Tuesday, 2018.08.07 №57 TRILINGUAL WEEKLY INDEPENDENT ANALYTICAL NEWSPAPER www.defacto.mn

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ARTICLE REVIEWDeFacto

MONGOLIA’S INFLATION RATE IS 7.2%

UPDATES ON VEYSEL AKCAY CASE

THE PRICE OF EDUCATION IN MONGOLIA

ARTICLEDeFacto

Gerelmaa BatchuluunCo-founder and the CEO of the US based STEPPE TECH

FinTech regulatory Sandbox for Mongolia: EMBRACING NEW MARKET OPPORTUNITY WHILE PLAYING SAFE

BUYANT UKHAA

Countless opportunities at

№ 441

ARTICLEDeFacto

JARGALSAIKHAN Dambadarjaa For weekly articles,

visit http://jargaldefacto.com/category/23

BUYANT UKHAACountless opportunities at

Mongolians haven’t been paying adequate attention to an important business opportunity that is not dependent on

commodity prices or permits from neighboring countries, has much less environmental implications, creates hundreds of jobs, attracts tens of millions of dollars’ investment, and diversifies the economy.

The Buyant Ukhaa airport has an opportunity to generate even more revenue than the mining industry if it successfully expands its operations in a disciplined way, ensuring its workforce is well prepared and relevant standards and regulations are complied with. This business opportunity is aircraft maintenance. Even though Mongolians have been in this business for many years and have recently entered the international market,

we aren’t seeing the bigger picture and have neither set out a long term vision nor paid enough attention. Also, this business hasn’t been allowed enough freedom.

However, as our international aviation services are going to be

moved to the new airport at Khushig, a historic opportunity has come up for

the aircraft maintenance business.

As the aviation industry grows at an aggressive pace globally and in the Asia-Pacific, there is increasingly a strong demand for all types of maintenance work for aircrafts. This means Mongolia now has a rare opportunity to take good advantage of our geographical location and vast territory.

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ARTICLEDeFacto

MAINTAINING AN AIRCRAFT COSTS MORE THAN BUYING ONE

The International Monetary Fund projects that global

economic growth will be at an annual 2.8 percent in the long

term. Randy Tinseth, Vice President at Boeing, suggests that

the global passenger traffic will increase by an annual average

of 4.7 percent, and freight turnover by 2 percent over the next

twenty years. He also commented that there are about 24,000

aircraft in the global aviation industry today, and 18,500 of

them are likely to be replaced over the next 20 years with

42,700 brand new ones expected to come in as well. It is

expected that the new aircraft will cost 6.3 billion USD while

their maintenance costs will be at around 8.8 billion USD. The

fastest growth is expected in the Asia-Pacific, with China and

India topping the list.

Over time, the purchase price of an aircraft is dwarfed by

maintenance costs. Internationally, the supply for flight crews

and maintenance capability has always struggled to keep up

with demand, creating a shortage in the market.

The International Air Transport Association (IATA) has determined that 10-15 percent of the operational

costs of international aviation

companies go to maintenance. In 2015 alone, the Asia-Pacific countries

spent 18 billion USD on maintenance, and this is expected to increase by 71 percent in the region in 2015-2025,

and by 93 percent in China.

The Asia-Pacific region has several maintenance hubs in

Taiwan, Shanghai, Singapore, Indonesia, the Philippines,

Malaysia, Vietnam, and Thailand. Aviation companies with big

fleets such as Korean Air and Asiana Air usually have their own

maintenance units while companies that offer low cost, budget

aviation services such as Easter Jet, Jeju air, T’Way, and Air Asia

outsource maintenance units from third parties. Globally, 45

percent of aviation companies are outsourcing their aircraft

overhaul services.

In order to be able to fly, aircraft must undergo frequent

inspections, maintenance, and repair work (A-check happens

every 45-70 days, C-check every 24 months, and D-check every

5-10 years). These services, including MRO maintenance, repair,

and overhaul, are provided by a maintenance unit that meets

all relevant requirements and certified by manufacturers.

Aircraft maintenance services have been provided in

Mongolia for many years. MIAT’s aircraft maintenance unit

provides inspection, maintenance, and repair services to

their Boeing B737 and B767 aircraft. This unit currently has

a team of 170 engineers and technicians, who have been in

charge of technical services and maintenance work for all

aircraft that were ever used in Mongolia. Since 2005, this team

has implemented the international ISO 9001:2008 standard,

having been certified in safety and technical services by

countries such as the European Union, South Korea, Thailand,

and Turkey.

Mongolia’s aircraft maintenance unit works in two hangars

that comprise 3,600 and 2,000 square meters, and provides

daily maintenance services as well as complete overhaul.

There are 14 workstations equipped with modern technology

and toolsets. Given it is already approved by Boeing, this

unit has been providing maintenance services not only to

MIAT’s aircraft but also aircraft that belong to international

companies.

So far, our maintenance unit has worked with nine companies (including Thailand’s Orient Thai, Jet Asia Airways, and Asian Atlantic Airways, South Korea’s Eastar Jet, Jeju Air, and T’Way, Russia’s UT air and Alrosa Air, and Blue Star Aviation

from the United States) from four countries and completed heavy maintenance services on five B737 and B767 aircraft as of 2017.

A revenue of 11 billion MNT was generated from maintenance services in 2017 alone.

The target market of our maintenance unit comprises

aviation companies who reside in locations within three hours

flying time from Mongolia and who currently outsource their

NOT TOO LATE TO SEIZE THE OPPORTUNITY

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maintenance services. If you look at this customized region,

there are about 258 of the same two Boeing aircraft, and the

overall fleet size is increasing by 4-5 percent every year. The

relatively low cost offered by our engineers and technicians

positions us favorably in the market and gives us a competitive

edge. The team is now working to acquire certification for

maintenance and repair works for Airbus aircraft.

We have opportunity to develop aircraft maintenance

services into a major export industry. The first step is to build

on our existing capabilities, provide more freedom to operate,

and encourage turning the business into a public company

going forward. In order to diversify their economy, Chile, which

was overly dependent on mining, first made state investments

in fruits, wine, meat, fishing, and forestry, and then carried out

the task of making those companies public. These experiences

have been widely studied by most of the Mongolian authorities

who visited there.

We need to pursue a policy aimed at building a new hangar

at the Khushig Valley airport and add several to Buyant Ukhaa,

so that hangars can be allocated to specific aircraft models. In

order to expand our capability, our top priority should be to

provide services to Airbus aircraft, especially the A320 model,

which would grow our market threefold. Also, we need to seek

certification from China and the United States.

To offer comprehensive maintenance services, several

approvals are needed, including Production Manufacturing

Approval and Design Organization Approval. This also means

there needs to be a permanent team who looks after the non-

technical side of things such as improving revenue streams,

introducing new technologies, undertaking research and

development activities, and carrying out economic valuations.

Therefore, the government needs to build on our existing

aircraft maintenance capabilities, provide policy support, make

plenty of investment into Buyant Ukhaa, keep the existing

infrastructure at the Chinggis Khaan airport and turn it into a

proper maintenance complex. Also, there are countless other

opportunities in creating a training center for pilots, engineers,

and technicians, and assembling aircrafts.

If we develop Buyant Ukhaa airport into a diverse complex

(as in an industrial park), there is a bright future ahead

as it could become a highly competitive industry that can

generate annual sales of 50 million USD and create over 1,000

specialized jobs.

When trying to diversify the economy, building on existing

capability yields better results than starting from scratch.

2018.08.01

SMART STEP FORWARD

4

ARTICLE

Sung Park is a current legal advistor to Truss Chain, New York accredited lawyer

FinTech regulatory Sandbox for Mongolia: EMBRACING NEW MARKET

OPPORTUNITY WHILE PLAYING SAFE

Distributed Ledger Technology (“DLT”), including blockchain, is at the forefront of possibility of reshaping the society as

we know it. Its application and utility are limitless; one of the well known example of its application is Bitcoin. Providing a solid growth-friendly environment in this fast growing digital technology sector would undoubtedly position Mongolia as the attractive destination for relevant businesses around the globe. This, in turn, will bring about positive impact on the majority of local industries such as financial services, education, logistics, and public administration as well as other important areas such as intellectual property and technology in general.

Mongolia can be the hub of digital technology innovation attracting entrepreneurs and investors from

all over the world.

The key question is how much to regulate the usage of technology. As DLT’s application is versatile, it is inevitable that its usage could fall under the jurisdiction of existing laws. In fact, the biggest issue for any ICO (Initial Coin Offering) is determining whether it is a capital market product (“security”) or a simple utility token. If deemed as a security, then the token is to comply with the existing securities law. This is necessary for protecting the public from unscrupulous scammers, however, does hinder proliferation of ICOs and its related

technology and businesses. Therefore, striking up a balance between the protection of the public and promoting both the business and technology is of utmost importance. Especially, for a nation who is residing between the two giant markets, Mongolia should move smart and use certain innovative tools to protect its people from unwanted consequences.

Recently, after announcing worldwide to become the world’s most crypto and blockchain friendly nation Malta has actually passed three bills which delineate the government agencies and relevant laws around ICOs.

In fact, Malta is the first country ever in the world to legislate laws relating

ICOs. This motivated a few cryptocurrency exchanges, including Binance, OKEx, and BitBay to set up their operation in Malta

and continued to stoke the interest of related businesses and ICOs.

The Three bills are the Virtual Financial Assets Act(“VFA”), the Malta Digital Innovation Authority Act(“MDIA”), and the Innovative Technology Arrangements and Services Act(“TAS”). The MDIA Bill provides for the establishment of an Authority to be known as the Malta Digital Innovation Authority. The TAS Bill sets out the regime for the registration of Technology Service Providers and the certification of Technology Arrangements. The VFA Bill sets out the framework for ICOs and the regulatory regime

Gerelmaa BatchuluunShe is a co-founder and the CEO of the US based STEPPE TECH and working on multilevel projects focused on her native Mongolia to support its economic empowerment and growth through technology, education, innovation and carefully orchestrated system design made for private and public institutes.

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on the provision of certain services in relation to cryptocurrencies. The intermediaries subject to the VC Bill include brokers, exchanges, wallet providers, asset managers, investment advisors and market makers dealing in cryptocurrencies.

Other ICO friendly countries include Singapore and Switzerland. They have well developed financial system and corresponding regulations. They both regulate security like tokens under their existing securities law. However, both countries proactively support ICOs.

Notably, Singapore operates “Fintech Regulatory Sandbox,” which encourages

“financial institutions in addition to FinTech players to try out cutting-edge economic

products or services” as well as providing “suitable safeguards to keep the total

safety and strength of the economic system.” Switzerland harbors Crypto Valley to become the next Silicon Valley and the

international center for crypto innovations.

From these, it can be surmised that a new ICO legislation calls for a government agency which administers the actual ICO procedures and registration of technology service providers including exchanges. Such government body should also be capable of coordinating existing laws such as securities law and anti-money laundering law. The clearer the guideline is the better for the businesses to confidently start their operation in Mongolia. In addition, a supportive attitude toward ICOs both in policy and action is a must.

Without a solid legislation and guidelines, many ICOs have failed because they were not able to pass muster with existing laws, especially securities law. For example, ICO issuer Black Cell Technology Limited (Black Cell) has halted its initial coin offering (ICO) to the Hong Kong public and agreed to unwind ICO transactions for Hong Kong investors by returning them the relevant tokens following regulatory action by the Securities and Futures Commission (SFC) over concerns that Black Cell had

engaged in potential unauthorized promotional activities and unlicensed regulated activities.

The issue at heart is whether ICOs could provide the public with investment opportunities as a security. The majority of countries sweepingly ban security type ICOs under their securities law. In addition to legislating the governing body and relevant laws regarding ICOs, if Mongolia legislates an exemption or a special provision for security type ICOs, it will be a magnet for DLT based businesses from all over the world. Even US has opened the door for a similar activity such as equity crowdfunding under the Jumpstart Our Business Startup Act. JOBS Act is a law intended to encourage funding of small businesses by easing many of the country’s securities regulations.

Now is the time to act. The development of ICOs is at still an inchoate stage. As of February, 2018, there has been about 53 successful ICOs. Successful ICOs for the purpose of this report mean that it has raised more than 10 million in USD; and that it is perceived as stable in the market; and that is still in operation; and lastly should have not engaged in a fraudulent scheme. Specific ranking is as follows:

Countries with successful ICOs that raised more than 10 million USD and its number

1. Singapore: 11

2. Switzerland: 10

3. Cayman Islands: 7

4. USA: 6

5. UK: 3

As you can tell, small but proactive countries like Singapore and Switzerland did more ICOs than behemoths like USA and UK. Also note that the overall number of successful ICOs are still few. Mongolia should take part in this development; the sooner the better.

August 2018

ARTICLE

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Every Sunday live at 8pm on VTV television: 5th August, 2018For weekly reviews, visit http://jargaldefacto.com/category/12?lang=en

REVIEWDeFacto

MONGOLIA’S INFLATION RATE IS 7.2%According to the National Statistics Committee, there are

50 consumer products that are impacting inflation the most. 72% are imported. Mongol Bank’s current policy is to limit the inflation rate to 8%.

The traditional food, named Khuitsaa, costed 6 tugriks and average salary was 500 tugriks in 1990. But now Khuitsaa costs 12 thousand and average salary is 900 thousand tugriks. Therefore, the price of Khuitsaa has increased 2000 times; the average salary has increased about 1800 times. It is not recommended to say that 7.2 percent of inflation is good, because the optimal rate lies around 2 percent. Of course, Venezuela crisis of 1 million percentage of inflation is a whole different matter.

The inflation is measured based on several indicators, which includes consumer price index and manufacturer price index. But for Mongolian case, we are currently using CPI based on the prices of major goods. Our consumer goods basket consists of 344 goods and services. To reflect the constant change of goods and services that we use the basket composition was changed in 2010 and 2015 respectively. Central bank is currently targeting only inflation rate. But they can target not only inflation but also unemployment rate like USA. 2 percent of inflation is considered as an optimal rate because the consumer expenditure increases simultaneously with the stock market under this circumstance. 5 major goods such as meat, flour, rice, sugar and etc have the most influence on inflation out of the 344 goods that make up the consumer basket. Statistics survey shows that 72 percent of 50 major consuming goods are imported goods. However, 7.2 percent

of inflation is acceptable number compared to our current economic situation.

Inflation is not only dependent on prices; it can also depend on the state budget deficit, as there are only 2 ways of covering the deficit. The first way is increasing the tax and the other way is printing out moneys. It is not enough to cover the entire deficit even our state keeps increasing taxes. So they are printing out moneys to cover the residual balance of deficit. Inflation of below 2 percent is dangerous, but beyond 10 percent is unacceptable. According to Statistics committee, the inflation is caused by the cost increase of goods and services production. Particularly logistics cost, fuel cost, exchange rate fluctuations are affecting the prices. State controls the fuel prices by changing excise taxes. For example, if fuel cost increases, the government decreases excise tax for fuel. Also, the optimal inflation rate depends on the amount of the government influence on GDP. As for Mongolian case, the state purchasing and procurement accounts for about 30 percent. As for developed countries, this accounts for 17-20 percent. But for developing countries like Mongolia, this should be more but not as twice as more as we are experiencing. State tends to spend more money than they earned.

As I said, the inflation should not only be the target of the Central bank. US bank targets unemployment level besides inflation rate by keeping the unemployment level below 6.5 %. Their monetary policy gives opportunities to

private sector to create jobs.

THE PRICE OF EDUCATION IN MONGOLIA

In three weeks, the new school year will start. Tuition fees in 4 major universities are expected to rise. Many student groups have expressed their discontent with the increase in tuition.

There are 96 higher education institutions and 18 out of 96 are state owned. And 90 thousand students are studying at those state owned institutions out of total 155 thousands of students. And 8100 teachers are working at these state owned institutions. So when we talk about tuition fee increases, we are not only talking about those 90 thousand students but also the teachers who are supposedly providing higher quality educations that meets the need of private sector and businesses. There are 2 types of costs, which are permanent and current costs. The mixed type of financing leads to more problems.

Last year state owned schools asked 21 billion tugriks from the state and received only 2.1 billion tugriks according to T.Amarjargalan, head of Ministry of Education and Culture Science and Sport. This incident drives schools to choose their possible option of financing that is to increase their tuition fees as the fixed costs had already been cut by 10 times by the state. So the problem is either the government should provide all the funding to schools or they let them to become private schools. Scandinavian countries, like Norway, Finland, Germany, provide tuition free education. Technically, it does not really mean free as it is simply paid by the state.

Health care institutions and higher education institutions are the most politicized institutions in Mongolia.

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Full explanation is needed to save the relations between Mongolia and Turkey

The Turkish Government completely refused the use the word “Abduction” to talk about recent incident. The representative of the government said that “FETO terrorist organization has a large presence in Mongolia, posing a danger to the Mongolian national security. This recent smearing campaign conducted by FETO in Mongolia should be awake up call from Mongolian friends demonstrating their capacity to fabricate lies, to manipulate and influence the public”. It says that the Turkish government has no involvement in

the incident. Also, Mongolian state announced that they did not interfere. Particularly, the minister of foreign affairs was the first to announce official announcement of not letting the plane to take off. This means that the ministry did not know this incident beforehand. So, if Turkish and Mongolian government did not know, then who did know? The police have opened a case of abducting a person in Mongolia.

Now we, public, are demanding the Mongolian prosecutors to issue an open statement. We want

to know more explanations from our police.

This review has been edited here for space and clarity. You can watch the full 30-minute

review on the Defacto website [HERE].

REVIEWDeFacto

UPDATES ON VEYSEL AKCAY CASE

Because the average age of the government is 1.5 years and they are spending 1 year for replacing the heads of the schools and hospitals, which is unproductive. As the result, the ministry is not providing fixed cost funds to schools. Fixed costs are the costs that are incurred in spite of whether the school is running or not. This cost includes heating, lighting, cleaning costs. The discrepancy between 21 billion and 2.1 billion is resulted from the irresponsibility of the Mongolian government where one side promises to do something but the other side says we do not have money. The question is why they do not have money? It is because they spend more than they planned and do things, which are not included in the budget. I think it is very shortsighted move from the political perspective. Higher education is important economic factor because statistics show that people who received higher education is less likely to do criminal acts, they tend to care their health, and they are more responsible for taking social and public goods.

Therefore, education is not just a wealth of the person who received it, but it is also the

wealth of society.

Higher education revenue stream can consist from fee, tuition that is dependent on the credit hours. Also, there is also 3rd source of income that is endowment. For example, people who graduated from that school donate money to the fund. And the people who donated can take exemption from tax. The largest endowment reaches to 37 billion US dollars, which is Harvard endowment. Harvard Management Company manages the fund. But for Mongolian case, large companies and commercial banks provide tuition scholarship to students and use it as an advertisement. Endowment is action of giving money and expects nothing in return. 4th channel is student loan. Student loans are usually free of interest. Loan without interest cannot exist if there is no state subsidy. There is no such thing as free money. Therefore, we should use these 4 channels of financing source in higher education. In 2011, former president Elbegdorj initiated the law on financial structure of the higher education institution. Unfortunately, it was misused by the politicians. Recently, the head of medical school has suddenly being replaced by former politician.

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