Legal Reform in Mongolia

Mongolia’s economy has a narrow base with a high reliance on the mining sector, and low income levels. These factors make the economy vulnerable to the commodity cycle and introduce economic risks associated with high inflation.

The Bank's recent assessments show that Mongolia's legal and judicial regimes have not kept pace with the recent economic developments in the country. In particular, reform is urgently needed to support non-resource sector development.
Reforms are also needed to help develop the infrastructure sector (in particular, by promoting the modernisation of power infrastructure and the development of renewable energy sources). The EBRD has been instrumental in helping to develop a new concession law for Mongolia, and continues to work to improve the legal framework for public-private partnerships and public procurement.
 
 

Access to Finance

Secured transactions reform has been on the agenda since 2006 and the EBRD has provided the Mongolian government with technical assistance for drafting the pledge law based on the principles of a modern secured transactions legal regime. Unfortunately, the reform has been stalled and no evident progress has been shown by the government since 2009 when the draft pledge law was finished. However, the new government has sent signals that they would like to see the reform taken further and the EBRD as well as the IFC (that has offered to help with the establishment of the pledge registry) will be waiting for the official invitation and presentation of the government’s strategy before deciding on future steps.
 
 
EBRD Legal Reform Projects
 
Since end of 2005, the Bank has been working with the Mongolian
government (Ministry of Justice “MoJ”), providing technical assistance for reforming and enhancing the legal regime for secured transactions over movable property, but progress was slow. The EBRD sent to the MoJ a final draft pledge law and amendments to Civil Code provisions on secured transactions. The project was completed in 2010
 
In 2014 the EBRD conducted an assessment on secured transactions which examined the availability of collateralising different types of assets regardless of the underlying legal instruments used to achieve the establishment of secured creditor’s rights. In addition to the classic security interests (pledges and mortgages the assessment also covered usual types of quasi security, such as sale and lease back transactions. The assessment also covered related issues such as enforcement and syndicated lending. The links below take you to the assessment results for Armenia.
 
 
 

Capital Markets

In the financial sector in Mongolia, the EBRD has focused on expanding support to existing and new partner banks (e.g. Khan Bank). Other EBRD’s investments relate to (i) developing the transport, energy and municipal infrastructure in the country; and (ii) mining industry. Mongolia has not yet signed the Memorandum of Understanding with EBRD in terms of a local currency lending programme and thus, local capital market development.
 
 

Contract Enforcement and Judicial Capacity

The EBRD Judicial Decisions Assessment 2011 found that the quality of court judgments in commercial law matters in Mongolia was among the weakest in the assessed region (Commonwealth of Independent States, Georgia and Mongolia). As is the case in other early transition countries, judges’ lack of experience with commercial law and practice, coupled with limited judicial training in such areas, adversely affect judges’ ability to deal effectively with these matters, particularly in the lower courts. Judges tend to decide commercial cases with reference to
general principles of law and civil code provisions, rather than applying the specific commercial laws which are relevant to the case at hand. Decisions of lower courts frequently replicate the text of parties’ submissions, and court orders are often poorly matched with the parties’ arguments.
 
Particular difficulties are encountered in cases involving disputes over commercial agreements. Here, judges’ lack of market experience complicates their task of understanding the underlying business dispute and interpreting the meaning of the parties’ agreement. One clear priority for reform in the area of judicial capacity and contract enforcement is systematic, targeted judicial training in areas of commercial and administrative law. The EBRD is currently working with the Supreme Court to implement a training programme to improve judges’ understanding of markets and the application of commercial law to practical business problems. Another priority is to continue with the commercial law reform process, taking into special account
the perspective of judges who will be called upon to resolve disputes in these areas.
 
 
 

Corporate Governance

The latest EBRD assessment of corporate governance (2007) found Mongolia to be in medium compliance with the OECD Principles. However, despite a number of recent proposed or enacted amendments made to modernise the corporate governance framework, compliance and practice fall short of international best standards. In particular it appears that boards do not effectively guide or supervise
management, but instead tend to manage the company themselves. Key policies on risk management, internal control and audit processes, disclosure, and succession planning are rare. Board nomination processes are generally opaque and dominated by majority owners, causing boards to be composed of insiders and to lack the necessary mix of skills. Financial reporting and non-financial disclosure remain underdeveloped.
 
(2013 Assessment of Corporate Governance of Companies – country report)
 
 
 

Debt restructuring and bankruptcy

The Law of Mongolia on Bankruptcy, adopted on 20 November 1997 (the “Bankruptcy Law”) is the centrepiece of the Mongolian legislation on insolvency.
The stated purpose of the Bankruptcy Law is “to govern the relations arising in connection with starting and settling a bankruptcy case, rehabilitation and liquidation of an insolvent business entity.” Nevertheless, the EBRD’s 2009 insolvency sector assessment (the “Assessment”) concluded that the Bankruptcy Law did not meet international standards of insolvency law and that the legislation was weak in a number of important areas, such as defining the assets that form part of the debtor’s estate, the provision of information regarding the debtor and its assets and the
avoidance of pre-bankruptcy transactions.
 
 
 

Electronic Communications

To support the evolution of policy and regulatory environment that best enables the significant new investment in infrastructure, EBRD’s Legal Transition Team previously worked with ICTPA and CRC on modernising sector policy and enhancing effectiveness of regulatory implementation.
 
 
EBRD Legal Reform Projects
 
Communications Regulatory Development
 
Through this project, completed in 2008 the EBRD provided advisory services to assist the Government of Mongolia to create a modern legal and regulatory environment for the telecom sector with a focus on building capacity within the Communications Regulatory Commission (CRC). Specifically: (1) Training and Capacity Building at CRC; (2) Assistance to government in sector policy development; (3) Assistance with optimising sector institutional structure; (4) assistance with revision of sector primary legislative; (5) Assistance with modernising of licensing regime; (6) Assistance with modernising tariffing regime; Assistance with modernising interconnection regime. Under the project, a significant programme of training was completed with CRC.
 
Communications Sector – Law Review & Secondary Legislation development
 
In 2010, the EBRD completed a review of the latest draft of a new communications law during the course of the Montenegro Regulatory Development TC, below, revealed significant deficiencies in the draft from the standpoint of EU compliance and investor attractiveness. A similar review of the draft law by the European Agency for Reconstruction concluded with identical concerns being relayed to government. The Bank has agreed technical assistance with improving the draft law and drafting of certain secondary legislation instruments with the Ministry for Maritime Affairs as to feasibility and timing of such Assistance.
 
 

Energy and resource efficiency

In the energy efficiency and renewable energy sectors, key applicable legislation includes Law of Mongolia “On Energy” (1 February 2001) (as amended), Law of Mongolia “On Renewable Energy” (11 January 2007), and Resolution of the Grand State Assembly of Mongolia No. 72 “On certain actions in the fuel and energy sector” (9 December 2010). Mongolia is considered to be one of the top ten most energy
intensive countries in the world. However, no adequate legal framework exists to address energy conservation and energy efficiency activities and no energy efficiency priorities and policies have been adopted by the government.
 
EBRD Legal Reform Projects
 
Ulaanbaatar Clean Air Initiative (Phase 1)
 
In 2009 the EBRD Ulaanbaatar Clear Air Initiative (UBCAI) responds to a request from the President of Mongolia and Minister for Fuel and Energy for help in addressing the chronic pollution besetting wintertime Ulaanbaatar City.
 
Ulaanbaatar Clean Air Initiative (Phase 2)
 
A key concept of the Operational Framework is the application of a tax on raw coal and the use of this tax to support the production of cleaner fuels and other initiatives aimed at improving air quality. An additional element of the Operational Framework is to establish an Independent Clean Air Fund to receive and disburse revenues from such taxes and administer the Operational Framework generally. While the original intention of the Operational Framework was to draft and adopt new air pollution tax and clean air fund laws, the Government, through the Ministry for Nature and Environment (MNE) is currently at an advanced stage of drawing up similar draft laws. Our recommendations above for an air pollution-type tax are consistent with the general frame of MNE’s proposals, but having reviewed MNE’s drafts there are some important differences. MNE are supportive of the EBRD approach and have requested TC assistance to ensure harmonisation of approaches. Accordingly, it has been agreed that EBRD will provide interim practical implementation assistance to MNE in ensuring the effectiveness and consistency of the MNE drafts with both the Operational Framework and international best practice prior to submission to parliament for approval. Work on this phase was carried out in August and September 2009.
 
Renewable Energy Advisory
 
The Government of Mongolia (GoM) has put into place a set of policy and regulatory provisions which create a favourable environment for attracting private sector participation in renewable energy development. Based on this framework, it is hoped that private sector investors will become keen on the formation of largescale renewable energy commercial operations in Mongolia.
However, there is concern about cumulative economic and financial impact of the accelerated intake of renewable energy and the possibility that such intake could undermine the financial sustainability of existing power sector operations and/or
affordability for end-use electricity customers, in the absence of adjustment mechanisms or mitigation measures. Accordingly, the Bank (upon request from GoM) has engaged a consultant to advise the Energy Regulatory Authority of Mongolia (ERA) in reviewing the current renewable energy feed-in tariff and proposing a mechanism to balance the effectiveness of the feed-in tariff to
attract investments to meet the national target and economic affordability. Agreement was reached with ERA in Ulaanbaatar in November 2007 with respect to the content and parameters of the TC. Consultant selection has been completed and in-country launch took place in June 2008.
 
 

Energy legal and regulatory reform

Mongolia’s economy is largely based upon mining and its development drives a continuing increase in the country’s energy demand. Coal has traditionally been the country’s primary source of energy, generating approximately 80% of the country’s power. However, most of the current installed power capacity for coal fired power plants in Mongolia is aging and inefficient resulting in significant electricity loss.
 
 
 

PPP/Concessions

The Concession Law is fairly recent and has been the first piece of special legislation adopted in the country without any prior experience in concessions, save for the mining sector. The Concession Law is one of the very few laws in all the EBRD countries of operations which has been drafted to take account of the best internationally accepted standards and in accordance with lenders expectations in order to ensure the bankability of project finance based transactions. It explicitly provides for a good range of PPP models as well as for all sorts of security instruments, for the possibility of Government support and guarantee together with a specific chapter on Lenders rights, for the possibility of direct agreement between the Grantor and financiers as well as for the lenders’ step in right.
 
 
 

Public Procurement

The Mongolian government declared it is aware of regulatory and policy challenges and decided to continue legislative reform with plans to redraft public procurement legislation and implement eProcurement reform in forthcoming years. At the request of the Mongolian government, the EBRD has started a technical cooperation project regarding the facilitation of market development through increasing small and medium enterprises (SMEs) participation in public tenders. The project encompasses relevant policy advice and capacity building of appropriate market participants. Mongolia applied for participation in the EBRD UNCITRAL Initiative and a policy workshop was planned for late 2012 / early 2013, gathering together local stakeholders and policy makers. By experience of other workshops within the Initiative, such workshops help to clarify the national government reform agenda and to structure technical cooperation projects in order to support reform efforts. Mongolia also considers starting negotiations to access the WTO GPA.