Guest Post: State Participation in Resources Projects

By Unurjargal U

The State’s Role in Large Resource Projects

The appropriate forms for state participation in mining sector – a sensitive issue in Mongolia. The Canadian International Mineral Resources and Development Institute (CIRDI) organized a cooperation conference with the Mongolian Ministry of Foreign Affairs themed “The State’s Role in Large Resource Projects“. At the 2 day conference participants and experts discussed their experiences and mistakes with interactive experiences. CIRDI invited mining experts from developing countries such as, Kyrgyzstan, Myanmar, Laos, and Afghanistan. These various experts provided solutions which strengthened national mining governance, efficiently allocated resources and ensured diversity of the mineral sector.

Matthew Genasci, a principal consultant at “Mining Policy Group”, hypothesized that the state could become involved numerous ways in mining projects. The second panel discussion was having professionals from Mongolia major mining company “Erdenet”, “Baganuur LLC” partially owned by the state and state-owned company, national head investment company, basically mining assets, “Erdenes Mongol” present their objectives. All of these companies have different level of state participation yet the state’s participation has not been formalized. For instance, Erdenet company is owned 51 percent by the Mongolian Government in Mongolian-Russian joint venture, which contributed about 13.5% of Mongolian’s GDP and 10% of tax revenue. The Baganuur coal mine is owned 75% by the Mongolian Government and privatized 25% of its share on the market. In the case of Erdenes Mongol’s main objective is execute Mongolian state owned mining companies assets as well as public shares in market. Other well-performing, state-owned companies such as Codelco (Chile), and LKAP (Sweden) etc., have a similar situation requiring reform of state involvement. So, to what extent should the state get involved?

Root of State Participation in Mining Projects

Mining is capital-intensive, navigating many regulations to initiate most projects. First, the state must establish well-adapted mining regulations. In 2014, Mongolia adopted a “State Mining Policy” which documents the state’s role from a legal perspective. Second, the state will determine how these principles, rules and laws will be implemented. During the conference, participants expressed the view that SOEs’ board members must be independent, must improve and must stabilize each company’s governance. While ensuring transparency, the state needs to deal with total economic capacity prior to negotiating any large mining project. Third, the state needs to consider long-term and “unseen” consequences of their decisions. As claimed by the Fraser Institute, the state usually faces the problem of dynamic industries as like mining. For instance, empirical evidence shows the Tavan Tolgoi coal project bid has proven the state has fallen short in considering opportunity cost and long term considerations. Eventually, even state participation form could be varied, the principles of participation must be clearly identified.

How can states participate more?  The Future of State Participation

SOEs’ involvement in the resource sector is decreasing in developing countries with none in developed countries. The state must choose their participation level in mining projects. Once established, some fundamental principles could be identified, such as a distinction between the player and the regulator of the game; flexible state mining policy may be a good start. One of mining global leading country, Peru, approved corporate tax rate cuts from 28 to 30 percent beginning of 2016. Also British Columbia in Canada announced a relief plan for mining companies struggling with low commodity prices, aiming to not only remediate mining companies, but also providing relief for communities around large mining projects.

State flexibility will not work without transparency and will lead to a highly uncertainty environment. [The case of Mongolian Windfall Tax Regime]. Mongolian Constitutional law indicates natural resources in Mongolia shall belong exclusively to the people and be under state protection. Although, I oppose the windfall tax regime, people need to get benefit from the commodity price boom cycle. Also, the state should relieve companies and enterprises from harmful situations like commodity price downturn. Therefore, state participation must be flexible under a legislation framework working with mining companies, instead of against them, for the benefit of the country.

By the way, this conference was a great chance to discuss with newly developing mining countries like as Mongolia, to explore their strength as well as representatives figured out better suitable models on their countries to use natural resources efficiently.

About Unurjargal

Unurjargal Urjin is a Master’s student at the Norman B. Keevil Institute of Mining Engineering of the University of British Columbia. His research interest in Social License to Operate, company and society relations. He also has working experience in Tavan Tolgoi and Oyu Tolgoi mining companies as mining engineering in Mongolia.

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