Strategic deposits – a fiction by government
Last Friday D. Sumiyabazar, Minister of Mining and Heavy Industry, organised a national discussion on the topic of ‘Mining and Sustainable Development’. Here are the remarks I gave on mining and infrastructure.
The US-based Mining Journal reported in their World Risk Report 2017 that Mongolia’s infrastructure development is ‘weakly developed’ and ‘high-risk’. A total of 3,600 factors were taken into account in the report, which assessed some 85 big mining players. The risk of investment was given scores of 1-100 points and ranked between AAA to DDD. Five provinces in Canada, Alaska from the United States, and Sweden scored more than 80 points, which translated into AAA ratings and the lowest risk countries, while Laos and Guinea’s scores were less than 40, meaning the highest risks. Mongolia scored 53 points and was one of the high-risk countries with a CCC rating.
Mongolia’s legal environment, governance, social licence, and financial environment were scored 49, 64, 66, and 52 points respectively. When it came to infrastructure, our score was 11 (7 for railroad, 15 for guaranteed power and energy), which contributed to the rating of ‘weakly developed’. This is their assessment only. But what about our own assessment?
Mega fantasy on infrastructure
Given Mongolia’s vast territory and small population, it is highly costly to build roads and energy infrastructure, not to mention the long time required for return on investment. It is a given, not something we have control over. But what we can control is conducting smart policies and create an environment for our people to have a good livelihood, regardless of where they are living – urban or rural areas. The destination can only be reached when the policy is right and adhered to.
However, because our policy is not the right one, we have neither built infrastructure nor experienced economic growth. All we see is the emptying countryside. The Myanganii Zam (Road of Millenium) project is progressing albeit slowly, because it has the right vision. But people do not see the vision of ‘strategic deposits’, while the authorities use them for their advantage. It has led to the mining sector failing to be the accelerator of our development. The idea behind strategic deposits was supposed to be developing infrastructure, leveraging mining.
The minerals law of Mongolia, which was first enacted in 1997, was ameded in 2006. Since then, this law was changed 250 times, which means amendments were made every two weeks on average. Let’s focus on just two changes from these amendments.
The first one refers to the introduction of a new term by the 27th resolution of the parliament (during M. Enkhbold’s government) on 6 February 2007. Clause 4.1.12 defined ‘strategic deposits’ as ‘minerals deposits with strategic significance and either have potential to impact on national security, economy, and social development, or are producing / can produce products, value of which exceeds five per cent of Mongolia’s GDP’.
Two years later the parliament (during S. Bayar’s government) made amendments to Clause 5.5 and inserted language that said ‘If a strategic deposit is developed without funding from the public budget, the government can aquire equity interest (of the deposit) equal of up to 34 per cent of the initial investment made by the licence holder. The amount of shares will be determined in an agreement, by reference to the equity interest to be acquired by the government. Royalties may be substitutable for the equity interest of the government.’
There are laws that allow the government to be a majority owner in a deposit discovered by a foreign company (Russia is an example). However, it was only the Mongolian authorities who dared to fantasize that the government can own shares, buy them, deduct the payment from royalties, and pay interest rates. This led to half of the payments Mongolia was supposed to receive to be postponed, and the dividend having to be received after decades when all loans and interest rate payments are paid off. Why was it profitable for the government to ‘settle for a goat when a camel was available’?
Since Mongolia postponed its receipt of payments on her own will, the government has been issuing bonds with fancy names. When the debt is due for repayment, the authorities are just raising new loans with higher interest rates and longer terms. The new borrowings have even fancier names, but work great in settling previous debts. Mongolia is trying to make ends meet, living from one loan to another.
Countries such Australia and Canada who managed to get wealthy leveraging mining industry do not own shares in mineral deposits or mines. What these countries do is that they simply impose complete oversight on mining operations, ensure all legislation is complied with, and receive their royalties and other payments they are due on time, starting from the beginning.
Investors come for profits, not to build a town
In a socialist country, you can build towns alongside mineral deposits and force people to live there. Everything is co-owned in a totalitarian regime, meaning nothing belongs to a particular person. The government builds social infrastructure and requires miners to cover operational costs. Even that company is owned by the state. This was the exact way Erdenet was built.
In contrast, when it comes to the market economy, the private sector decides what to do. Because Mongolia does not have the funds, our government is begging foreign private companies to make investments. Foreign companies come into the country in order to explore for mineral resources, conduct mining and processing, and make profits. They do not arrive here to build a town.
It is up to the owner of natural resources whether the country decides to build a town or a village after receiving payments and royalties they are entitled to. But the authorities should consult with the local community on what to build where. It is impossible to force someone to live in a mining town. Therefore, we must follow a system where we receive royalties and other payments from the beginning, and decide for ourselves whether we build a town somewhere or focus public investment on developing existing rural settlements. When doing so, we have to remember that the vitality of a new town does not depend on its neighboring mine, but on a favorable environment to meet the needs of people and businesses. This is the only way we make sure that the settlement does not become a ghost town in the end.
Having strategic deposits suddenly meant too many state-owned entreprises running deficits and making up for this through the public budget. Due to the deficits, they are receiving funds that could otherwise be spent on building infrastructure, schools, and hospitals. Our strategic deposits have brought debts rather than helping us flourish. Mongolia today is sinking in her external and internal debts.
Infrastructure is not supposed to be built with funds from bonds, but with 30-40-year development bank loans with 1-2-per-cent interest rates. The authorities are well aware of this, but they decided to issue bonds and take advantage for personal gain instead of obtaining a loan with strict oversight.
The authorities are now refusing to progress any mega project as long as their own companies are not involved. It can be seen from the fact that there were 10 groundbreaking ceremonies for the 5th Power Plant. If Mongolia’s own power plant was supplying Oyu Tolgoi with power, we would have made a lot of profits given the willing customer.
How long will the government follow its ‘strategic deposits’ fiction for?