Policy Series: Mining Policy Failures (I)

Mining policy is a good entry point to understand the overall policy-making processes of Mongolia. For one, mining has been one of the dominant economic sectors of Mongolia since the early 1900s.[1] Second, with extensive mining activities, mining has caused numerous political and socio-economic challenges for policy-makers. Today any policy decisions related to mining trigger diverse reactions from political parties, political-business factions, businesses, civil society activists, and citizens. Third, mining policies also have implications for global stakeholders such as IFIs, multinational corporations (MNCs), state-owned enterprises (SOEs), foreign governments, and transnational advocacy networks (TANs). Finally, mining requires policies with long-term consequences not only to ensure foreign and domestic investors business rights and property rights are protected, but also to assure citizens limit negative mining impacts on politics, economy, society and environment are prevented. For these reasons, the study of mining policy and its failures is useful to illuminate ways to manage the central challenge of democratic governance – how to promote long-term policy solutions in the face of short-termism (fractionalized, parochial interests) dominated politics. In other words, mining policy failures in Mongolia will highlight a key feature of democratic politics: politicians, who are on an electoral schedule are inclined to neglect the long-term consequences of their policies and only be interested in remaining in office at any cost.

The following examples illustrate the less successful policy-making processes in Mongolia. They are policy failures for a few reasons: (1) their negative consequences are still present; (2) both politicians and the public acknowledge them as failed policies; (3) succeeding parliaments and cabinets have not taken any long-term policies to mitigate their negative impacts; and (4) politicians and bureaucracies still introduce similar policies that would certainly repeat these failures.

The Gold Program [Алт хөтөлбөр] was introduced in 1992 to attract foreign and domestic investors and to alleviate the immense socio-economic challenges resulting from the economic transition of the early 1990s. Even though the program provided opportunities for domestic mining companies and the government to generate some revenues, the program brought many challenges. First, mining companies exploited the weak regulatory and institutional settings and the majority of miners did not properly close and/or reclaim their mining sites. Second, related to the first, it provided opportunities for the emergence of a Mongolian-type of ‘gold rush’ – the ninja miners – people who engage in artisanal mining activities at abandoned mining sites.   Although the studies present different numbers, over 60 thousand people engage in artisanal mining activities and live within the informal (illegal) socio-economic structures of the artisanal mining. (Swiss Agency for Development and Cooperation, 2011, pp. 23-27; Grayson, 2004) Third, the negative environmental and socio-economic impacts of these small and medium-sized mining companies and artisanal miners are the most devastating to local community, environment, and herding livelihood (Swiss Agency for Development and Cooperation, 2011; World Bank, 2006). Although a few attempts were initiated, they did not succeed because of sudden policy changes.

Nalaikh Coal Mine [Налайхын уурхай] is a thermal coal mine partially closed following a deadly explosion in 1990. From 1954-1980, a Soviet-style mining town was built in Nalaikh to provide high-quality coal for the Soviet military facility (i.e., the largest joint military airbase, engineering and air defense units), power plants of the capital city as well as ger districts in the greater capital city area. At that time, the mine had state-of-art facilities and followed the Soviet mining standards for environmental and labor safety.[2] The withdrawal of Soviet military forces and suspension of Soviet assistance contributed to the overall deterioration of the operation and maintenance of the Nalaikh mine. Because of economic devastation in 1990, the government partially closed the mine, but it could not fully restrict artisanal mining activities in underground shafts of mostly unemployed miners and their families. Today over 1500 people mine with the lowest safety requirements. Since its partial closure, on average 10-17 people die annually in Nalaikh mines.[3] Despite periodic talk about the negative impacts of artisanal mining in Nalaikh, no government attempted to enforce the mining law, standards, and regulations or to provide a long-term policy solution even though it is the closest mine to the capital city.

Oyu Tolgoi [Оюу толгой] – was the first-ever and largest mining deal with multinational mining corporations (Jackson, 2014). After eight years of its discovery by the Canadian Ivanhoe Mines, the Mongolian government concluded the investment and shareholders’ agreement with the Ivanhoe Mines and Rio Tinto in October 2009. Under the agreement, the Mongolian government obtained 34 percent ownership and the Turquoise Hill Resources (a name of joint mine of Rio Tinto and Ivanhoe Mines) 66 percent, with foreign investors agreeing to provide local employment, procurement, and to contribute to infrastructure development for the value-added production (e.g., copper smelter, power plant, rails, and roads). Even though this phase I (i.e., open pit mine) of the mine was completed in June 2013, the Mongolian government and Rio Tinto failed to reach agreement on the project costs, including its phase II (i.e., the underground block-cave mine). This disagreement caused both sides to take retaliatory measures against each other (e.g., unpaid tax claims by the Mongolian government and trimming Mongolian employees and some local procurement by the investors) while slowing the overall project development, sending negative signals for foreign, especially Western investors, and heating up domestic politics. Now many policy questions – how to deal with powerful, global investors over the ownership, management, and development of the large-scale projects and how to assure the public about long-term environmental and socio-economic challenges – remain unanswered. The most interesting fact is why politicians, most of whom were members of the 2004 and 2008 parliaments which approved the investment agreement, now have been attempting to change their policy choices.

Tavan Tolgoi [Таван толгой] is the largest coal deposit in southern Mongolia. Since 2008, Mongolian politicians, bureaucrats, and private businesses as well as foreign investors have hoped to generate quick, substantial revenue from the Tavan Tolgoi deposit for two reasons. First, it will be closer to Chinese and East Asian markets if the railroad to the Chinese border is built (247 km). Second, unlike the Oyu Tolgoi mine, the deposits are extractable with open-pit mining technology. Therefore, all stakeholders have been extensively competing over licenses for mining operations and development of infrastructure, especially the railroad. In 2010, following the recommendation of the National Security Council (NSC), the parliament directed the government of Prime Minister S Batbold to negotiate with potential foreign investors to operate the western section of the mine. A year later, the government announced its decision to divide the operating licenses for Chinese Shenghua Group (40%), Russian-Mongolian consortium (36%), and American Peabody Energy Corporation (24%). However this decision was recalled immediately due to concerns from Japanese and Korean bidders. At the same time, the government permitted the state-owned Erdenes Tavan Tolgoi to operate the eastern section of the mine with domestic and foreign mining companies. Then contracts of the Erdenes TT were revoked and re-negotiated by the governments of ex-Prime Minister Altankhuyag and incumbent Saikhanbileg. In August 2014, the government issued another resolution to finalize the bidding over the operation of the Tavan Tolgoi mine.

The Strategic Entities Foreign Investment Law was passed by the parliament in May 2012 and invalidated in October 2013 with the passage of the new Investment Law. In April 2012,the Chinese state-owned Aluminum Corp of China Ltd (Chalco) launched a bid to buy the stakes of Ovoot Tolgoi, a Mongolian coalmine, from the South Gobi Resources Ltd (SGQ). Since the deal was done without informing the Mongolian government, politicians and the public began to voice concerns about the country’s sovereignty. A month later, the parliament passed the ‘Strategic Entities Foreign Investment Law,’ which requires foreign state-owned and private investors to obtain the parliamentary and governmental (cabinet) approval to operate in sectors of strategic importance (i.e., terrestrial resources, banking and finance, and media and communications).[4] Just like the quick passage of the law within a month, it was amended in April 2013, and repealed in October 2013 with little study and justifications.

The Windfall Profit Tax Law was passed in 2006 and repealed in 2011. The law imposed a 68 percent tax on copper and gold concentrates. In accordance with this law, mining companies operating in Mongolia would pay 68 percent tariffs on copper and gold concentrates if the price of copper and gold exceed $2,600 per metric ton and $500 per troy ounce respectively on the London Metal Exchange.[5] The threshold for gold was raised to $850 in 2008. Although the initial draft included only copper, gold was added later because of pressures from civil society movements. Interestingly, this law was secretly passed through a quick legislative process without proper consultation with major stakeholders – the copper and gold mining companies. By imposing the windfall profit tax, politicians intended to generate revenues to implement their election campaign promises (e.g., cash transfers), to assuage concerns of environmental and civil society movements concerning irresponsible mining, and to pressure the Oyu Tolgoi mine to build smelter facilities in Mongolia.  The Windfall Profit Tax Law produced several unintended consequences. First, it faced strong opposition from the mining communities; many sought ways to evade taxation (mostly due to poorly institutionalized enforcement) and the scale of the artisanal mining increased. Second, the only implementer of the law became the Mongolian-Russian joint copper venture, Erdenet, which then needed to generate additional revenue for the state beyond its operational capacity. Third, it projected the image of an unstable regulatory environment for major foreign investors.

The Law on Prohibition of Minerals Exploration and Mining Activities in Areas in the Headwaters Rivers, Protected Water Reservoir Zones and Forested Areas (known as The Law with the Long Name [Урт нэртэй хууль]) – was passed by the parliament in July 2009 under pressure from civil society organizations and the environmental movement.[6] Since the implementation of the aforementioned Gold Program, environmental damage, especially to rivers and forests, had grown noticeably and disrupted the livelihood of herding families and agrarian communities. The law caused strong opposition from the mining companies while bringing staunch support from civil society and the public. However the implementation process became difficult for two reasons. First, the law stopped all types of exploratory and extraction activities of mining companies near water sources, river basins, and forests. As a result, the government has been mandated to reimburse costs of all these mining companies. Second, the law still lacks effective enforcement mechanisms for artisanal miners, whose operations are not regulated under any mining and environmental legislation. Although civil society and environmental movements succeeded in pressuring politicians to regulate irresponsible mining activities, politicians failed to produce a well-thought, phased, and effective policy that considered the demands of all stakeholders, namely civil society organizations, mining companies, and local community.

These are a few examples of failed mining policies in Mongolia. Although politicians, parties, and bureaucracies have been attempting to improve the regulatory framework for mining activities, these laws, regulations, and standards are destined to be “momentary policies” due to the bargaining dynamics of major stakeholders – domestic and foreign investors, mining lobbies, mining companies, and IFIs on one side and civil society actors made up of domestic and international networks, environmental movements, and local community on the other side. Between these two forces, politicians, parties, and bureaucracies could not envision and enforce long-term mining policies.

[1] The mining sector of Mongolia has evolved through different historical stages: mostly Chinese dominated artisanal mining period (up to 1925), when Western companies were conducting small-scale exploration and extraction activities; the socialist period (1925-1989), when the Soviet Union and other communist bloc states (esp., Czechoslovakia, Bulgaria, Germany) had assisted establishing a large and medium scale mines and conducting geological surveys; the post-communist period (from 1990 onwards), when Mongolia has been using its mineral resources to attract foreign and domestic investors.

[2] Mining administration, mining rescue unit, recreational facilities, railroad, and mining vocational training college.

[3]For more information on Nalaikh mine, see http://mining.time.mn/content/26292.shtml; www.eurasianet.org/node/63373; www.ibtimes.com/most-dangerous-coal-mine-world-mongolias-illegal-nalaikh-pits-1564916; ubpost.mongolnews.mn/?p=10802

[4] The Strategic Entities Foreign Investment Law (2012) available at: www.legalinfo.mn.

[5] The 68 percentages was taken not because of the careful calculation, but of the commemoration of the Mongolian sumo records.

[6] The law was published in the State News (Төрийн мэдээлэл) 2009, No. 28. In 2011, the Head of the Mineral Resources Authority acknowledged the law was an important step towards responsible mining, but its implementation process was not clearly articulated. “The Law with the Long Name is a Good Legislation,” [“Урт нэртэй” хууль бол сайн хууль] 27 April 2011, http://economy.news.mn/content/64451.shtml; the civil-society compiled information on the Law with the Long Name is available at transrivers.org.

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