SMEs in Mongolia face significant transaction costs in conducting business with government agencies. A survey of 807 SMEs found the largest transaction costs come from dealing with customs authorities, with average costs of 11 million Togrog. Other substantial costs include dealing with taxation authorities (average 2.8 million Togrog) and obtaining permits from inspection agencies (average 3.27 million Togrog). Reducing these transaction costs through streamlining regulations and processes would improve Mongolia's business environment for SMEs, who make up the majority of business entities and employment in the country.

1. TransactionCost of Conducting Business
in Mongolia:
SME perspective

2. SME’s Importance
Playscrucial role in JobCreation
In Mongolia,SME represent
98% of number of business entities
52% of employment
22% of exports
Therefore, theGoM in collaboration withdomestic and
foreign institutionsimplement many programs directed at
SMEs:
Chamber ofCommerce of Mongolia; JICA; EBRD;World Bank;
UNDP; Swiss Dev’t Agency;ADB

3. Business Environment:
what are impediments?
WorldCompetitivenessReport 2014-2015 (WEF2014):
Heavy Bureaucracy of Government agencies
Exchange rate risks
Lack of skilled labor
Inflation
Political instability
Corruption
Doing Business (World Bank 2014)
Lack of electricity
Difficulty in obtaining various permits and licenses
Compiling export and import documents
Closing a business

4. Business Environment:
what are impediments?
ADB (2011) out of 5 points
High tax rates 2.78
Lack of skilled labor 2.64
Difficulty in obtaining licensesand permits2.39
Lack of financing 2.18
Lack of collateral 2.07

5. We are interested in :
Transactioncost
This cost incurred before, during andafter the interaction
(transaction) toensurethat you do not get deceived by the
other party.
This activity is a wastebecause it does not create value for
you and theother party.
Search and information
Bargaining and decision making
Policing and enforcement
Cumulatively it may represent a significant cost toconduct a
business!

6. Our objective
Identify sources and measure the
size of transaction costs to the
SMEs in dealing with the
government agencies
Costs can be measured in monetary terms and/or days
lost

7. Who are SMEs?
Sales andindustrial sector
Less than 199 employees
Less thanTogrog 1.5 bln in sales revenue
Wholesalesector
Less than 150 employees
Less thanTogrog 1.5 bln in sales revenue
Services sector
Less than 20 employees
Less thanTogrog 1 bln in sales revenue

8. Survey was conducted
From 807 of SMEs, which represents 54,929 business entities
We asked 217 questions
Following 10 sources of transaction costs:
Obtaining permits and dealing with inspection agencies
Dealing withTaxation authority
Dealing with Customs authority
Dealing with General inspection authority
Registering a business
Costs related to enforcing contracts and resolving disputes
Costs related to having an access to infrastructureand communication
Dealing withCentral and local gov’t with regards to gov’t procurement
Costs related to Innovation and renovation

9. Obtaining permits and licenses
and Dealingwith inspectingagencies
These costsare related to activitiessuch as bribes, waiting for
permits, getting more info about permits, hiring somebody else
to obtain permits etc
51% of respondentsobtainedsomespecial permit
More than halfof these businesses hasto renewpermitsevery
year
Businesses spent on averageTogrog 3.27 mln in these activities

10. Dealing withTaxation authority
These costs related to preparing taxdocuments,dealing with
inspectorsfrom taxation and social insurance authorities,finesand
penalties,illegal paymentsto inspectorsetc.
71% spentTogrog 2mln on these costs or more
One fifth of these paid more than Togrog 5 mln
On average SMEs spentTogrog 2.8 mln
Of total transaction cost:
58% were in penalties
27% in days spent dealing (6 person-months every month)

11. Dealing with Customs authority
These costsare illegal paymentsto customsofficers, time spent
collecting andfilling documents,wait time to get processed,
penaltiesetc.
50%of SMEs involved in exporting/importing
On average SMEs spendTogrog 11 mln (highest)

12. Dealing withGeneral inspection authority
These costsinclude hosting inspection agents,paying finesand
penalties,dayslost disputing the chargeetc.
Dealing with Inspection agencies(sanitary inspection,work
safety inspection,fire inspection)
26% dealt with inspection agencies
On average SMEs spentTogrog 1.84 mln
71% of SMEs appreciatedtheimportanceof issues raised by
General inspection authority

13. Conclusion
These costsare substantialfor SMEs
Especially,dealing withCustoms authority is painful
Decreasing transaction costswill improve overall business
environment