Professor B. DAVAASÜREN, Chief of Academic Affairs, Business School of the National University of Mongolia is the guest of this edition of our TMO Forum, hosted by Dr. N. Batnasan. In this edition of TMO Forum Prof. Davaasüren shares with us her experience and findings about the business environment in Mongolia as a result of a comprehensive study that she and her team had carried out in the last one year in collaboration with the National Chamber of Commerce and Industry of Mongolia.
Batnasan: I think this is the first in the country study into the business environment, carried out at a professional level. Can you tell us about the key findings? I suppose the country would benefit if this kind of national-level study is conducted on a regular basis.
Davaasüren: We conducted this study over a period of one whole year in collaboration with the Mongolian National Chamber of Commerce and Industry (MNCCI).
The prime objectives of the study were three-fold. One, allow the businesses, themselves, to give an assessment of the business environment, the changes in this environment, either towards good or bad. Two, identify the main challenges and problems being encountered by business people. Three, priority actions required for improving the business environment, basing on the findings, and the roles and responsibilities of the state and non-governmental organizations in their implementation.
Prior to venturing out to carry out our study, we studied quite well many different international research methodologies, such as “Doing Business”, “Competitiveness”, basing on which we developed our own research methodology tailored to the prime objective of the study. By the y, the aforementioned methodologies emphasize on comparative study and are generic in nature, so they need to be tailored to specific needs and peculiarities of the countries being researched. Proceeding from this premise, we thoroughly studied Mongolia’s business environment, and tried to map out actions that would be conducive to supporting the businesses by way of creating a favorable business environment.
The study was carried out at the national level. 2010 business entities from all 21 aimags of the country and 9 districts of Ulaanbaatar were involved.
Five basic indicators were used, and we tried our best to define as precisely as possible the assessments for each one of them. They include infrastructure and technological environment; economic environment; governance and legal environment; social-cultural environment; and, business activities. While researching into each one of them and their sub-indicators, we found that the business environment in Mongolia is “unsatisfactory.” In other words, while evaluating the present business environment in Mongolia on a scale of 1 to 7, the average coefficient is only 3.03 or is less than one half of the assessment scale.
From among these indicators, the governance and legal environment was the worst with an average showing of 2.69 points. The activities of the Government and the coordination among the state and government agencies are poor, which are becoming a serious impediment to the development of the business as a whole.
Let me clarify. The stability of the Government had a worst showing of 2.3 points. Mongolian business people are noting that the replacement of the Government at close intervals is leading to the instability of the policies, which consequently have a negative impact on the business environment as such. The second concern is the unfairness in which government bids are being conducted, this creates unfairness in business competition as favor is given to one business over the other, which is undermining the business environment. A third negative factor contributing to poor business environment is the level of bribery, corruption and red-tape among government officials and the point given was only 2.4 from an overall point scale of 7. State and government institutions such as the taxation, customs and specialized investigation agencies, whose duties and responsibilities lie in providing services and support to the businesses, are becoming impediments to the businesses.
An unsatisfactory assessment has been given to the coordination among state and government agencies, the quality of services being provided by the experts working in these agencies, as well as the professional skills and qualifications of theses experts. In other words, when there is a change in government, professional civil servants working there also are replaced en-masses by worse still poorly trained and qualified experts who are unable to provide professional support to private businesses, which in itself becomes an impediment to business development and growth. This is a major concern among the Mongolian businesses and they are raising a red-flag over this matter.
A factor that is having a serious negative impact on the business environment is the worsening purchasing capacity of the people, which has been evaluated at 2.5 points (see the cartoon). As part of the qualitative research, it has been found that the real buying capacity of the population in the last 3 years has weakened substantially, which means that the market capacity has worsened, and some businesses are concerned that they are rapidly losing their customers.
Businesses have also drawn attention to the economic environment. From among the sub-indicators of economic environment, the financial market environment has been assessed as extremely poor at 2.65 points. The lowest point of 2.24 in this respect is given to the fluctuation in the exchange rate, which is having a most pernicious effect on the business environment, and also the very high interest rate on credit means that either the business cannot grow or expand any further. This factor is given a point of 2.31 only.
Businesses voice concern over the absence of an incentive system in investment. Alongside this, unsatisfactory evaluations have been given to domestic-market directed investment, the possibility to be involved in the investment market, strict loan-taking procedures and the rights of shareholders.
The evaluation given to internal environment of business as compared to the evaluation of the macro environment, we found that there are less issues in this relation. To illustrate, social responsibility of Mongolian companies is improving, and private companies are giving more attention to building the professional skills of their workers and staff-members. However, our study found that cooperation between businesses and college and university-based research institutes is unsatisfactory.
Changes in the business environment in the last 3 years were assessed using 5 as the highest evaluation point and we found that the business environment, as a whole, had not changed to better as the evaluation point was only 2.62, which actually means that the business environment has worsened during these last 3 years. Three basic indicators were of particular interest. Situation has worsened drastically was related to the purchasing capacity, in the second place were economic activities, and in the third place was the poor coordination among state and government agencies, whose indicators had not improved as compared to similar indicators in the last 3 years.
Batnasan: How much of a difference did you find in the business environment in Mongolia’s rural and urban settings? I feel that the evaluation of business environment can be used as a yardstick for evaluating personal performance. Depending on the overall economic environment, one tends to evaluate the performance of say the Finance Minister, the Prime Minister or even the Government, and one can even draw a line and say that if such and such an action is taken, then the situation will register improvement. The economic and macro-economic situations, I feel, are related to the management of the Government and local authorities. Did you find any difference between urban and rural setting while you were carrying out this study?
Davaasüren: The objective of the study was to carry out a comparative study among regions, aimags, the capital city and its districts. At the regional level, the business environment in Ulaanbaatar was the lowest with 2.87 points, which at the national level was 3.03 points. From among the regions, the western region was the lowest with 2,97 points, while the Khangai or forest steppe region was at 3.16 points and the best was the central region at 3.4 points.
I agree with your statement. Depending on the changes in the business environment, we can say what kind of policies rural and municipality leaders pursued, and what was their implementation status and outcome. We can see a general trend from this maiden study and we will most probably get a better picture in the future as we plan to conduct this kind if study once every two years.
If I may add, in recent years, the state and government have taken many actions to promote the business environment. For example, this includes the one-stop government services, online government services, preferential taxation, VAT rebate, the implementation of the law on transparency, increase in the customs duty of some import items etc., which have been positive support to business. From among them, the highest score has been given to the one-stop government services, e-governance as well as government-sponsored trade exhibitions. However, expensive financing from the bonds has the lowest mark of 2.27 points from 7 points, which means that such financing has not been conducive to business. Financing from bonds could have been a support to the business that has received the financing, but when one looks at the different sectors, their impact has not been even as hoped for. Majority of the businesses, which took part in the study, maintain that the financing from the bonds were not disbursed honestly and fairly.
Batnasan: In 2003 I was working on a Human Development Report. At that time, the income of the rural population was relatively lower than people in the urban areas. When we asked people what they thought of their life quality, the inhabitants of Ulaanbaatar, whose life was on the whole better responded saying their livelihood was not good and the reserve was the response of the rural population. The fact that people in the urban areas complained about the poor business environment in the cities was related to the level of education of the people. We know that evaluation tends to be different depending on the knowledge and education level of the people.
Davaasüren: Businesses in Ulaanbaatar, in the study, have said that the business environment in the city is bad, which compared to other regions, was the lowest assessment. This, however, does not mean that the business environment in Ulaanbaatar is worse than in the other regions. Had we included all the regions in the study on an equal footing then perhaps we would have been able to compare the business environment of different regions and we could have got a different picture and know which region is better or worse than others. But the assessment given for each different region is what the businesses in that particular region think when it comes to evaluate their business environment.
Batnasan: I believe that such an assessment is being made depending on the level of education. I agree that from among the actions taken by the government to support the business environment, introduction of e-governance has been the best in terms of service. In this connection, I think it would be much simple if both the businesses as well as the government officials work under e-environment and in this sense, it would make good sense for the government to promote e-governance.
On the other hand, the Government is taking different actions to support business. In some respects, some of them, more than supporting the businesses, tend to become an impediment. Take for example the government mortgage loan. In the first two years when this scheme was launched the business flourished but when the size of the mortgage loan was reduced it had a negative impact on business. For instance, more than 100 of the 120 companies producing ready-made concrete are reported to have shut down. This is an example of how Government action fails to support business. Because a wrong signal was given thousands of apartment houses were built but today thousands of them have not been occupied and hundreds and thousands of construction companies are on the brink of going bankrupt because of the loans they had taken. How do you expect the Government to apply the result of your study in order to bring about changes in their actions and policies? Is anything being planned in this respect by your team?
Davaasüren: When we look at different sectors, we find that one sector differs from another in a big way. A sector which is making relatively good progress in the mining industry. Businesses in the trade, tourism, transportation and construction sectors are saying their business environment is not favorable. As mentioned earlier, this is the result of the instability of the government and its unstable policy.
We have also tried to look into the possibility of improving those business environments, which have been qualified as unsatisfactory, and we have found the following: Businesses was the lowering of the tax burden by introducing effective policy; reducing the interest on loans; flexibility in the size of loans; more simplification of the banks’s loan processes; and they have noted that the Government must conduct a policy that supports local industry supporting more local investment. Apart from this, the businesses also want effective tackling of corruption and bureaucracy; promotion of fair competition, creation of a favorable economic environment and conducting of a long-term state policy which ensures continuity. They also want to see the sectoral ministries and agencies staffed with professionals, who know their job and their sector; better coordination among the government ministries and agencies, and more emphasis on e-governance.
Our study is not a one-time research and the Chamber is paying heightened attention to this research and its impact. A set of actions and measures are already being planned for implementation by the Chamber as part of this study. One of them includes the setting up of an Economic Policy Council under the Chamber, whose primary duty would be to bring to the state and government the voice of the private businesses in the country.
As far as the research team from the National University of concerned, we plan to continue with this research once every second year and in this respect, we are working to further streamline the research methodology so that the research would be independent free of any kind of subjective influence with without.
Batnasan: Bringing the result of this study to the public is important. But because of financial and other constraints this may not be possible?
Davaasüren: This is indeed a very important concern. We have already launched the study inviting representatives of government ministries and agencies, private businesses, as well as non-governmental and civil society organizations. The National Chamber of Commerce and Industry has also posted the study in its entirety in its own website. Our next goal would be bring the result of the study to target groups.
Batnasan: In Brazil, development index of the states was compared, which helped promote competition. Similarly, in future if this study focuses on different aimags and regions, and compares their development and business environment, they would know where they stand, and this could help generate competition amongst them. As a researcher myself, I feel this kind of approach could be helpful. And taking this opportunity, allow me to congratulate your team for such an extensive research and wish success in your future research.