Privatization towards a fairer distribution of wealth
All previous Governments of Mongolia had a traditional practice of putting privatization of state-owned enterprises on their agenda and making a list of such enterprises. However, even though the Mongolian Stock Exchange has always been on top of that list for as long as we can remember, it is still entirely owned by the state. It wouldn’t be incorrect to say that there is no other case of stock exchanges being fully owned by the state around the world, but only in Mongolia. This indeed might be one of the factors that are slowing down the development of our capital market.
Historically, the Mongolian Stock Exchange was created for the purpose of privatization of state property and for the development of the capital market in 1991. There is quite a lot of evidence indicating that the privatization of 1990 was unquestionably corrupted and some of the factories and companies were privatized unfairly. Moreover, some analysts suggest that if the privatization was done fair and square, Mongolia’s economy would have been in better shape than today. Since the first wave of privatization, the Mongolian Stock Exchange has been in hibernation for quite some time. As part of the “State Productivity Recovery”, state-owned enterprises will be turned into public companies, and commercial banks are expected to release their IPO details. Hence, I would urge everyone to pay careful attention to the above process so that we could avoid making the same mistakes and we don’t need to cry over spilled milk again.
During the period from 2010 to 2012, the Government of the Prime Minister S. Batbold strived to carry out the privatization of state-owned properties as a lever to develop the capital market but it was held up and it didn’t happen. Then, during 2015-2016, the Government of Mongolia now led by Ch. Saikhanbileg approved resolutions regarding the privatization and restructuring of the state property and made a list of 15 state-owned enterprises for that purpose. Among state-owned enterprises that were on that list, Mongol Post JSC was the only company whose 34 percent of shares owned by the state were traded publicly through the Mongolian Stock Exchange and successfully raised 6.2 billion MNT. Due to a number of complications such as conflicts of interest, the privatization of the rest of the state-owned enterprises failed to materialize. It’s widely believed that the political influence in state-owned enterprises is relatively significant. Member of Parliament, Kh. Bulgantuya once said, “Bribery and corruption are committed through three channels. One of them is the looting of state-owned enterprises. Therefore, in the first stage, we will reduce stealing and corruption by enabling public participation and the monitoring of state-owned enterprises.”
Based on the above, it seems that privatization of state property is an issue that politicians cannot agree on. In fact, the events after the privatization of 1990 are one of the clear examples of contradictory actions and words of our former governments on how to privatize state-owned enterprises to improve their operations. International best practices have shown that converting state-owned enterprises into public companies with public participation and monitoring tend to increase the key financial indicators of those companies. To name a few examples of such companies, we have Aluminum Corporation of China Limited (Chalco), Air China Limited, Gazprom PJSC of the Russian Federation, and Japan Post Co., Ltd.
Consequently, at the turn of 2022, most of the state-owned enterprises, in Mongolia, were operating without profits or even worse with a loss and the government was getting bigger and bigger. Under the “New Recovery Policy”, the Prime Minister of Mongolia L.Oyun-Erdene and his Government plan to make state-owned enterprises into public companies. Consequently, around 25 entities such as the Mongolia Telecom Company JSC, Information Communications Network LLC, National Information Technology Park SOE, Mongolian National Reinsurance JSC, and road maintenance companies are expected to be privatized through the Mongolian Stock Exchange between 2022 and 2023.
However, we must approach the issue in stages based on careful research. The Government should categorize the existing state-owned enterprises and make a detailed plan of what percentage of its shares must be transferred to the public and in which order they should be listed on the stock exchange. It’s worth noting that if the authorities start listing poorly performing companies on a stock exchange, it could pose a risk of hindering our long-awaited reform of privatization of the state-owned enterprises. Thus, professionals in the financial industry are warning that the shares of renowned companies with a long history of steady operations must be offered first to the public. The 25 companies that were included on the list are unlikely to attract public and investors’ attention. Many have no idea about road maintenance companies operating in Mongolia. As a result, the “Public Proficiency Recovery” that will be implemented under the “New recovery policy” has a high risk of getting bogged down right from the start.
Almost per tradition, the Mongolian Stock Exchange is still at the top of the list of companies that will be publicly available from 2022 to 2023. That is just about right, as Mongolia transitioned from equal to a fair distribution of wealth in 1990. The spirit of democracy lies in moving toward the fair distribution of wealth. The mechanism that allows fair distribution is the capital market. Hence, to bring good results, we must begin with converting the Mongolian Stock Exchange into a public company and accelerate the progress on its operational transparency. At the moment, the equity market capitalization of the Mongolian Stock Exchange is around 4.9 trillion USD. Also, in September of 2021, the Mongolian Stock Exchange was added to the FTSE Russell’s Watch List. This could play an important part in attracting global professional investors to our country. In fact, Mongolia has already started the required preparation for reclassification to Frontier market status and thereby officially move on from the Watch List.
By offering the shares of the Mongolian Stock Exchange to the public, it will make it possible to simultaneously carry out clearing operations like any other international stock exchange. In addition to that, it will become a lot easier for startups, and small and medium enterprises to issue their bonds on the stock exchange. At this stage, another state-owned company performs clearing services for the stock exchange trading. That reduces the competitiveness of our stock exchange. According to international standards, clearing services tend to be a huge source of income for stock exchanges which in turn gives them the opportunity to lower their trading fees. In other words, trading fees, the current source of income, could be lowered and liquidity could be improved through in-house cleaning services.
The CEO of the Mongolian Stock Exchange, Kh.Altai emphasized that offering the shares of the stock exchange to the public will help to expand the scope of our capital market, simplify the process of attracting investments and encourage good governance. Unless Parliament makes any sudden decisions, the Mongolian Stock Exchange is expected to become a publicly-traded company by June 30, 2023. Meanwhile, the Minister of Finance B. Javkhlan announced, “The Cabinet meeting will be held, within the second quarter of 2022, to discuss and determine the value of the Mongolian Stock Exchange. After that, the process of initial public offering will take place.”
It is a common practice for some countries to closely cooperate with stock exchanges in advanced economies and make them key strategic investors in order to develop their capital market and take their stock exchanges to the global level. We could follow in their footsteps but it’s crucial to set the optimal ratio of shares owned by the state and/or strategic investors in advance. In the past, D. Bayarsaikhan, the Chairman of the Financial Regulatory Commission, made such a suggestion and said “The shares of the stock exchange shouldn’t be entirely offered to the public, but instead should also be offered to professional investors.”
The privatization of the stock exchange has a tremendous impact on the future development of our capital market. Moreover, it should have higher listing requirements as it trades shares of companies with high market capitalization. The reason behind that is the growing criticism of poor governance structures, operations, financial reports, and transparency of companies listed in the stock exchange. Hence, it is essential to raise the requirements for companies listed on the Mongolian Stock Exchange and clearly establish how to expand the capital market within what period of time and how to protect the rights and interests of their investors. During the Mongolia Economic Forum, the Resident Representative of the European Bank for Reconstruction and Development in Mongolia, Hannes Takach stressed the importance of protection for small shareholders and good corporate governance of listed companies in the stock market.
Stock exchanges are buyers and sellers of bonds and a marketplace that connects brokers and dealers. The marketplace must sell high-quality products that could meet the necessary standards and requirements. On the other hand, the private sector has a great interest in raising money from the stock market. If they intend to list their companies, it is logical to expect them to to improve their corporate governance.