PRESENTATION

1. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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2010.01.25
NATIONAL DEVELOPMENT AND INNOVATION COMMITTEE
G o v e r n m e n t a g e n c y o f M o n g o l i a
www.ndic.gov.mn
Development Bank of Mongolia:
Needs and Risks
Ch. Khashchuluun
National Development and Innovation Committee,
Government Agency of Mongolia

2. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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Current economic conditions
• Structural weaknesses - 30% of its GDP and about 40%
of the government revenue depend on the mining sector
• Growing vulnerability because of larger projects in
mining
• Need to diversify into processing of mining products
and agricultural raw materials such as meat,
cashmere/wool, leather, develop tourism, IT,
infrastructure, regional development, support green
economy and environment protection, etc

3. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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Structure of merchandise exports in Mongolia (% of total exports)
EBRD London Conference, Source: World Trade Organization, Trade Statistics
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Fuel and Mining Manufacture Agriculture
• Increasing dominance of the mining sector

4. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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• Priority one: Developing mining sector by exploiting mineral resources deposits and
setting the foundation for heavy industry: Industrial projects to develop the base for
heavy industry
• Priority two: Developing intensified agriculture and implementing industrialization
policy: Projects in biotechnology, intensive agriculture to increase food production
• Priority three: Developing infrastructure: Projects for developing infrastructure linked
with exploiting mining deposits such as constructing new railroads, new power stations
and constructing paved roads in rural areas.
• Priority four: Providing sustainable development through human development and
protecting the environment: Projects on environment protection, promoting tourism,
establishing training-production parks for information technology.
• Priority five: Improving governance and supporting private sector: Supporting
private sector and developing public-private-partnership.
Strategic priorities in investment, 2010-2015 Government decree No 320, 2009

5. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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№ Government Decree No 320. 2009 Project name
Estimate of cost
/$ million/
Timeframe
Priority one: Developing mining sector by exploiting mineral resources deposits and
setting the foundation of heavy industry
1 “Oyu Tolgoi” project 4,000.0 2010-2015
2 “”Tavan Tolgoi” project 800.0 2010-2015
3 “Copper smelting factory” project 1,000.0 2010-2015
4 “Metallurgy complex” project 1,000.0 2011-2016
5 “Coke -chemical plant” project 700.0 2010-2015
6 “Oil refinery ” project 900.0 2011-2015
7 “Coal chemical and processing plant” project 1,000.0 2010-2015
8 “Construction materials” projects 800.0 2010-2015
Priority two: Developing intensified agriculture and implementing industrialization policy
9 “Healthy food” projects to make livestock healthy and increase meat and dairy production 150.0 2010-2015
10 “Development of irrigation systems” project 50.0
11 “Agricultural products and raw materials exchange market” project 50.0 2010-2011
12 “High-technology-based industrial complex and science parks” project 400.0 2010-2015
Priority three: Developing infrastructure
13 “Tavan Tolgoi Power Station” project 400.0 2010-2015
14 “New railroads” project 800.0 2010-2015
15 “Providing Gobi region water needs from Orkhon river” project 540.0 2010-2015
16 “National satellite for communications of Mongolia” project 100.0 2010-2015
17 “Upgrading of Ulaanbaatar roads” project 900.0 2010-2015
18 “Development of international, national and domestic auto roads” project 1,200.0 2010-2015
19 “Highway from Altanbulag – Ulaanbaatar – ZaminUud” project 1,200.0 2010-2015
20 “Power plant number 5 ” project 300.0 2011-2016
21 “Construction development project “Providing population with accommodations” 2,100.0 2010-2015
22 “Energy from waste and biomass” project 200.0 2010-2015
Priority four: Providing sustainable development through human
development and protecting the environment
23 “Information technology development and training town” project 100.0 2010-2015
24 “Students town” project 300.0 2010-2015
25 “Khar khorum – 13th century” Harkhorin tourism development project 500.0 2010-2015
26 Polluted and used water purification “ECO” project 200.0 2010-2015

6. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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• Budget investment - Projected 2010-2013 annual revenue public investment
possibilites: 350-600 million USD
• Loans and aid - no more than 200 million dollars annually
Possibilities:
• Raising funds domestically and internationally through IPOs using mining assets
and linking the funds with development of infrastructure
• Creating a new channel of financing by mobilizing international development
finance into domestic bankable projects
• Supporting FDI
Funds available

7. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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A proposed channel of funds into development
Shareholders
Other
Intl. Org.
IFC GoM JBIC
Private Org.
DBM
Infrastructur
e
Rural
Development Environment and green economy
Processing industry

8. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
З а с г и й н г а з р ы н т о х и р у ул а г ч а г е н т л а г www.ndic.gov.mn
What is Development Bank?
• Development Bank is a national or regional financial institution
with intention of providing mid and long term capital for the
creative investment /economic development.
 If we focus on the development banks as national development
institutions:
• National Development Bank is a financial institution primarily
concerned with offering long-term capital finance to projects
generating positive externalities and hence underfinanced by
private creditors.
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9. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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Development Banks’ yesterday
• At the time of industrial revolution, the banks in England,
French, Italy were performing some of the functions of modern-
day development banks for their growing industries.
 Medici Bank, Rothschild and the House of Morgan etc.
• After World War II, the lack of long-term funding for
investment projects encouraged many countries to make
decisions of establishing Development Banks.
 Korea Development Bank, Development Bank of Japan, KFW Banking
Group of German etc.
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10. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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Development Finance in the market economy
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HIGH
HIGH
LOW
LOW
Profitability
of operation
Public nature
of operation
B. Mixed public and
private sector
A. Public sector
C. Private sector

11. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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Operating Scope of the Development
Bank of Mongolia(DBM)
To make mid and long term
loans and do other financial
activities with the intentions
to support development of the
sectors referred in Mongolia’s
development policy, produce
more value added goods and
improve the economical
competitiveness.
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12. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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Development Bank and Economic Growth
• The Roles of a Development Bank, a development finance
institution, are vital for a nation’s economic growth,
particularly during the crisis.
 International Conference on Financing for Development (Monterrey,
Mexico,2002), Doha Declaration on Financing for Development(2008)
• The establishment of the Development Bank of Mongolia takes
a critical place for Mongolia’s development.
 Exploit the strategically important mining deposits
 Accelerate economic growth through implementation of large
industrialization projects
 Develop processing industry
 Re-structure economy
 Promote competitiveness of Mongolia in a global arena
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13. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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 The scope of financing options is limited to implement large
volume infrastructure and industrial projects referred in the
government action plan.
 Domestic financial sector remains scarce and lending rates of commercial
banks are high.
• The DBM needs to be established to expand more investment
for the implementation of government action plan, to create a
new source of the official development assistance and to develop
national financial market.
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The Government Action Plan and
the Development Bank of Mongolia

14. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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Development Bank Partnership with Commercial Banks
• The DBM will not compete with commercial banks in their
funding activities, it will provide conditions for
harmonious and mutually beneficial cooperation with
commercial banks.
 The DBM will provide long term funding for large, technology intensive
industrial projects that CBs can’t provide.
• The DBM partnership with CBs will create new banking
activities.
 Funding large projects through loan syndication
 Assisting in raising funds in international markets
 Providing guarantees to private sector
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15. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
З а с г и й н г а з р ы н т о х и р у ул а г ч а г е н т л а г www.ndic.gov.mnThe DBM and International Bond Market
• The current credit rating for Mongolia that evaluates her
ability to repay her debt on time is lower to issue sovereign
bond in international bond market.
 Standard & Poor’s –BB/, Moody’s Investors Service В1
• To issue its bond in international market, the one’s credit rating
must be BBB at least.
• Credit rating for the DBM can be higher than Mongolia’s.
 Downgraded credit rating for the government doesn’t have to mean that
her total industrial output declined.
 A legal entity whose investors are well known in global arena and
managed to build strong competitive advantages in international market
can upgrade its credit rating while the government credit rating
downgrades.
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16. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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Common reasons for success of Development Banks:
• The DBs only make loans to bankable projects.
• Interest rates of the DBs must be determined to be sufficient to
cover its expenses.
• The independence of loan decision process must be ensured.
• The management team of DB should be independent
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17. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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Corporate Governance of Development Bank
• Good corporate governance of the DBM is a key factor for not
repeating the state owned commercial banks’ failures in the
past.
• Therefore, on one hand the DBM needs to secure equity
participation from international organization and on the other
hand the DBM’s Board of Directors should include
representatives from the government and domestic investors.
• Finding and attracting the best experienced specialists with the
required skills set are vital to the DBM, while their
compensation should be competitive with the compensation
offered by commercial banks.
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18. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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JICA Experts’ advice on establishment of the DBM
• Lend in accordance with the government development
programs
• Lend only bankable projects with interest rates that cover
funding costs and other expenses.
• Have a mechanism to receive subsidy or equivalent in case the
DBM has to lend not bankable projects, but priority to the
GOM projects.
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19. ҮНДЭСНИЙ ХӨГЖИЛ, ШИНЭТГЭЛИЙН ХОРОО
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JICA Experts’ advice on establishment of the DBM
• Have an able management team with determination to
lend based on objective credit analysis
• Cooperate with Mongolia’s commercial banks
• Carry out ample training with an emphasis on
management of development bank and credit analysis
• Number of expected employees are 45.
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