources. Corporate managers who have taken the management study courses are building networks.

Laos

Nearly 200 people have finished their MBA programs, which were instituted to produce superior business personnel who could act as the motive power in private sector corporations that want to see economic integration among ASEAN countries. Japan Center has emphasized its presence by holding business forums together with concerned organizations.

Myanmar

With the Republic of the Union of Myanmar Federation of Chambers of Commerce and Industry as C/P, networking activities between Japanese and Myanmar business personnel were emphasized as the curriculum was devised. Certain ones of those who finished their business courses were chosen for further study in Japan, and business exchange with Japanese companies was aggressively pursued.

Source; JICA Survey Team

Figure 68 Japan Center Programs in ASEAN Countries

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JETRO has offices in all four of the countries in the above table, and those offices proved business support, but there is no JETRO office in Mongolia so MOJC is expected to provide those functions. Below are explanations of the roles, functions, and services expected of MOJC.

3) MOJC Business Course Results

Currently, MOJC provides the following business courses: (1) General Courses (basic courses, management courses, and executive courses), (2) Specialist Courses, (3) Corporate Internal Training, (4) Model Company Training Diagnosis Guidance. Further, the general courses and specialist courses started in September 2016 are as follows:

Course

Classifications Periods held

Students

qualified Lecture subjects Lecturer Limit

General courses

Basic courses

Apr.-Jun. 2016 2 days per

course Evening

Beginners (learn basics of company

operation and management)

Japanese operations,

Financial mgmt., Marketing,

Mgmt. strategy, Personnel mgmt.,

Outlet mgmt., Production mgmt.

Mongolian lecturer 30

Management courses

Sep. 2016~ Jan. 2017 5 days per

course Evening

Executives, Small Co.,

Mgrs・executives

(Less than 10 employees)

Mgmt. strategies, Human resources

mgmt., Marketing,

Financial mgmt.

Japanese/ Mongolian lecturers

30

Executive courses

Sep. 2016~ Mar. 2017 6 days per

course Weekday morns＆ all day Sat.

Mgrs. & Execs

(Co. with 10 or more

employees)

Mgmt. strategies, Human resources

mgmt., Marketing,

Financial mgmt.


30

Specialist Courses

Sep. 2016～ Jun. 2017

3 or 5 days per subject

Evenings

Owner・Exec. Mgr.

Personnel strategies, ISO Outlet mgmt.,

Production mgmt., Project mgmt.

Advanced finance Toyota production system, Business Developing by Utilizing EPA,

Business Analysis by Utilizing Excel


30

Further, after the model company diagnoses, 3~4 companies a year were chosen and given a year

of multifaceted instruction and training aimed at improving their management. So far, 27 companies have gone through the program. Now a flow has begun with companies that complete the general courses hold internal training internally or become model companies that qualify for management diagnosis and instruction. The skills and knowledge learned in the lectures, which actually used in company management, create an excellent environment and are evaluated highly.

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More than 460 companies have completed the business courses, and the MOJC network of Mongolian companies will enable MOJC to provide business services to Japanese companies (Ref. 6 [Introducing companies that have finished MOJC Business Courses] attached). 4) Project Outcome

Business services provided to Japanese companies entering Mongolia MOJC makes use of the networks build through the business courses heretofore given to

Mongolian companies. Currently, MOJC offers the following business services to Japanese companies. Offering information on Mongolian economy, business environment, and investment Introducing Mongolian companies (from among those that have finished the business

courses) Prepare and attract visitors to MOJC-sponsored exhibitions and business negotiations Introduce local consultants Provide information on Mongolian companies and products Provide interpretation, translation, hall rental, etc.

MOJC’s strengths include ongoing ties with companies that have completed the business courses,

a high awareness of MOJC within Mongolia, and staff with a high level of Japanese language skills. Companies that have finished the courses cover a wide range of industries such as food products, cashmere and wool, agriculture, medical services, leather, and retail, so promoting business exchange through MOJC’s business network is entirely possible. Japanese businesses need to learn of MOJC services availability, and we must work aggressively to get that information out about Japan Center activities, etc. Issues faced in broadening business exchange functions

In order to strengthen business exchange functions, a list of what MOJC must do includes: (1) having a dedicated Japanese expert and Mongolian employee in charge of business exchange, (2) gaining the trust of Mongolian companies and gathering information about their operations, (3) maintaining a database on Mongolian companies, (4) confirming the trust of Japanese companies, and (5) specifying exempt items.

As of December 2016, MOJC’s business section has five Mongolian employees, but we must have a Japanese expert and Mongolian employee at business section in business exchange to strengthen that area. A Japanese expert would not only check information on the Mongolian business environment and changes in laws regulating investments, but will also be expected to conduct OJT for Mongolian employee at business section to gather data on Mongolian businesses which hire people who complete the business courses, confirm the credibility of the company through direct interviews, and match them up Japanese businesses (including business partners), etc.

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3.2.2 Two-Step Loan Project for Small and Medium- Scale Enterprises Development and Environmental Protection

It was confirmed that JICA's TSL project was also highly evaluated through this survey’s workshop and interview with Mongolian private company. This survey confirmed the situation of financing for SMEs in Mongolia and the important role and position of JICA's TSL through the detailed communication with the TSL office entrusted with TSL support operation from Ministry of Finance Mongolia, the Ministry of Industry of Mongolia / SME Development Promotion Bureau under the Ministry of Food, Agriculture and Light Industry, SME Development Fund, Credit Guarantee Fund MGCF) and PFI.

The Situation of SME Finance in Mongolia

The financial environment of SME in Mongolia in the points of view of "Loan amount", "Interest rate", "Loan term" and "Collateral" is as follows. Loan amount

Loan outstanding amounted to approximately 500 billion MNT in the fourth quarter of 2008, exceeding 2 trillion MNT in the fourth quarter of 2014. Loan outstanding for SMEs has exceeded 4 times over the past 6 years. Looking at the quarterly loan amount for SMEs, the loan amount which was 77 billion MNT in the fourth quarter of 2008 was increased by more than six fold to 486 billion MNT in the fourth quarter of 2014.

However, looking at the share of loans to SMEs in Mongolia as a whole, the ratio of outstanding loans is 17.5% as of the fourth quarter of 2014, which is lower than 19.1% in the fourth quarter of 2008. Looking at the loan amount (flow), although it exceeded 500 billion MNT in the second quarter of 2013, it has been around 500 MNT since that time. Judging from these data, it can be considered that the funding environment of SMEs in Mongolia has not been improved. On the other hand, it is difficult to say unconditionally that the funding environment of SMEs in Mongolia has not been improved because it can be considered that the need for funding could be reduced due to the slump in the Mongolian economy in recent years.

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505

2,176

77

486

19.1%

17.5%

12.7%

16.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

500

1,000

1,500

2,000

2,500

4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

08 09 10 11 12 13 14

Billion MNTLoan outstanding Loan amount Loan outstanding (share) Loan amount (share)

Source: compiled by survey team based on Asia SME Finance Monitor 2014 (ADB) and Bank of Mongolia

Note) Share means the share of financing for SMEs (Loan outstanding and loan amount) in total loans.

Figure 69 Loan outstanding and Loan amount for SMEs in Mongolia Loan Interest

Looking at trends in interest rates, it is said that loan interest rates for SMEs in Mongolia have been high, but this tendency can be said to remain the same even now. Figure 70 shows the trend of the average loan interest rate in Mongolia. Although the interest rate was 15.5% as of 2011, the interest rate on MNT denominated, rather than declining, shows an upward trend in recent years (19.7% as of March 2016). Mongolian enterprises, especially SMEs, often borrow with MNT because of the small number of foreign transactions, so the heavy burden of interest continues.

17.9%

15.5%

18.2%

17.4%

19.5%19.1%

19.7%

12.6%12.1%

13.5%

12.7% 12.9%

12.0%12.4%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

2010 2011 2012 2013 2014 2015 2016

MNT Foreign currency

Source: Compiled by survey team based on Monthly Statistical Bulletin 201603, Bank of Mongolia

Note) from 2010 to 2015 is as of December, 2016 is as of March

Figure 70 Average loan interest rate in Mongolia

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Loan period Next, looking at the composition of the loan period (Figure 71), Loans with more than 1 year but

less than 5 years are the most since 2009, next is less than 1 year and then 5 years and over. Until 2014, the loan period of more than 1 year to less than 5 years accounted for the mid 50% level, but in 2015 the proportion of loans less than 1 year accounted for 43%. However, it can be considered that the lowering of motivation to capital investment (reduction of loan more than 1 year) and increased working capital needs (liquidity securement) cause this situation. Therefore, it can not necessarily say that the attitude of financial institutions to long term loans tend to harden. However, since the composition ratio of long-term loans of at least 5 years has not changed from 12% to 13% in the last three years, compared to the past. That is to say, it is inferred that the attitude of the banks will continue to be severe with respect to loans of more than five years despite improvement trends.

58%

45%

40%37%

40%

32%34%

43%33%

47%

52%54% 53%

55% 54%

44%

8% 8% 8% 10%7%

13% 12% 12%

08 09 10 11 12 13 14 15

Under 1 year From 1 year to 5 year 5 year and over

Source: Quarterly Loan Report, Bank of Mongolia Note）The data from 2008 to 2012 is as of 4 th quarter and the data from 2013 to 2015 is calendar year.

Figure 71 The trend of composition on each loan term in Mongolia Collateral

Regarding collateral, although data on collateral ratio and related data are not disclosed, Financial institutions in Mongolia are supposed to make loans by comprehensively judging business performance, cash flow, business plan, credit information, collateral and so on but they basically evaluate collateral strongly. For this reason, it is difficult for SMEs, who generally have insufficient collateral, to take loans. Also, it is said that there is a big difference between the collateral value assumed by the company and collateral value appraised by the financial inst itution. This is also a problem. In order to cope with these problems, Mongolian government established Credit Guarantee Fund of Mongolia in 2012 and has started the guarantee operation since 2013. Although Guarantee amount was as small as 3.7 billion USD in 2013, 17.1 billion USD in 2014 and 9.9 billion USD in 2015, it is necessary to keep a close eye on the credit guarantee system because it will receive financing and technical advice from ADB.

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The structure of SME Finance in Mongolia

1) Project Outline As prescribed in the previous section, in order to improve the financing for SMEs in Mongolia

which issues are scattered, JICA has been implementing the “Two-Step Loan Project for Small and Medium- Scale Enterprises Development and Environmental Protection in Mongolia (hereinafter, TSL Project)” since 2006. General lending conditions for SMEs in Mongolia are said that average loan period is between 2 and 3 years and average interest rate is over 18%. Meanwhile, SMEs desire that an average loan period is 5 years and average interest rate is around 9%. That is to say, it can be seen that there is a large gap between ideal and reality.16 Therefore, TSL Project that supplies long-term, low-interest loan to SMEs is highly evaluated in Mongolia. Also, Ministry of Finance Mongolia highly evaluates JICA/TSL Project as follows. (“Prospectus for establishment purpose of TSL/SPE” (September 2016 Ministry of Finance Mongolia) Loan disbursement (the number of companies): 690 companies (as of the end of July, 2016) Job creation: total 10,000 Sale increasing of borrower: 30% (assumption) Loan disbursement: All Aimag (21) Environment protection loan: 92 Lower NPL ratio17

TSL Project phase 1 began in 2006 and TSL project phase 2 has been completed until now. Also,

16 Source Study Report on The Challenges Faced by SMEs to Access Financial Support in Mongolia, 2014, Mongolian

Statistical Association NGO 17 The rate of NPL in JICA TSL is 5.6% at the end of 2016 (The average of NPL in Mongolia 8.5% in 2016)

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the Mongolian government is requesting TSL project phase 3 to the Government of Japan/JICA at current situation. 29.81 billion yen in Phase 1 and 5 billion yen in Phase 2 were financed to the Mongolian government by the Government of Japan (Loan period is 40 years and grace period is 10 years). Foreign exchange risk is borne by the Mongolian government. TSL is financed to participating financial institutions and financed from individual financial institutions to individual companies (credit risks are borne by each financial institution). The TSL project is composed of two components for SMEs and the environment (the ratio is approximately 8: 2). In addition, this TSL project also provides technical assistance such as TSL's PR work, support for improving credit appraisal skills of staffs in charge of loan in PFIs, support for preparing business plans of companies and so on for the purpose of providing loan smoothly.

Loan conditions by JICA

Phase 1 Phase 2

Loan amount

2,981 million Yen 5,000 million Yen For SMEs promotion：

2,297 million Yen For SMEs promotion：

3,860 million Yen For environment protection：

573 milliionYen For environment protection：

860 million Yen Loan period(Grace period) 40 years（10 years） 40 years（10 years） Interest rate 0.75% p.a. 0.65% p.a.

Loan scheme of JICA/TSL

Source: JICA Survey Team.

Figure 72 The trend of composition on each loan term in Mongolia

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There are 6 PFIs (Participating Financial Institutions) in Phase 218.

Entertainment sector, real estate sector, military sector, mining sector and alcoholic/tobacco manufacturing sector are exempt from the scope of sectors. TSL project generally focuses on the manufacturing sector and especially focuses on “clothing, food and housing” and related industries

Source: TSL office

Figure 73 JICA TSL Loan performance by sectors Loan period is from around 3 years to maximum 10 years. The purpose of loans limits a capital

investment (an operating capital is out of the scope). Loan performance

The number of project in phase 1, phase 2 and their revolving funds is 630 projects and loan amount is 196.2 billion MNT as of 30 October, 2015 (Figure 74).

As of 30 Oct, 2015

Unit Amount

（Million MNT）

Agriculture, forestry and fishery 98 16% 24,336 12% 248

Manufacturing 379 60% 124,457 63% 328

Food and beverage 105 17% 32,309 16% 308

Construction materials 88 14% 36,239 18% 412

Textile 61 10% 18,086 9% 296

Basic metals (metal processing) 17 3% 8,517 4% 501

Others 108 17% 29,306 15% 271

Utilities 31 5% 11,211 6% 362

Service 122 19% 36,233 18% 297

Health and social activities 53 8% 15,473 8% 292

Transportation/warehouse 10 2% 4,536 2% 454

Hotel 22 3% 7,455 4% 339

Others 37 6% 8,768 4% 237

Total 630 100% 196,236 100% 311

Number Amount (Million MNT）

Source: TSL office

Figure 74 Actual performance of TSL by sectors The manufacturing sector accounts for about 60% in the value and the number. Following sectors

are the service sector and the agriculture, forestry and fishery sector. Looking at the sectors in more

18 Khan Bank, Golomt Bank, TDB（Trade and Development Bank of Mongolia）, Xac Bank, Capital Bank and UB City Bank

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detail, the food and beverage sectors are 105 projects and the most, followed by agriculture, forestry and fisheries (98 projects), building materials (88 projects) and garments (61 projects). Construction materials are 36.2 billion MNT and the most, followed by food and beverage (32.3 billion MNT), agriculture, forestry and fisheries (24.3 billion MNT) and garments (18.1 billion MNT) by loan amount.

Regarding the loan value per project, basic metals (metal processing) are 500 million and the most, followed by transportation/warehouse is 450 million MNT, construction material is 410 million MNT and Hotel is 340 million MNT.

In consideration of the purpose of the TSL project which mainly supports the agriculture and manufacturing sectors, the agriculture, forestry and fishery sector and manufacturing sector account for over more than 75% , therefore, it can be said that the operation of TSL project is implementing according to the original design.

PFIs and companies who received loan highly evaluated the TSL project. Nevertheless it is difficult for companies to receive long-term and low interest rate loan under the severe financial environment in Mongolia, TSL provide the loan of which loan period is over 5 years and interest rate is under 10%, therefore, PFIs and users are highly satisfied with TSL. In addition, the Khan bank, one of the PFIs, highly evaluated not only interest rate and loan period but also trainings and support for loan officers and applying companies.

Bank Content

Khan bank

<Status of utilization> Khan bank is the top bank in the number of TSL loan (167 companies, as of

January 2016), Loan amount is second (The top bank is TDB). Currency is overwhelmingly MNT (160 companies) because user companies of

TSL are mainly SMEs and business with foreign companies are few. The number of loan for the environmental protection is 14 projects. The number of user companies who has problems on repayment such as

re-schedule due to a drop in performance is 14 companies. Main financing sectors are important sectors in polies. Mainly manufacturing,

agriculture, livestock farming and so on. In addition, Hotel and restaurant industry.

Loan period: From 7 to 8 years. Interest rate: From around 7% (MNT), From around 5% - (USD) Collateral: must cover all loan amounts. Qualified collaterals are real estates,

moveable assets and inventories including cattle. Not necessity of personal guarantee but guarantee by the parent company is sometimes required.

<The merit of TSL> The loan period by the normal scheme is maximum 5 years but by TSL is

maximum 10 years. Low interest rate Currency is selectable (USD or MNT) Execution of training for bank officers and user companies <Request> Although a lot of companies apply the TSL, it is impossible to go forward

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Bank Content procedure because funding source only relies on the revolving money. Therefore, it request to proceed next phase on TSL project.

Same structure is favorable in next phase.

Golomt Bank

<Status of utilization> Golomt Bank is the second bank in the PFIs (1st is Khan bank). User companies

reached 120 companies and loan amount achieved 36 billion MNT as of the end of 2015

Manufacturing sector is 58% (Detail classification is not disclosed), Agricultural sector is 10%, Food service including of restaurants, catering service and so on is 8%.

TSL for SMEs are the most. The number of TSL for environmental protection is 20 projects. For example, for gas station (Japanese equipment), for clean energy and so on.

Priority industries are to be decided by direction of the TSL office. The selection of companies by PFIs on a first-come and first-served basis.

The NPL ratio of TSL is lower than the NPL ratio of normal loans <Credit appraisal> Credit appraisal of TSL is same as normal lending based on cash flow, collateral

and so on. Collateral is basically real estates but sometimes credit guarantee by Credit guarantee fund (no personal guarantee). Credit appraisal is executed by PFIs but approve by TSL office to be need for providing loan.

<Evaluation of TSL> User companies highly evaluated TSL and TSL is useful in Mongolia.

Especially, long-term is evaluated. Demand is continuously strong. Source: JICA Survey Team

Figure 75 The status of TSL user PFIs 2) Project Outcome

Response to increasing demand The TSL project is highly evaluated by PFIs and user companies and the continuity and

expansion of it is strongly requested. A lot of manufacturing equipment which Mongolian company hold are heavily used and inferior in the aspects of technology, productivity, energy-saving and environment (a lot of equipment made in Russian or China). For examples, taking into consideration of food safety and hygiene, companies who had enough equipment and factories to produce are not so many and it is difficult for these companies to manufacture products for export in the food and related sector (one of the major issues is that there are not enough testing equipment in Mongolia). Therefore, it can be inferred that demand for renewal of existing equipment and new investment for developing new markets will continue to be strong.

Response to issues on enhancement of credit appraisal ability in PFIs

Although the TSL project office has focused on the enhancement of credit appraisal ability in PFIs for the long-term loan and capital expenditure finance by hands-on advice through the TSL project phase 1 and 2, it is not enough and PFIs and PFIs rely on finance based on the collateral for loan even present.

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In addition, most financial institutions in Mongolia including PFIs do not have an industrial research function that is the foundation of the credit appraisal for long-term loan/capital expenditure finance and new customers’ development (Even major banks do not have the department of the industrial research).

The integration of industrial research functions and industrial development finance including SME finance in Japan is a high-quality financial structure that supported the development of Japan's postwar economy and the driving of transfer of this mechanism to Mongolia by the utilization of the TSL project is considered to be a major achievement on the long term basis.

Also, collateral is one of the major issues, too. As stated, Credit guarantee fund has been established and technical assistance from ADB is expected at present and then the function of the fund is gradually strengthened. In addition, JICA cooperates for improvement of credit guarantee ability and financing situation in Mongolia by implementation of trainings for enhancement of credit guarantee (latest trainings was held in January 2017) including seminars held by MOJC since CGFM established. However, the credit guarantee fund alone is not able to solve the collateral shortage issues of SMEs. It is necessary for the Mongolian government and each financial institution to control credit risk and set up the proper interest rate according to the risk in case of collateral shortage for improvement of these issues.

Response to the implementation structure of TSL/RVF and guarantee of soundness and sustainability of TSL

The support by TSL office in Phase 2 will finish in May 2017. Also, the current implementation structure by CSC (Counterpart Steering Committee) which is mainly structured by the ministry of finance and by the TSL office will finish.

Regarding the implementation structure of TSL/RVF, guarantee of soundness and sustainability of TSL, it is considered that establishment and its operational outline of JICA TSL SPE (Special Purpose Entity) who is considered by the working group of MOF and JICA technical advice team plays an important role.

3.2.3 Project for Strengthening Mediation System

1) Project Outline Background of the project

In response to the request from the Supreme Court of Mongolia to the Government of Japan for new cooperation for the introduction of the mediation system, JICA accepted to promote the use of legal counseling and mediation centers. The "Project for Strengthening Mediation System" was planned from May 2010 to November 2012 for the purpose of clarifying the path to establish as a system with positioning the mediation system as Mongolian law and judicial system (Phase 1).

Following the results of Phase 1 project, the Supreme Court of Mongolia requested the Japanese government to support the introduction and implementation of the mediation system nationwide. In this survey, together with information gathering concerning request content, field

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survey was conducted and a new project ("Project for Strengthening Mediation System Phase 2") was implemented with Mongolian side concerned including the Supreme Court.

2) Project Outcome Establishment of Mediation law

The draft of a mediation law to improve the legal foundation of the mediation system was carried out with the members of the project working group involved, and this law was approved by the Mongolian Parliament on May 22, 2012 (the enforcement date is July 1st, 2013).

As a result, it is legally confirmed that the mediation system would be introduced fully in the court nationwide.

Development of rules, systems, and facilities for nationwide introduction and operation of the mediation system. The plan for introducing mediation into the whole country was formulated with various

regulations, procedural formal models, mediator handbooks and interpretation of mediation law (commentary).

Appointment of the full-time mediators at the local courts nationwide according to the mediation law As of February 2015, 42 full-time mediators and nine secretaries are working. A mediation

room was established in 37 courts nationwide. From February 4, 2014, mediations were held in the local court nationwide

Training of mediators for introduction and operation of the mediation system The training of mediators is conducted seven times, the training in rural areas is conducted ten

times, and as of June 2015, 505 mediator qualification holders are trained. A total of 62 trainers for mediator trainers were also trained through domestic training.

Improvement of the design and practical operation for the mediation system by monitoring

In 2014, 6,427 mediations were claimed (48,431 cases in total were accepted in 2014, and among civil affairs and domestic affairs cases accepted at the local courts. It means that mediation is used at about 11%).

Improvement of the awareness of citizen's mediation system in Mongolia In addition to public relations by mass media, mediation events and seminars at universities

were implemented in collaboration with the National Commercial Arbitration Center. Brochures, posters, DVDs and TV programs were also prepared.

3.2.4 Project for Capacity Development for Promoting Foreign Direct Investment

1) Project Outline JICA’s Project for Capacity Development for Promoting Foreign Direct Investment was executed

with FIFTA (Foreign Investment and Foreign Trade Agency) as a counterpart from November 2010

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to May 2013. Technical cooperation aimed at strengthening the capacity of FIFTA and other related organizations.

This project focuses on promoting investment in Mongolia, and it was necessary to create an action plan for improving the investment environment by the FIFTA's investment promotion service to private sector.

2) Project Outcome Realization of one stop service (OSS) of FIFTA Building of the database for investors Improve the capacity of FIFTA staff

In 2014 the Foreign Investment Law was integrated / revised to the new Investment Law and

investment promotion function was moved from FIFTA to IMA. Mongolia basically adheres to the policy of opening up the domestic market and as explained in the section entitled "Advancement of Foreign Companies".

3.2.5 Project for Capacity Building for PPP in Mongolia

1) Project Outline Project background

In 2009, the Mongolian government launched a policy (national PPP policy) to promote the infrastructure development through a public-private partnership (PPP) scheme that utilizes private funds, and later enacted and enforced the concession law.

Since the history of PPP promotion in Mongolia was very limited and the institution and policy aspects were still inadequate, the Mongolian Government requested JICA to provided technical assistance for capacity building in Mongolia. The following is outlines of the project. Project period: May 2014 to June 2016 Counterpart (C/P): Initially the Ministry of Economic Development (MED), Invest Mongolia

Agency (IMA) from September 2014 after the MED has been resolved. Overall goal: PPP would be further promoted in Mongolia Project Purpose: The practical ability of the departments/personnel in charge of the PPP

promotion in Mongolia would be strengthened for formulating and operation. 2) Project Outcome PPP enlightenment activities (6 public seminars) for government officials and the private

sector were achieved. Hands-on seminar for MED, IMA, MOE and MOHS (small theme classroom practical

classroom) was fully implemented. Three different PPP practice guidebooks have been created. An action plan for PPP promotion in Mongolia (including revision of the concession law)

was prepared.

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In the above action plan, the establishment of guaranty funds and VGF (Viability Gap Fund) is proposed.

3.2.6 Higher Engineering Education Development Project

The “Higher Engineering Education Development Project”, a project developed to cultivate engineering human resource development to help industrial diversification and provide the human resources for the Mongolian economy, started in 2014. To meet the Mongolia’s internal needs, and looking toward the medium to long term development of engineering human resources, Japanese specialists teaching at allied universities are scheduled to guide improvements in curriculum for the Mongolian University of Science and Technology.

From 2016, students and teachers who study at Japanese colleges of technology (Kosen) or graduate schools will not be just ordinary exchange students. Instead, they will bear the important mission of realizing the development of engineering technology in Mongolia. 1) Project Outline

The “Higher Engineering Education Development Project” will be implemented for nine years, from March 2014 through March 2023. The C/P organization is the Ministry of Education and Culture (MECS), while the implementation institutions are the Mongolian University of Science and Technology (MUST) and the National University of Mongolia (NUM). However, with the new administration and the resulting reorganization of government ministries and agencies, counterpart is now the Ministry of Education, Culture, Science, and Sports (MECSS). The project has three objectives: (1) train and develop the superior personnel necessary for industry within a short time frame, (2) help raise the education level at science and engineering schools to international levels, (3) raise the level and quality of engineering course instructors and researchers at NUM and MUST. The expected results are: (1) to enable industry to obtain personnel with high levels of knowledge, capability, and practical skills to meet their needs, (2) to take the curriculum necessary to educate human resources in the engineering field at NUM and the MUST to international levels, (3) to improve the educational abilities and quality in engineering subjects at NUM and the MUST, and help with their educational machinery and materials, (4) to improve research capabilities and quality, maintain research facilities and research machinery and materials, and to implement the results of research and development that achieves international levels.

The contents of the program are as follows:

Items Exchange students (*)

Improve undergraduate education (curriculum and syllabus review, twinning program, support students going overseas, exchange university instructors)

320

Joint Research between Mongolian and Japanese universities (exchange researchers, educate MS and Ph.D. candidates)

480

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College of Technology (Kosen) exchange student program 200 Total 1,000

*Number of exchange students and scholars planned in the project period (9 years)

Because there will be a total of 1,000 exchange students and scholars over nine-year period, the project is called as the “1,000 Engineers Development Project.” The ten universities listed below are those on the Japanese side (as of March 2017) that have joined the Twinning Program.

Prefecture School name Hokkaido Kitami Institute of Technology Niigata Nagaoka University of Technology Aichi Nagoya Institute of Technology

Toyohashi University of Technology Wakayama Wakayama University Kyoto Kyoto Institute of Technology Yamaguchi Yamaguchi University Fukuoka Kyushu University Kumamoto Kumamoto University

2) Project Outcome

Consistence with Current Mongolian Industrial Development Policies Changes in Mongolian economic systems, which currently depend too much on mining

development and ore exports, are considered vital and can be evaluated as an important project. On the other hand, Mongolian domestic industrial development policies, MONDEP surveys, and

this survey have clarified that the industries that should be encouraged and promoted are agriculture and animal husbandry, food product industry; cashmere and knitting, and other such light industry, and the industries and products that should receive technical support are: (1) agriculture, food products, (2) textile products, (3) dairy products, (4) leather products, etc. With these products and industries, technology and knowhow is needed for product inspection, textile technology, cultivation technologies, food product production, quality control, etc.

The issue of employment opportunities for returning exchange students The PIU (Program Implementation Unit) organization implements the project, and because of its

aggressive PR activities, the awareness level of the “1,000 Engineers Development Project” is very high in Mongolia. And, as it is nurturing 1,000 engineering people, the program is evaluated highly. Hereafter, the issue is how the personnel will be used, which means that looking at the opportunities available will be very important. How the 1,000 engineering people generated by the project are utilized, and whether they can become promoters of Japanese and Mongolian businesses, we think, is an important issue.

One of the provisions for exchange students is that they work in Mongolia for at least five years

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after their return. The departments in which they study are civil and architectural engineering, mechanical engineering, and electrical engineering, and they are expected to be able to utilize their specialties at work. In the case of researchers, they must remain in their current jobs for five years, but because the program focuses on developing university professors, it is desirable that their employment be at universities rather than corporations.

On the other hand, the college of technology (Kosen) program aims to develop engineers that are useful on site. Some may go one to Mongolian universities after returning, and in that case, MUST takes charge.

If an exchange student quits before completion of studies or fails to work five years for a Mongolian company after returning, or in other ways does not live up to the conditions agreed to by exchange students, that student must repay the scholarship, including tuition and living expenses. Preparing for a situation where the student is unable to return those funds, each exchange student is required to make a collateral contract.

Even if an exchange student joins a Mongolian company right after graduation from a technical junior college, they have no business experience so it is difficult for them to be immediately useful employees. Further, small-to-medium size Mongolian businesses often do not have sufficient programs for human resource development. If the Mongolian economy continues to decline, employment will become more difficult to obtain, so project conditions need to be reviewed. The above mentioned company interns who are on exchange programs or graduates who have the capabilities necessary to be hired by a Japanese firm, perhaps should be given the opportunity of at least three years of OJT. This would be effective in giving them the chance to see how what they learned at a Japanese technical junior college can be used on the job in a Japanese company.

The necessity of contributing to business or industry-academia cooperation through joint research

Joint research is composed of 20 research programs (National University of Mongolia 10, Mongolian University of Science and Technology 10). Major research fields are listed below.

National University of Mongolia

Advanced Material, Resource Technology Sustainable Use of Biological Resources R&D for Renewable Energy, Clean Energy Technology Microelectronics and Computational Science

Mongolian University of Science and Technology

New Materials and Resources Technology Engineering Energy and Environmental Engineering Automation and System Engineering Bio Engineering (food, pharmaceuticals, bio printing)

Others Because of the long-term period of the project, it may become necessary to make adjustment in

the programs as conditions change. We need to work in cooperation not only with counterpart

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organizations, but also with all the government bureaus and agencies involved to ensure employment opportunities for exchange students.

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Chapter 4 Recommendations for JICA’s Operation for Private Sector Development in Mongolia

This Chapter of the report sets out the following recommendations for “J ICA’s Operation for Private Sector Development in Mongolia.”

4.1 Overview of JICA’s operation for private sector development

While a wide range of factors, including macroeconomic stability, infrastructure development, and improved basic education, constitutes important elements of private sector development, JICA’s operation focuses on the following fields: 1) developing policies and institutions to improve the business environment, 2) promoting trade and investment, 3) improving the competitiveness of local companies, and 4) promoting local economies and industries.

1) Developing policies and institutions to improve the business environment

JICA assists with policy and institutional development so that developing countries will be able to achieve an environment conducive to the activities of private companies and realize the development of industries that serve as engines for development.

Developing industrial promotion policy

Industrial promotion policy is a principal pillar for national development in developing countries. JICA's assistance in drawing up industrial policies focuses on various aspects (e.g., promoting trade and investment, improving the competitiveness of local companies, or promoting local economies and industries), depending on the situation in the partner country.

Developing business laws and institutions

JICA assists with the development and operational improvement of legislative and institutional infrastructure for business activities, including economy-related laws, such as the enterprise law and the competition law; intellectual property systems; standards and conformity assessment systems (standardization, certification, and measurement standards); tax administration; and financial systems.


The field of trade and investment focuses on benefitting from economic globalization.

Promoting investment

In 2014, 55.5% of direct investment went to emerging and developing countries; thus, developing countries are becoming even more attractive as investment destinations for foreign companies. There are moves on the part of developing countries to take advantage of foreign direct investment as an engine for economic growth and to promote domestic industries by developing supply chains in cooperation with foreign companies.

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Promoting trade

Emerging and developing countries’ share of total global trade in 2013 was 40.3% in export value and 39.6% in import value. It is obvious that trade plays an important role in economic development in developing countries.

To further promote trade, it is essential to simplify and facilitate trade-related procedures, including customs, and to improve the access of companies in developing countries to foreign markets.


JICA is engaged in strengthening support services for companies and developing industrial human resources to improve the competitiveness of local companies, especially SMEs, which are the predominant supporters of economic growth in developing countries.

Strengthening support services for companies

From the point of view of heightening the competitiveness of companies, assistance could be provided addressing management resources within companies: labor, technology, capital, and information. Because assistance in these areas, which is aimed mainly at SMEs, tends to be provided through intermediary public/private support organizations, much of JICA's assistance targets improving the functions of these support organizations.

Developing industrial human resources

Assistance for developing industrial human resources focuses on measures to boost the competitiveness of companies, utilizing Japan's know-how in this area. JICA cooperates with government institutions, educational institutions, and other entities in various countries that provide such support for human resource development. The goal of the cooperation is to enable companies to acquire and improve the know-how necessary for business activities, such as business and production management and manufacturing technology.

4) Promoting local economies and industries

As developing countries’ economies have grown, an increasing number of them have faced a major issue: regional disparity. In order to spread the benefits of economic growth widely to local residents, JICA supports industrial development that benefits local areas by effectively utilizing their respective special characteristics and resources.

Specifically, JICA assists in developing a mechanism for providing guidance and advice on various issues such as basic business knowledge (e.g., accounting), exploration and utilization of local resources, improvement of quality and productivity, food sanitation, packaging/design, and marketing/sales promotion. This effort contributes to creating attractive products.

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4.2 Policies for each field

1) Developing policies and institutions to improve the business environment

Developing industrial promotion policy The developing policies are basically governed and managed by the Government, and technical

assistance and/or supporting projects are proposed by the Government to JICA. The key issues are “Continuity” and “Consistency” for the sustainability of the proposed projects. The certifications/ commitments by the Government on the following points are important.

Status of consensus of Cabinet, Parliament and related ministries on the proposed projects Consistency between the proposed projects and existing laws and regulations Status of budget for the proposed projects) Status of personnel allocation for the proposed projects (Working Group etc.) Specific implementation plan and monitoring plan for the proposed projects.

Developing business laws and institutions Improvement of economic laws and regulatory framework has a large influence on foreign direct

investment (FDI). For foreign investors, not only the legal system but also the actual maturity of ' Rule of Law' such as actual trials and execution of legal decisions is important checkpoints.

JICA’s "Project for Strengthening Mediation System" in Mongolia is also a means of solving commercial disputes and can be included in the development of economic laws and institutions in a broad sense.


Promoting trade In emerging and developing countries, promotion of trade is important in advance of realizing

foreign investment. The promotion of trade requires, for example, simplification and facilitation of customs and other trade-related procedures and improvement of access to foreign markets by developing country companies.

Promoting investment In emerging and developing countries, it is necessary to make foreign investment the driving

force of economic growth and to promote domestic industry. In Mongolia, JICA has a track record of dispatched a trade and investment policy advisor to the

Ministry of Industry and Trade from 2007 to 2010.


Government policy on promotion of small and medium enterprises is important for strengthening the competitiveness of Mongolia’s private enterprises, and up until the first half of 2016 the promotion of small and medium enterprises was under the supervision of the Ministry of Industry (MOI). But now it is under the auspices of the Ministry of Food, Agriculture and Light Industry.

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Strengthening support services for companies From the point of view of heightening the competitiveness of companies, assistance could be

provided addressing companies’ management resources in terms of human resources, technology, finance and information. Because assistance in these areas, mainly aimed at SMEs, tends to be provided through intermediary public/private support organizations, much of JICA's assistance is targeted at improving the functions of these support organizations.

In addition, JICA also focuses on disseminating kaizen (quality and productivity improvement) activity, an area in which Japan excels.

Developing industrial human resources In the development of industrial human resources, emphasis is placed on efforts to improve

corporate competitiveness by making full use of Japanese know-how. Cooperation with administrative organizations and educational institutions that develop human

resources is being cultivated in various countries for the purpose of acquiring and improving know-how in management, production control, production technology, and other areas necessary for corporate activities.

The Mongolia-Japan Human Resources Development Center (MOJC) deserves special mention among the cooperation for the development of industrial human resources. The MOJC has already been in operation for over 14 years, and it is a precedent, a good example, of JICA’s Japan Center.

4) Promoting local economies and industries As previously mentioned, regional disparity is becoming a major issue that developing countries

face as their economies grow. JICA supports the promotion of industries that benefit particular regions, effectively utilizing their respective characteristics and resources, so that people in developing countries can receive the benefits of economic growth widely.

JICA has been focusing on the field of agriculture in Mongolia for years. 4.3 Recommendations regarding the strategic approach for Mongolia

4.3.1 Suggestions and lessons from JICA projects in Mongolia The analysis of JICA’s past and on-going private sector program in Mongolia, shown in Chapter

3, can be summarized as follows.

The MOJC project and the TSL project, both of which are directly engaging in the Mongolian private sector, are producing great results.

A distinguishing characteristic of technical assistance both for “Rule of Law” and for training of engineers is that longer periods are required for adaptation, but steady results can be expected.

In recent years, JICA has been promoting collaboration with private Japanese companies (private sector loan and investment finance scheme, PPP infrastructure, BOP business, support for Japanese SMEs’ overseas business development etc.), and several private sector collaborative projects are

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underway in Mongolia.

The following viewpoints were added to the above suggestions and lessons. The viewpoint of whether the focus of the support program is to focus on the purpose of

business practice or on business foundation development The viewpoint of which Mongolian-side leaders and beneficiaries of the support program are

targeted: government or private enterprise

The following figure shows the relationship between the four fields of JICA support for private sector development and JICA’s past/on-going support program in Mongolia.

Source: JICA Survey Team.

Figure 76 Analysis on JICA’s Operation for Private Sector Development in Mongolia

4.3.2 Recommendations for JICA’s Strategy for Private Sector Development in Mongolia

The multifaceted JICA private sector development programs in Mongolia are regarded to comprise an effective strategy that has achieved great results. Recommendations for the strategy and future programs are as follows.

1) Direct approach to the Mongolian private sector As per the analysis of Chapter 3 of this report, because the direct approach to the private sector

has had a great effect private sector in Mongolia. It is recommended that JICA continue to provide its support for the "competitiveness enhancement of local companies".

2) The role of the Mongolian government and MNCCI The Mongolian government and MNCCI are expected to play an important role in improving the

business environment in order to support B-to-B business between Japanese and Mongolian private

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companies.

Effective support of the Mongolian government The Mongolian government needs to actively improve the investment environment and investor

protection. The government is expected to focus on the revision of key laws and regulations, including the

DBM Law and the Concession Law. Improvements to the project approval process are also expected as follows. Speeding up procedures Securing transparency Achieving accountability

MNCCI's voluntary support Many private Mongolian enterprises are seeking information on the Japanese market (e.g.,

import regulations / inspection regulations, tariff quotas, market needs) and the MNCCI cooperates with the Mongolian government, the Japanese government / JICA, and Mongolian companies related to the Japanese market. It is expected to proactively promote information dissemination.

3) Business matching between the Japanese and Mongolian private sector with the effective utilization of MOJC and TSL projects.

Since the effectuation of the EPA, many private Mongolian companies have been seeking to establish business relations with Japanese companies. In order to stimulate B-to-B business between Japan and Mongolia, effective utilization of MOJC and TSL projects is recommended.

4) Higher Engineering Education Development Project The Higher Engineering Education Development Project is long-term and is expected to become

the foundation of strengthening industry in Mongolia. In order to realize that objective, devising a way to effectively utilize the knowledge and experience of the students of projects contributing to the Mongolian private sector (competitiveness enhancement of local companies) is considered necessary.

Specific project ideas deemed to be effective in strengthening cooperation with the Mongolian private sector are as follows. Establish a private sector organization to support the project private sector under the initia tive

of the MNCCI. Plan joint conferences, seminars and other events with private companies before students leave

for Japan. Establish, if possible, in the future a private sector-led scholarship system in order to ensure

sustainability of the project.

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APPENDIX 1: MNCCI’s List of Mongolian Top 100 Companies

No. Company names

1 Erdenet Mining Corporation 2 Oyu tolgoi LLC 3 Khaanbank 4 Trade and development bank 5 Ulaanbaatar railway 6 The development bank of Mongolia 7 APU company 8 Mobicom corporation 9 Golomt bank

10 NIC LLC 11 State bank of Mongolia 12 Mongolyn alt corporation 13 Xac Bank 14 Unitel corporation 15 Achit Ikht LLC 16 Bold tumur eruu gol LLC 17 Magnai trade LLC 18 Tsairt mineral LLC 19 Ulaanbaatar Therminal power plant 20 MCS Coca-Cola LLC 21 Gobi corporation 22 Sod Mongol group LLC 23 Thiess Mongolia LLC 24 National Power Transmission Grid 25 Nomintav trade LLC 26 Petro star LLC 27 Ulaanbaatar Electric transmission company 28 Shunkhlai LLC 29 Spirt Bal buram LLC 30 MCS International LLC 31 Civil aviation authority 32 Ulaanbaatar Therminal power plant co 33 M-oil group LLC 34 Information and Communication Networking Company 35 Miat Mongolian airlines 36 Monpolimet LLC 37 Apu trading LLC 38 Skytel LLC 39 Ulaanbaatar city bank 40 Baganuur LLC 41 Nomin holding LLC

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No. Company names

42 Mongol Tamkhi So LLC 43 Transwest Mongolia LLC 44 Darkhan Metallurgical Plant State Property Stock Company 45 Nomin trading LLC 46 Talkh Chikher LLC 47 MCS Asia pacific brewery LLC 48 Wagner Asia LLC 49 Support services Mongolia LLC 50 Tavan bogd LLC 51 Anungoo LLC 52 Shivee Ovoo LLC 53 Songino Khangai LLC 54 MT petroleum LLC 55 Capital bank LLC 56 SBB trade LLC 57 Univision LLC 58 Voltam LLC 59 National power transmission grid SOSC 60 Monos Pharma trade LLC 61 Monsuli LLC 62 Altan taria LLC 63 Altangadas trade LLC 64 Alhana trade LLC 65 Mongol em impex LLC 66 Usukh zoos LLC 67 G-mobile LLC 68 Tavan bogd international LLC 69 Darkhan thermal power plant 70 Shunkhlai LLC 71 Asia pharma LLC 72 Petro-china daichin tamsag LLC 73 Erdenet carpet LLC 74 Nomun tabak LLC 75 MCS distribution LLC 76 Moncement building materials LLC 77 Eco construction LLC 78 Milk JSC 79 Mongol Post JSC 80 Sharyn Gol JSC 81 Cummins Mongolia Investment LLC 82 Suruga Mongolia LLC 83 Erdmin LLC 84 Boroo Gold LLC

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No. Company names

85 Gatsuurt LLC 86 Jiguur Grand group LLC 87 Mongolian trans logistic LLC 88 Max food LLC 89 MCS Property LLC 90 Universe Solution LLC 91 Uguuj chikher boov LLC 92 IC IC LLC 93 BUTI LLC 94 Nomads hospitality LLC 95 Tsakhiur LLC 96 Khanbogd cashmere LLC 97 Petrojump LLC 98 Global bridge LLC 99 MSM group LLC 100 MERA LLC

Source : MNCCI

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APPENDIX 2: Application Forms for Company Registration 【Incorporation of a Foreign invested legal entity】

UB-12

Application for registering incorporation of a foreign invested legal entity

1. Date of application for submission: […]

2. Name of the legal entity […]

3. Type of the incorporation [ ] PC [ ] LLC [ ] LLP

(tick the right answer)

4. Legal address of the legal entity and phone number:

Province, city: […] Phone-1: […] Soum, district: […] Phone-2: […] Bag, khoroo: […] Email address […] Khoroolol: […] Fax: […] Street, building: […] Postal address […] Door: […]

5. Information of the founder:

5.1. Name and type of the parent company in case the legal entity is a subsidiary […] Registration No.: […]

5.2. Number of founders of the legal entity: […]

5.3. Amount of share capital (MNT): […]

No. Name of the founders

Citizen Nationality Type of ownership

Share capital Clan name

Registration No.

Amount (MNT)

Percentage

0 1 2 3 4 5 6 7 1 2 3 4 5

- The table set forth above shall be used in case of legal entity with more than 5 founders.

- If founder is a legal entity, name and type of the legal entity while if the founder is a

citizen, surname and initial of the last name shall be written in Column 1.

- In case of legal entity as a founder, leave the Column 2 and 3.

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6. Duration for the legal entity to conduct its activities: Indefinite, Period […] years

(choose one or fill the space)

7. Activities to conduct:

[…]

8. Applicant:

8.1. [ ] Founder [ ] Executive management [ ] Person under a power of attorney

(tick the right answer)

8.2. Clan name: […]

Last name: […]

Surname: […]

Registration No. […]

______________ / /

(signature) (name)

Glossary:

PC Public company LLC Limited liability company

LLP Limited liability partnership

Registration No. Registration number

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【Representative Office of a Foreign legal entity】

Source : General Authority for Intellectual Property and State Registration

UB-13 Annex 1, Decree No….. dated 2015, Head of General Authority for State Registration

Application for registering a representative office of a foreign legal entity

1. Date of Application for submission: /to be completed by the applicant/

2. Name of the Representative office:

/ to be completed by the applicant/ 3. Legal address of the Representative office and phone No.:

Province, city: Soum, district: Bag, khoroo: Khoroolol: Street, building: Door:

4. Incorporated date and country of the foreign legal entity:

Phone-1: Phone-2: Email address: Fax: Postal address:

5. Number of shareholders of the foreign legal entity: 6. Duration for the representative office conducting its activities: 7. Activities the representative office to conduct:

year

8.Name of decision for establishing the representative office: date:

9.Applicant : 9.1. Founder Executive management

Reference No.:

Person under the power of atterney /where necessary

9.2. Clan name: Lastname: Surname: Registration No.

/

__________________________________ /signature/

/ /Name / /

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APPENDIX 3: Outline of MINAC

Source :MINAC

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APPENDIX 4: Introduction of Mongolian Companies by MOJC

-The companies have performed the studies on MOJC Business Course-

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Documents

Data Collection Survey on Business Environment and Investment Promotion in … · 2017. 4. 25. · IPSAS International Public Sector Accounting Standards IPP Independent Power Project