MCashmere

Cashmere 110 bln tugrugs are too late

Interview with a parliament member, ex-president of "GOBI" factory Mr.Sedvanchig

Although the government decided to issue bond worth 110 billion turgrug to support the cashmere industry, parliament members are still in conflict over this issue. Are you in favor of issuing bond, or do you have some other thoughts?
Cashmere is a rare treasure - not all countries even have it. Cashmere is a treasure that can always act as a hard currency, and that is why the government must support this industry and its environment. The reason why government is supporting this industry is to preserve jobs, and on top of that cashmere industry is a large portion of tax income for our government. But this issue is left behind time wise. Plus, the method of interpretation is not very clear. That is the reason we had summoned a committee to straighten up this issue.

Officials from Department of agriculture said that, “it is not late for factories to produce their cashmere”. But you seem to claim it is too late. What are your thoughts on making its method and interpretation correct?

For this year, the preparation work of producing cashmere is practically completed. In other words, 90 percent of all the cashmere that are produced in Mongolia already has its owners. Obviously, the remaining cashmere is likely to increase in value. And I do not think there’s a guarantee that cashmere producers can make any profit selling their product on the market, if they buy their raw material at such high price.

Even if they find a profitable market segment, I think majority of the revenue will be spent to pay their high commercial interest rate loan back to the bank. Our ultimate goal is to steady the price level of cashmere. Government will issue a bond, so we can support our herdsmen, and organize a conjunct exchange market for cashmere. Eventually, it would be better for all the cashmere business to run through this exchange market. It appears that 12 cashmere companies formed this group called “Mongol negdel”. Exactly what capabilities they have, what common law status they fall in, are a bit ambiguous. I don’t see why those particular 12 companies are forming a union. There are plenty of organizations that are working in this industry. But they did not include them in the union, which doesn’t seem right. Since this issue is related to the government bond, all this has to be disclosed in the government budget and expenditure account, which means this is a part of fiscal budget. Officials claim that without disclosing it on the federal budget, without jumping to the next fiscal year, they can collect the entire bond loan they made to those 12 cashmere companies. If government decided to make a loan to the companies in the cashmere industry, at least they have to allow some time for them to pay back the loan, 3 years or 5 years sounds much better. Only this way government policy would achieve its desired result. If we really want to organize our herdsmen, reward the herdsmen who are selling their raw material to our national cashmere manufacturers, jump start the exchange market, form a network, and support this industry we need to elect a method that efficiently serves all the segments of this industry.

So other than cashmere companies, the wool manufacturers and skin refiners and so forth are need to be in the frame of this policy aren’t they?

Absolutely. But not just cashmere and wool, but also meat, milk, skin and everything need to be in the scope of this policy. Since the government is providing the monetary resources and assurance, it all must to be tied to and follow the federal policy. If we gave all that 110 billion tugrugs to those particular 12 companies, how can it be an effective policy? If government is trying to encourage our productive companies, we need to adopt a performance based rewarding method. Which means, for those who are producing a good quality final product and exporting it to the foreign markets and constantly increasing its export volume, are need to be rewarded by tax deduction, or some specific monetary rebate per product exported from the government. For this reason, the committee that is formed to deal with this 110 billion tugrug bond issue needs to discuss it in great detail. Cashmere season for this year is over anyways.

You said the loan period should be longer. What is the reason?

Firstly, Parliament hasn’t yet passed this bill. It is only on its initial discussion stage. Secondly, if government requires those companies to pay back the loan within the current year, the loan becomes much more risky. We don’t know if they’d be able to pay it back or not. I personally cannot see them paying it back. Cashmere is inherently a seasonal business. I’m working in this industry for more than 20 years, so I know what the basics of this industry’s business cycle is. For instance, manufacturers usually complete their export contracts by the end of the previous year. After that, they contact the banks for a loan, and receive their loan by February and March, and by the end of March and April they go out and by their raw material. From March they already start to produce the products that are supposed to get exported to foreign markets, and by June they ship them to the buyers. In other words, exported goods come back to them in a form of currency, but only in the next year. According to the introduction of this project, manufacturers are planning to make 250 billion tugrugs sales using this loan and around 80% of them are going to be exported. Realistically, this time period is too short. Besides, not only those 12 companies are operating in this industry. There are more than 200 small businesses in this field. In addition, there are 30-40 small manufacturers only producing cashmere tops. Also we have factories that buy raw cashmere and refine and de-hair them. Because we have this many participants in the industry, we have to consider their rights in this as well.

How informed are you on this “Mongol Negtgel” union?

It appears that anyone who is in this industry can join this union, but they require 10 million tugrug entrance fee. That’s how they filter the small manufacturers from this union.

They can’t set 10 million tugrugs entrance fee requirement, can they?

If we are trying to cover all the areas of this industry with our policy, we cannot classify them and set double standards based on their size or capabilities. Plus, when government is issuing loan, we have to be informed about what manufacturer is buying their raw material from where, and what they are producing, where they are shipping it, and who they are selling it to. It all has to be disclosed in the budget. Pulling out just one example, during 2008 parliament election, candidates promised people that they will increase the price level of cashmere. Then Parliament set the price of cashmere to be no less than 30 thousand tugrugs per kilogram, and they pulled 10 billion tugrugs from “Development of Mongolia fund” and allocated it to commercial banks. From this 10 billion, 3 billion went to manufacturers. To get a sense of the effectiveness and results of this activity, I asked some of the officials that are responsible, and they don’t have any sort of evaluation or results. Despite all this, they manage to make it a commercial bank loan. Worst of all, when I ask about the effectiveness and usefulness of this loan from the executives of those companies that are alleged to be the recipients of this loan, they respond that they never received this loan from anyone. What happens when government issues a loan, and the recipients use the fund for different purposes? This is one of the concern of our parliament members, I personally do. Because the evaluating system is not quite vivid, the loan has a high possibility of not being utilized for its original intention.

This loan could even be spent as a fund for someone’s campaign for a next election, right?

If not the campaign fund, what if they use it to pay off their high interest debt they had previously borrowed? What if some crooked businessman uses the money to finance their more profitable mining project or some real estate or land business? There is not enough clear reference in this project intended to prevent this sort of activity. Since the government policy is already out there, why don’t we just form a raw material exchange market and run everything through there. Although we don’t have that raw material exchange market, we need to allow some time – 3 or 5 years for instance – and encourage and support our individual herdsmen, manufacturers until the exchange market gets organized and created. This way we would be able to detect who bought what from who. Plus, we have to hold a policy on the physical locations of those factories.

What do you mean by holding a policy on the physical locations of the factories?

I think we need to relocate initial stage refinery factories to rural areas if possible, and create new ones if necessary. If we run this whole process through an exchange market, the goods have to follow certain standards – refined, de-haired, washed and packaged and so forth. To do this first we need some refining factories in rural areas.

If we create those initial stage refining factories in a lot of rural areas, aren’t we going to have to wrestle with environmental issues as well? They already polluted “Tuul river” here, if they move outside the city chances are high that they will create a disaster out there, isn’t it?

We need to deal with this issue through our government policy. What kind of factories we need to have here in Ulaanbaatar city? What kind of it we need have in rural areas? Government officials have to discuss this issue at arm’s length. Even today, all sorts of agricultural and cashmere raw material merchants and intermediaries travel hundreds of kilometers to bring the goods here in the city and spend a fortune in the process. It would be right if we make it easier for them by making policies favoring the establishments of those cashmere and wool raw material manufacturers here in the city.

You have mentioned about agricultural raw material exchange market. When the issue of establishment of agricultural raw material exchange market hit the parliament your party had called a break. Exactly for what reason did your party choose not to continue the discussion over this project?

Government is bringing this creating agricultural raw material exchange market issue to the Parliament for the second time. When first time they brought it, the subcommittee decided this project was unsatisfactory. But the second time Parliament did favor the discussion of this issue, but Democratic Party had one problem with it. “Government involvement, and politicians’ power over this exchange market is way too much, so we need to look back and amend this area”, they said. That’s how the committee was formed to work on this, and they received their assignment. Now they are working on adopting the parliament members’ ideas into the project.

You are the head of that committee, what changes have you made to the project so far?

We changed it quite a bit, what it contains and means of it. For example, we gave up this policy said “agricultural raw material exchange market must be 100 percent government owned”, and we changed it to “company owned”. That company can be in any status. It can be government owned, or private owned or both. Company would run this market more efficiently, I think. According to their company policy, they can appoint their board of directors and director and so forth. In addition, we changed this group called “oversight board”, 100% percent consisted of officials from government departments. We changed it to 13 officials, and 60 percent of those officials must be the representatives of the non-governmental organizations, individual business owners, and the manufacturers. Remaining 6 officials will be government officials. This means, the management will be prevailed by non-governmental personnel. As you can see that we intended to minimize the government involvement in this exchange market.

What exactly do you imply by agricultural raw material exchange market? What is the significance of it? I know that by creating this exchange market, we can get rid of those intermediaries, individual herdsmen can sell their raw material directly to the final users, but in real life it sounds so distant.

By our old policy every rural district had a committee responsible for inspecting the quality of the raw material and approved it to be sold on national market. Since our economy shifted to capitalism this policy had completely vanished. While appropriating the herds once were government’s property to herdsmen and making them the owners was a good thing, the administration at that time missed many important issues. Herds’ quality, their rate of reproduction and selection, plus they just let the market handle all the products that were coming out of this industry. Because of this, the quality and standard had lowered significantly, and they only cared about the number. Ultimately, the wealth makers – the herdsmen – became vulnerable to the risk. Although when the price increase of raw material coming out of the herds increases the herdsmen’s income, this whole industry is still in individual herdsmen’s hands. Government needs to organize those individuals and bring them together. If individual herdsmen come together and form a partnership and bring their product to the market, they would be much less exposed to the risk of price change, and maybe they wouldn’t be influenced by natural disaster, even if they do get influenced they’d be able to get over it with much less damage. Just like this, they’d have a lot of positive advantage. The partnership they form will participate in the market through the raw material preparation network. To sum it all up, the market exchange that we are describing is the market that is not consisted of place or time. Individual participants – herdsmen partnerships, manufacturers, intermediaries - would be able to negotiate, create a contract with each other or just simply buy and sell their product through this exchange market.

Isn’t the price level of raw cashmere, wool, raw skin and so forth are very clear with the existing market we have?

We hear the general price level of raw material every day, but those prices are influenced by distance and time frame and gets very inconsistent, in other words it causes a bit of confusion. It confuses herdsmen too. For example, when in Govi-Altai 1kg cashmere sells for 50 thousand tugrug, in Sukhbaatar 1kg cashmere goes up to 70 thousand tugrug. Time and location affecting those prices so greatly. If this raw material exchange market goes in effect correctly, the price level will be more consistent and will be more informative and understandable to the public. Even before the cashmere season starts they’d be able to know, how much profit they are most likely to make when they sell their cashmere on the market, in advance. There’s a system that intermediaries and manufacturers can pay an installment or a deposit to the seller before the cashmere season and when the raw material is ready to be sold, they can either pay the rest of the payment or renegotiate. One function of this market is that the participants can negotiate or sell and pass down the contract to one another. Products running through this exchange market would have to follow the strict standards. At the same time, the minimum or maximum amount of products to be negotiated at a time will be indicated clearly.

You said that this exchange market is projected to be minimally dependent on government. But to construct a network this large, government definitely needs to get involved. How are you planning to deal with this issue?

Yes. It would be right for the government to get involved in establishing this exchange market and provide with certain policy. The committee working on this project had made amendments about how to establish this exchange market from many different angles. For example, when government builds national wheat, meat, flour, oil reserve – government has to buy them through the exchange market, that’s what we’ve talked about at the committee meetings. Although it is easy to just make a policy and form this exchange market, it is difficult to account for all the trouble it might face in reality. That is why we need to estimate those potential troubles and straighten the path before-hand and follow the newly passed policies after a year it had passed.