Guest Post: ICF Workshop – Private Sector Perspective

Guest Post: The Less State in mining, the better the state of mining

By Aligermaa B

Does the state, responsible for national welfare, have any business getting actively involved in a business, even in one related to essential services or strategic national resources? Or, should everything be left to the private sector which, usually less concerned with social commitments, can concentrate on competence, which is judged, almost exclusively, by profitability and shareholder satisfaction?

No one knows for sure, but regular efforts are made to find an answer. One of these was the May 16-17 workshop in Ulaanbaatar on “The State’s Role in Large Resource Projects”, organized jointly by the Canadian International Resources and Development Institute (CIRDI) and the International Cooperation Fund of the Mongolian Ministry of Foreign Affairs. Given the preeminence of mining in the Mongolian context, the State’s role in large resource projects was examined mostly in relation to the mining sector. Since the issue is of interest and concern to many developing countries seeking to develop their mineral resources, participants included delegates from Afghanistan, Kyrgyzstan, Laos and Myanmar. On offer were views from the perspective of the State, the private sector and NGOs, all speaking from direct experience.

Among the speakers were Matthew Genasci, Director of US-based Mining Policy Group, S.Oyun, member of the Mongolian Parliament, D.Bat-Erdene, Board member of Mongolian Society of Economic Geologists, N.Algaa, President of Mongolian National Mining Association, G.Battsengel, CEO of Energy Resources, and M.Tulgat, Executive Director of Khishig Arvin.

This is not meant to be an exhaustive report of the proceedings, so I am restricting myself to what the last two said, representing the private sector on Panel 4. This was on the second day and both of them spoke without a prepared text, and this informality embellished the immediacy and impact of their chosen examples, mainly showing how state participation in Mongolian mining has done more harm than good.

State owns vs State gets

Most Mongolians believe that large State shareholding in a project means more revenue for the State budget. According to G.Battsengel, CEO of Energy Resources, the facts do not bear this out. It is a myth created and nurtured by politicians to justify having their finger in the pie. There is no question that Erdenet Copper, 51% owned by the State, pays a large amount to the State, but it is no more than a private company also would pay. The Extractive Industries Transparency Initiative (EITI) report makes it clear that 90% of the total amount paid by a company to the Government is made up of taxes and fees, and Battsengel emphasized that this is what any company, private or State-owned, has to pay, with no special higher rates for the latter. Dividends, which come from profitable operations, accounted for only 5%-10% of what the State gets. In the case of the Mongolia-Russia joint company Monrostsvetment, 97% is tax payment and the rest dividends.

Since how much the State owns is thus not directly proportionate to what the State gets, Battsengel wanted the State to restrict its involvement to setting down rules and regulations, ensuring their implementation without any favors shown to State-owned enterprises (SOEs), and collecting taxes. It should also help create conditions that would help make domestic mining companies more competitive.

Playing outside the rules

Battsengel talked about the Tavan Tolgoi mine, where Energy Resources and State- and locally owned companies are active, to show how regulations are used selectively, never allowing the field to be level for all players, Professional inspectors usually turn a blind eye when SOEs operate outside the regulations, but they are very strict that the private companies keep to the line. For example, coal should be transported along the paved road which, incidentally but importantly, has been built by a private company on its own. However, the SOEs continue to use the dirt roads, to avoid paying for use of the paved road. Their defense is that their responsibility ends as soon as the coal is sold at the mine and thereafter it is up to the buyer to decide how to transport the coal. Battsengel wondered if a private company would be allowed to get away with such specious arguments.

He then referred to selective extraction of coal, a practice prohibited by law, but merrily indulged in by SOEs in recent years. Extracting higher-quality coal, together with less soil removal, certainly makes for more profits, but, according to Battsengel, it is a clear breach of the policy laid down for long-term natural resources use.

M.Tulgat, whos company works as an operator at the Erdenes Tavan Tolgoi mine, also talked about specific problems faced at work. For starters, he said, SOEs do not make timely payments. Not that there would be no money; more often, it would have been frittered away on underproductive and wasteful expenses. Tulgat said one person in his company would do an engineering job for which SOEs would employ four workers. Hiring an operator company would be a good way for State companies to save money. A comparison of how State, local and private companies worked in Tavan Tolgoi would be an interesting exercise, Tulgat thought.

Lessons Learned

Battsengel felt a right policy would open the door to more productive cooperation between the State and private sectors in Mongolia, and hoped the recent move to substitute State ownership with a special royalty rate would be a paradigm for future development.

State ownership of mines is almost unheard of in developed countries, but that has not stopped the mining sector in Australia or Canada – to take two countries with strong links to this sector in Mongolia – from playing an important role in the country’s economy. The lasting impression one carried from the workshop was that Mongolia should discourage any increased Government role in mining. State involvement usually turns into a license for political interference, which does the mining no good.

There is much talk in Mongolia about responsible mining. It appears we first have to understand the need for responsible governance.

About

Aligermaa Bayarsaikhan will be a Master’s student at the Norman B. Keevil Institute of Mining Engineering of the University of British Columbia. She has been working at the Central Bank of Mongolia since 2012. Her Master’s project is focused on the effective management of the revenues generated from Mongolia’s extractive sector.

This entry was posted in Aligermaa Bayarsaikhan, Business, CIRDI, EITI, International Cooperation Fund, Mining, Mining Governance. Bookmark the permalink.

2 Responses to Guest Post: ICF Workshop – Private Sector Perspective

  1. Jan Boon says:

    Interesting perspective. There is a role for each actor: government, private sector, and communities. Defining who should do what is important and the examples of the practices of SOEs suggest that governments are not good at emulating private companies and should instead regulate them effectively. There are examples from other parts of the world in which state-owned extractive industries behaved similarly. However, there are also examples of state-established enterprises that appear to have managed to avoid bureaucratic procedures and deliver valuable infrastructure projects to the population using advance royalties. I haven’t studied the details, but you may be interested in looking at Ecuador Estratégico

    • Thanks for the comment!

      I suspect that the notion of governments emulating private companies is probably far-fetched, but instead, if governments opt to involve themselves in the resource sector, there should be clear goals for that involvement and they don’t always match the goals of private companies. Mongolia’s Erdenet may be an example of this where an entire town (seemingly sustainable) was built around a mine which may not have happened in the same way under private ownership.

      Not knowing anything about Ecuador Estratégico can you tell me what makes them an interesting comparison in your mind?

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