Can Mongolia Reform Its SOE Governance? It Must Aim Higher

Mongolia’s state-owned enterprises (SOEs) have long been a drag on its economy. Decades of mismanagement, political interference, and failed reforms have left the sector bloated and dysfunctional. Now, Prime Minister Oyun-Erdene is pushing a new “Law on Improving SOE Productivity, Transparency, and Governance.”

Three urgent realities demand swift action:

1. Mongolia risks missing the global critical minerals boom. The world’s appetite for copper and rare earths is soaring, but Mongolia’s opaque SOEs are ill-equipped to capitalize on this opportunity.

2. SOE inefficiency is strangling growth. The sector’s 22.8 trillion MNT ($6.7 billion) accounts for roughly one-third of GDP, yet 43 of 120+ SOEs operate at a loss. Only ten entities generate 85% of total profits, exposing deep systemic inefficiencies.

3. Corruption has reached a boiling point. Public anger is palpable. In 2022, mass protests over coal-sector graft underscored diminishing tolerance for mismanagement.

The proposed reform—consolidating SOEs into two holdings and privatizing underperformers—is a step forward. But unless the government sharpens its strategy, it risks repeating history’s cycle of failure.

SOEs: Dominant but Dysfunctional

Mongolia’s SOEs dominate strategic sectors but fail to deliver on their potential. State entities largely control mining, aviation, and energy, yet collective debt has surged. Erdenes Tavan Tolgoi (ETT), the state-owned coal giant, exemplifies the problem. Chronic infrastructure issues—border bottlenecks and rail delays—compound political meddling.

Since its inception in 2010, ETT has been plagued by corruption scandals. The 2022 arrest of CEO Battulgyn Gankhuyag for coal smuggling and embezzlement is merely the latest chapter in its troubled history.

This inefficiency undermines “Vision 2050,” Mongolia’s blueprint for a tech-driven, diversified economy. While mining SOEs contribute 90% of exports, they invest minimally in innovation. Renewable energy goals—30% by 2030—are stalled by state monopolies that crowd out private firms.

The Reform Blueprint: Merits and Flaws

PM Oyun-Erdene’s plan has strengths. Consolidating SOEs into “Erdenes Mongol” (mining) and “Erchist Mongol” (non-mining) could reduce redundancy. Privatizing non-core, loss-making assets might attract much-needed foreign capital. Adopting OECD standards for board independence and financial reporting could curb graft.

However, critical flaws remain:

1. Ambiguous “strategic” designations. The law labels some SOEs “strategic” without clear criteria, leaving loopholes. In 2022, a state-owned hotel chain was deemed “strategic” to block its sale—a telling example of reform’s fragility.

2. Weak public support. Polls show only 6% of Mongolians back full privatization of “strategic” assets like mines. Most favor state-controlled partnerships, reflecting skepticism of reform.

3. Political expediency over economic logic. Past reforms have crumbled under pressure from SOE elites and populist fears of “selling Mongolia’s crown jewels.”

   
   

PM Oyun-Erdene has an opportunity. His party holds a parliamentary majority and, with coalition partners, a supermajority. Success hinges on bold, transparent steps:

• Publish a definitive list of privatization candidates. Start with non-essentials, such as Mongol Railway’s catering arm, to build momentum.

• Mandate OECD standards by law. Require independent boards and enforce penalties for political meddling.

• Partner with Western firms on critical minerals. Joint ventures could diversify Mongolia’s export markets, reduce reliance on China, and improve governance.

Reform as Geopolitical Imperative

This is more than economic policy. As the U.S. and EU seek alternatives to Chinese-controlled minerals, Mongolia’s transparency and efficiency will define its role in global supply chains.

Political Resistance: Legitimate or Obstructive?

Mongolian MPs fear the reforms might mask ulterior motives to privatize profitable SOEs.

Key concerns include:

1. Deliberate mismanagement to justify privatization. The law’s provision to dissolve unprofitable SOEs raises suspicions that valuable entities could be intentionally run into the ground.

2. Opaque restructuring processes. Consolidating SOEs into “Erdenes Mongol” and “Erchist Mongol” may open doors to political manipulation during privatization.

   
   

Now the government must tread carefully. Economic logic should not be sacrificed to political expediency. Transparency, public trust, and governance reforms are non-negotiable. Without them, even the most promising blueprint will falter.