Mongolia – Rich in Governance Models

By Julian Dierkes

These days, the optimism regarding Mongolia’s development (economic, political, social) has turned into a disappointed consternation, “how could things go so wrong?”. Of course, the answer is mostly a domestic political one, but is also linked to commodity prices, etc. While we used to think of Mongolia as a soon-to-be-rich country, that is a little less clear now. Soon-to-be-rich in democracy, human development, etc. Those have all been topics for many posts on this blog and I will continue to return to these questions. But, inspired by a workshop in Bishkek bringing together Burmese, Kyrgyz, Mongolian, and Timorese participants, I am observing that Mongolia may well be rich in one unexpected commodity: mining governance models.

Governance Models

Here, I am primarily concerned with the nature and extent of government involvement in mining enterprises. More specifically, different levels and forms of government ownership, a limited view of governance, of course.

From a Canadian perspective (and it’s a very interesting conversation from this perspective at the workshop that got me writing this post), that is an odd concern under the broader rubric of governance models. Simplistically, there is no state ownership of mining enterprises in Canada. Of course, that could be a more complex discussion of First Nations involvement, and also public subsidies for mining in the tax code or in the unwelcome role of the public as an owner-of-last-resort when it comes to clean up of mining activities (see Giant Mine as an example, though not of ownership formally). Yet, as a simplistic statement, it probably works to say that the federal government does not act as an owner in mining enterprises.

Mongolia

If we think about mining governance as including different levels of involvement of the government, I would claim, Mongolia is rich in different models that are all operating at once.

What I mean is that the mining industry in Mongolia includes companies that

  • are fully privately held, that include some level of government ownership, and fully government-owned mines.
  • are operated directly by the state, or owned by a state holding company.
  • are very small companies that amount to barely more than a backhoe and a truck, there are medium-sized industrial mining companies operating a single mine, there are very large mining concerns with multiple operations.
  • are entirely owned by Mongolians, partly owned by Mongolians and non-Mongolians, and fully owned by non-Mongolians.

If we arranged these dimensions in some kind of array, we could probably fill all cells with at least one example from Mongolia.

International

Not all mining economies display such an array of different ownership models. Take Canada or Australia as mature mining economies, for example, and federal government ownership does not exist as a model, even though there are also many variations as to the size and domestic vs. foreign ownership.

In learning more about the four countries represented at the workshop, there is also much less diversity in ownership models than there is in Mongolia. In Kyrgyzstan, the instinct toward state ownership is strong, but the most prominent mining enterprise (Kumtor, with its Canada links (Centerra Gold) that are also a Mongolian link (Boroo Gold)) is fully owned by a Canadian company (Centerra), but the Kyrgyz government in turn has a 33% share in the Canadian company via Kyrgyzaltyn.

#Mining at 4000M in #Kyrgyzstan.

A photo posted by Julian Dierkes (@jbdierkes) on

The Burmese oil and gas sector is primarily organized around production sharing contracts, while mining is dominated by direct state ownership and operation. There is also some involvement by foreign investors, often SOEs from China. More ownership models seem to be on the horizon as Myanmar is taking steps toward opening its mining sector for investment.

The natural resource sector of Timor-Leste is concentrated in oil. Timor-Leste has a national oil company, Timor Gap, that partners with foreign companies in exploration and investments.

While the oil & gas sector operates very differently from the mining sector in many areas, making the Timorese and Burmese cases perhaps somewhat more distant from Mongolia, the Mongolian experience with different ownership models is still quite relevant to other emerging mining economies.

What does this Wealth of Models Mean?

It is not the case that Mongolia set out with its turn to a market economy following its democratic revolution in 1990 to become a world leader in the variety of governance models. At that time, there were only three models,

  • Erdenet, the very large copper and molybdenum mine, jointly owned by the government and the Soviet Union
  • fully-foreign owned operations like the uranium mines operated by the Soviet Union
  • fully publicly owned mines within Mongolia, like the coal mines near Ulaanbaatar that were developed to heat/power the capital (Nalaikh, Baganuur, etc.)

To some extent legislation on mining from the 1990s on was aimed at encouraging foreign investment, so this did presage some of the variety of models that have emerged since then.

But, a number of subsequent policy decisions took Mongolia further in the direction of a variety of governance models. For example, designation as a “strategic deposit” mandates a state equity stake in projects, but does not determine the level or nature of involvement.

So, today, Mongolia really is a particularly rich ecosystems of ownership governance models. Surely, some of these models have shown themselves to be effective for particular outcomes. Erdenet Mine would be the most prominent example here. As a mine that has been owned and operated by the state (and the Soviet state), most Mongolians see it as successful in spurring the growth of Erdenet as a town, and in securing financial benefits to the Mongolian state. More doubts may arise as to its corporate record (i.e. is it an efficient operation in extracting copper), or regarding its environmental impact. Given its disastrous closure “policies”, the Nalaikh coal mines might be an example of successful state-operated extractions, but at huge costs to the community after the state failed to close the mine properly.

At this point, I have not really seen a process that would begin to settle on one specific model, but instead, mostly not by design but in fact nevertheless, the diversity of models is likely to persist for some time.

That means, for example, in terms of political risk for foreign investment, that there is very little in the Mongolian trajectory that suggests outright nationalization, the worst-case scenario for foreign investors.

It also means that policy recommendations and solutions are, perhaps appropriately, complex. While many OECD-based consultants might emphasize the “need” for private sector-led development of the mining sector, Mongolia’s neighbours (China and Russia) might lean much more toward SOEs as the engine of development, and nearby neighbours like Japan and South Korea might point to state guidance for private-led development. For Mongolia, all these options exist and are relevant.

How Can Mongolia Benefit from this Wealth?

If I am right that the Mongolian mining industry is an ecosystem with a high level of diversity in governance models, is that a benefit to Mongolia?

Currently, it does not seem that way, as I said in the opening paragraph.

But, many models means experience with many models! If that diversity and that experience can be understood better, it will certainly form a strong basis for future policy decisions.

Sadly, that is yet another “big if” when it comes to Mongolia’s future. One of the great missed opportunities of the past 5 years has been the lack of concerted effort to build up analytical capacity within the Mongolian government, but also in civil society and the media. In order to turn the wealth of governance models into a wealth of human and sustainable development, such analytical capacity is sorely missing. Without it, the number of different models is just that, a lot of different models that potentially obfuscate the real situation at mining enterprises as it is difficult to understand for the (Mongolian public). A case in point for that is the recent “privatization” of Erdenet Mine.

In line with previous patterns, the new MPP government seems to be embarking on yet another round of wholesale replacement of personnel, destroying any capacity that may have built up, again. That makes me less than optimistic on the analytical capacity that would help understand the impact of different governance models on benefits that accrue to Mongolians.

About Julian Dierkes

Julian Dierkes is a sociologist by training (PhD Princeton Univ) and a Mongolist by choice and passion since around 2005. He teaches in the Master of Public Policy and Global Affairs at the University of British Columbia in Vancouver, Canada. He tweets @jdierkes
This entry was posted in Development, Kyrgyz Republic, Mining Governance and tagged . Bookmark the permalink.

Leave a Reply

Your email address will not be published.