What happened to Avo in Mongolia?

Over the past few months many of my friends have been asking me, "Avo, hows Mongolia?" I often reply,
"hold up, let me check my iPhone.. Yup, -30F, which means the expats are still wearing their gas masks!

Despite the pollution and the vodka cajoling winters, I was totally struck by the country and began seeing myself living there. This vision became reality when I received a job offer and had accepted it. It was not until the Mongolian Immigration Office delayed my work visa for three months (whereafter I had gone to visit family in Europe) that I began to see things differently and came to new conclusions: Living the exotic life of an expat in such a wild and rustic country as Mongolia, developing investment proposals for your family office and traveling around the greater Asian region on weekends does sound great, but is it worth seriously risking your health and mental sanity during the darker months of the year?

From time to time I kick myself for not sacking up and staying there. Regardless, I'm satisfied with my decision. There are many opportunities in Mongolia, but lets not discount those in the United States, especially now that key asset prices are falling. Everything is measured in cycles.

The Pollution Crisis

Most people who come and visit Ulanbataar come in the summer when the average temperate is comfortable. But during the winter months things start to change. The temperature drops at lows close to -40 Celsius and pollution levels are even higher than the infamous northern Chinese cities.

Sixty percent of the 1 million residence of Ulanbataar live in peri-urban developments north and upwind of the city center. They live in small shacks and round ger huts, the traditional nomadic Mongolian home. Because they are not on the cities' heating grid, these people resort to burning low quality coal, wood, and in often trash as a means to stay warm during the harsh Siberian winters.

A view of a Ger district outside and upwind of Ulanbataar. I think that man is sleeping.

I have heard stories from people since I have arrived. They truly believe that this pollution is killing them. I've heard that its not uncommon to see people driving some mornings with their headlights on just to see through the pollution haze. Others say that they refuse to step outside without a heavy-duty air filter mask. Ulanbataar is well on its way of becoming the most polluted city in the world, if its not already there.

The pollution poses great health risks as it contains carbon monoxide, mercury and lead. Each year people claim it gets worse as an increasing number of people move from the rural parts of Mongolia to the capital, increasing to the density of the ger districts and driving up the number of cars on the road. Another factor which contributes to the poor air quality is dust, much of which is kicked up on the poorly paved roads. According to Reuters, over 80% of children under the age of 5 suffer from some sort of respiratory disorder.

In Ulanbataar the average particulate matter concentrations (PM10, i.e, particles that cause damage to the lungs when inhaled) have been recorded as high as 279. To put this in perspective, the World Health Organization's recommendation PM10 level is 20. That means that Ulanbataar's PM10 levels are 14 times higher than the levels recommended by the WHO. This is repulsive.

a typical winter day in Ulanbataar..

This problem needs to be solved, and fast. I have heard that the government has a lot of money for anyone who can come up with a creative way to solve the nation's pollution crisis. Many want the government to invest in new and more efficient heating stoves for the local ger districts and provide the people with higher quality coal (which the country has plenty of). Others are saying the government should subsidies some sort of natural gas initiative. Whatever they do, it must address the problem at it's root and not be some sort of pollution control technology as this would only prove to be a waste of the peoples time and money.

One step in the right direction is known as the Japan Fund for Poverty Reduction (JFPR) project, where the United Nations Development Program has engineered a blanked which the people living in the poor neighborhoods will use to cover their ger tents. The aim here is to better insulate them in the colder months, and to reduce emissions, heating consumption, and thus their energy bill. Within the project also exists funding to create local businesses which will produce and supply these insulating blankets.

a typical Mongolian ger and the insulating blanket.

It's funny, as I'm writing this the skies are bright blue and the air is fresher than ever. I have been here for 10 days and I cannot fathom what this place thickened with death smog must be like. Let me tell you the pollution is really the only thing that really terrifies me about considering to stay here if I were to find an interesting job. All I can say now is that I hope the government is wise and forward thinking enough to create a solution which will provide jobs for the local people while educating them about environmental sustainability and the harmful properties of carbon emissions.

Conference Day 2

I'm a little peon compared to most of these guys I'm sitting with in the investemnt conference.. First of all this is because I forgot to pack a business suit. This is due to a few reasons including having no space in my travelpack, the fear of being charged for extra baggage and the idea of having a suit for 2 months stuffed in my bag without being able to find dry cleaning (I've seen like 6 of them since I've been here)...
So now I have to accept the fact that I look like the casual journalist while everyone resembles a legitimate and professional investor, armed with pin stripes. I wont kid myself though, it's alright because I'm not here to invest just yet, I'm here to learn and report, and thats what journalist do, right? But let me say, there is so much information being covered, more than I could even consider writing in the "Day 2" portion of this blog. For that reason, I am going to be very selective and wright about something which I find most interesting. Ch-check it out.



Potential for Private-Public Partnerships in Mongolia

One vehicle of investment which many are saying is vital to perpetuate growth in Mongol are PPP initiatives (Private-Public Partnerships). PPPs are used typically in developing nations who cannot necessarily fund essential hard infrastructure sectors (transport, housing, water, energy, health and education) themselves and thus need the help of the able and interested global private sector. A common type of PPPs are BOT schemes (Build Operate Transfer schemes). This means that a private investor builds a highway for example, operates and collects revenue from the highway (in this case through a toll) and then transfers the ownership to the government of that nation once he has collected his desired but not piggish profit.

If careful planning is done, many believe this is a viable solution for the government to raise funds for hard assets in Mongolia. This is because such an investment would be a win-win situation for the investor and the government as it has limited obvious drawbacks compared to other methods of capitol raising such as issuing sovereign debt, increasing taxes or increasing the money supply.

One interesting point which I have learned is that honest politicians support BOT initiatives, whereas dishonest ones might reject them. This is because BOT initiatives put the investment out of the politician's hands, making them impossible for them to profit from. A good example of this dishonest profiting was seen in the late 90s when President Maria Gloria Macapagala-Aroyo of the Philippines dishonesty approved (and its implicated that she profited from) the National Broadband (NBN) project despite an initial proposal which would not cost the government a single cent of taxpayers money. More information concerning this scandal can be found in this blog post by the Vincenton Post.

In Mongolia, the IFC, a member of the World Bank Group and the largest global development institution focused on the private sector of developing countries has signed a memorandum to support the government in selecting private partners to prepare, structure, market and implement competitive projects which would best aid the country. The memorandum was signed in October of 2010.

More information is available here courtesy of the IFC. I believe that the involvement of such a globally recognized institution will help avoid any corruption. The next question is what is happening now, a year later, and how can private investors get involved? This is something that I am going to investigate during my time here. Stay tuned.

Frontier Securities Conference 2011: Day 1

Today was the first day of the Frontier Securities Annual Conference here in UB. It's taking place at the Children's Palace, a convention center. I was about 2 hours late after a series of taxies took me to a lineup of wrong locations, including a middle school, a children's health clinic, and the Mongolian children's authority (a government public organization). Gotta love that language barrier.

What I saw of the conference was very interesting. They covered a lot concerning the coking coal and copper markets but the part which really stood out to me today was the bit concerning the soon expected Tavan Tolgoi IPO. There was a panel discussion where questions concerning the privatization were asked to a few key players instrumental in the process. This included Parliament Member of Mongolia, the COO of Frontier Securities, as well as the Deputy Director of BDsec, Mongolia's largest broker.

In the discussion, the 30/10/10 share distribution was brought up, witch I mentioned in the last paragraph of my previous post entitled Resource Curse. I've understood this breakdown as 10% being given to Mongolian citizens, another 10% being given to Mongolian companies and 30% listed on international exchanges (also the additional 50% being kept nationalized). This I see is a good thing as it would seem to create a sound economic foundation the country can build on. However, like I mentioned in my previous positing the government must create a sort of a lockup provision to keep this wealth in the local community and prevent speculators from snatching up all the privatization vouchers.

A recent article from the WSJ addresses this important issue. It talks about how 20 years ago when the nation finally was able to turn its back on Soviet style Communism it began privatizing many of it's state owned assets, giving out shares to the local people in the form of vouchers. However, many of them who were uneducated sold off the shares for a quick buck, intern allowing some foreign and local speculators to generate massive pools of wealth leading to great resentment. That was 20 years ago, and now the government is going to do it again, but as mentioned in the above WSJ article, this time the government is to create a lockup provision which will prevent these locals from selling off their vouchers immediately. Although it is unknown as to how long this provision will be instated for, many expect it to last 1-2 years.

Returning to the panel discussion, it was interesting to hear that one women was not in support of an IPO being used to raise initial funds, but rather that the government should do so by issuing debt. Her argument was that the shareprice needs to gain value before it's issued as an IPO. Also, its unknown exactly how much is in the ground, somewhere around 6 billion metric tons. Knowing a more accurate number would create a more accurate value. She went on to saying that many Mongolians are uneducated in regards to the securities market and if they were given shares (536 each initially) which were valued higher it would increase their desire to educate themselves about the securities market. "thats what this 10% issuance to the Mongolian citizens is about" she said. "It's about opening the door to our citizens to the Mongolian securities market".  I found her point very valid and seemingly very important in the process of financing this major project and at the same time socioeconomically modernizing the country.

First Day of Arrival

It's Monday. On Saturday I arrived here in Ulan Bataar at 06:30 after nearly missing my connecting flight from Moscow due to a flight delay. Thankfully there were about 15 people on my flight from Zurich-Moscow with a final destination of UB so they grounded the flight until we all arrived at the gate.

Upon arriving I was so insanely jetlagged. I got to my hostel and passed right out until noon. I then woke up, walked around the city for a few hours and got my barrings straight. Souel street, Peace avenue. East to West and they run parallel to each other. That's all you need to know it seems. Being here is my first time in an proper Asian country so that first walk around town was a bit of a culture shock. It has the feel if the wild west out here, but with a little bit of that obvous easternness. In a way it's almost reminds me of an unswept Mexican boarder town, the main streets are laden with bars and restaurants. They seem to cater towards western tourists in a way but not many are here to be seen. When you do see them they seem to be those middle aged miner types, you know, those guys with the thick mustache, BBQ gut and sun beaten skin. They always seem to be accompanied by a young and healthy looking Mongolian, indeed their local connection.


Anyways, later on in the evening I met with a new friend, someone I've never met before but was put in contact with through a friend. He's an Englishman in his late 20s and the head of metals and mining investments for Origo Partners, a private equity fund specializing in mineral exports to China. We had dinner together then went out for some drinks. "There is this concert tonight" he said. "It's this expat Mongolian group, should be fun!" Right away I was reminded of these guys I had stumbled across during my research on Mongolia over the past few months, a sweet music remix of Empire State of Mind by this duo called Jesse James. "That just sounds like it would be the guys who did UB State of Mind" I said to him. I was taken by surprise when I found out that it was indeed those same guys. Crazyness!

The place was full of english speaking Mongolian locals and expats in their 20s and 30s working in UB, mostly for private equity or mining startups, investment banks, property or sustainability focused NGOs. They were cool, welcoming people and it was good to see a strong expat community. It was crazy meeting Jess from the video above, and the guitarist James. Jesse works for one of the largest property firms here in UB and James for the Wildlife Conservation Society as a research biologist. Very cool dudes. I felt a bit like a groupie talking to them, but not so much, their video only has 25,000 views... ;)

I spent Sunday hiking up one of the hills around UB. It was a lot of fun, and we got a good view of the city. Im keen to get out of the city though and do some hiking in more rural areas... After all, Mongolia is the size of Western Europe and only houses 3 million people... there are ALOT of rural areas.

* * * * * 

Something which I have to mention both because its hysterical and slightly disturbing that I've heard from so many people already after being here for only 3 days is the violence in this city towards non-locals. Apparently its very common for non-locals to get jumped or simply sucker punched in the street when walking around town, especially at night. It's a phenomenon to the expats out here, just something they have learned to accept. A few of them were telling me,

" I feel safer here in UB than they might back in London because here in UB the people will fight with you for sport, not because they are bloodthirsty. You'll never see a Mongolian with a knife or a gun, but they love to fight and often do with foreigners to show their dominance over them. Back in London however you get these street kids with knives who go looking for fights and an excuse to stab you, thats something to worry about!"

To be honest I think this might be something to worry about. I don't wanna be having a goodnight out and then unknowingly get my ass handed to me by a group of thick Mongolian dudes. I've heard that even when you smash their face in defending yourself they wipe the blood of their broken nose and busted lip with a huge smile on their face, so happy that you've decided to fight. These guys are the last great nomads on the planet facing -40c winters live well below the poverty line. They know no pain. I must say though, thank goodness they have more heart than the thugs in England.

The Mineral Curse

One of the main reasons investors are hesitant to invest in Mongolia is due to it’s abundance of natural resources. It’s called The “Paradox of the Plenty” and it has proved fatal for many mineral rich nations. This is paradox is expressed through something known as the Resource Curse, or the Dutch Disease. The path to oblivion can occur in a few ways. First is through revenue volatility. Quite simply this is danger created in an under developed market where the vast majority of the revenues are coming from the export of one commodity. If the spot price of that commodity were to shift more than expected, it could cause havoc in the producing nations economy (seen in Angola). Second is the classic example of excessive borrowing. Believing they can secure future debt payments many mineral rich nations have borrowed great amounts; some have not been able to pay them back. Third is the more specific concept of the Dutch Disease. It goes like this: Nation becomes rich from exporting natural resources; its currency appreciates. Because of this the nation’s exports become more expensive for other nations, leading to the nation’s manufacturing sector becoming less competitive.

The three reasons above are key in understanding how governments of mineral rich nations often lead their country into economic blunder. However there have been exceptions. Batswana, Canada, China and Norway among others have all proved the resource curse to be avoidable.

So how is the resource curse to be turned into a mineral blessing?

The secret lies in good governance and accountability stemmed from trusted institutions such as NGOs and pressure groups. Their job is to lobby for new resource revenues to be constructively distributed among various social infrastructure projects including healthcare, education, housing, pension fund improvement and creating more job opportunities. Nations have tried to simply give their citizens ‘cash handouts’. Currently Mongolia gives its citizens a cash handout of $20 each day. This does not work, and if increased will likely boost Mongolia’s alcoholism problem.

Something that would work would be the creation of a stabilization fund. Mongolia’s former Country Manager for the World Bank, Arshad Sayed, writes about the importance of this type of fund.

“The importance of fiscal policy across the ups and downs of commodity prices, suggests that much like the herder in Mongolia who saves, and dries his curds, meat and other things in preparation of the winter, some form of a stabilization fund, that accumulates the extra revenues that come suddenly, would be important.  These revenues would ideally be managed by an entity that has no authority to spend the money.  The rules for when and which revenues should be accumulated and when they should be spent should be very strict and transparent.  The stabilization fund can be helpful to smooth government revenues and thereby spending over the commodity price cycle.  Second, it might help in smoothing growth. Because the fund accumulates money when commodity prices are high, the money can be spent in years when the prices fall. As such it can prevent the economy from overheating when it is growing very fast and provide a stimulus when it begins to slow.”

Where does Mongolia currently stand?

Mongolia’s president Tsakhia Elbegdorj is aware of a need more stringent government action. In a CNN article, he claims that the government is working on laws to strengthen mining regulations, increase transparency, and avoid over-exploitation and eliminate corruption.  

One notable step is Mongolia’s compliance with Extractive Industries Transparency Initiative (EITI). This initiative, endorsed by the World Bank, increase transparency over payments by companies to government and/or non-government entities such as the above stabilization fund. It’s statement of principles can be seen here. This is a very important step the government has taken to move forward and eliminate corruption while increasing the confidence of foreign investors.

Another development worth noting is the expected late 2011/early 2012 IPO of Erdenes Tavan Tolgoi, a state owned company witch owns massive untapped coal reserves in the Gobi Desert. According to Raw Materials Group, a data provider company based in Stockholm, the coalfield is the second largest in second largest in the world, behind Shengli in China.

The interesting part about this IPO is how its structures. Only 50% of the shares will be issued as stock. 30% of those will be sold to investors listen on the Hong Kong and/or London sock exchanges, 10% to wealthy Mongolian private business owners, and 10% to Mongolian citizens. Thats right, 10% of half of the expected $1.5bill - $5bill IPO will be given to local Mongolians, the vast majority of witch live below the poverty line. If these sums are structured in a way where the local people cannot simply sell them off but must keep them for a period of time, allowing them to appreciate in value, it could provide for a healthy long-term fiscal foundation the nation could build on.

Days until Departure

It's a little over a week now until I depart on my journey. My flight is booked and my bags are almost packed. On June 3rd I fly from Zurich, Switzerland to Moscow and then onto Ulan Bator, Mongolia. I fly with Aeroflot Russian Air, you know the airline with the Hammer and Sickle set in their corporate logo?  

A few days after my arrival there is a 5 day conference entitled the 2011 Mongolian Capital Raising and Investment Conference where heads of industry are gathering in Ulan Bator to discuss new investment opportunities in the Mongolian Mining, Real Estate and other booming industries. It should be a great environment to learn new developments, network and meet some key people. I will be attending, which means I have to pack a suit. Packing a suit into a travelers rucksack is going to be interesting.. I hope they have dry cleaning in Ulan Bator.