Mining Governance: Tavan Tolgoi

Tavan Tolgoi was a costly test for the Mongolia’s mining governance.  It tested the resilience of the revised mining governance under the 2006 Minerals Law, checked the unity of political elites, especially of two major parties, and examined the resolve of the state bureaucracy to implement new mining policies.  Apparently, all didn’t pass the test an even failed to capitalize the favorable momentum of the global commodity market.  But, most importantly, did we learn from our mistakes?  Did we take measures to enhance the institutional resilience of the mining governance, to unite political forces on a major (mega) project, and to insulate bureaucrats from political, economic, and social pressures? In this blog post, I will lay out the government intentions during the favorable period for mining  governance (esp., 2008-2012) and then discuss some factors that complicated the decision-making process over the Tavan Tolgoi coking coal deposit.

Intentions were clear during the coalition government of 2008 – 2012.  Under the revised 2006 mining law, licenses of the Tavan Tolgoi deposit were taken back to the state from private license holders because the deposit was discovered with state funds in the 1960s. Then the government also delegated its authority to the state-owned enterprise (SOE), Erdenes Mongol, to manage the tender process for permitting foreign mining operators while also allowing it to establish its sister SOE, Erdenes Tavan Tolgoi, to mine and export the coal.  Furthermore, the government decided to issue stock shares to its citizens (1072 shares per person) and to allow Mongolian companies to operate some parts of the deposit.  Moreover, the government hinted its ‘mining diplomacy’ by rewarding the operating licenses of Tavan Tolgoi to US Peabody Energy, China’s Shenhua and a Russian-Mongolian consortium.

In retrospect, politicians and bureaucrats in power complied to the mining governance rules. First, Tavan Tolgoi was included in the list of mineral deposits with strategic importance. Second, the SOE was established to govern the process of operating on the largest coking coal deposit.  Third, it created ways to allocate the mining benefits to the public.  Finally, it attempted to balance interests of Russia, China as well as newly found third neighbors. These decisions were approved and endorsed by the parliament, the coalition cabinet, bureaucracies, political parties, and the public.  But, these decisions were not implemented. If these intentions were formulated as a result of the formal politics, the implementation process became blurry for all actors – maybe except those in power.  The role of the informal politics has dominated the formal rules, procedures, and mechanisms; thus makes everything suspicious and non-transparent.

Seemingly, three factors, (1) competitive interests of transnational corporations, (2) dynamics of the competitive elections, and (3) interests of domestic business entrepreneurs and groups, have overwhelmed the Mongolia’s weak mining governance.

First, Mongolia now interacts with influential, experienced, and wealthy transnational corporations, including Western multinationals, Chinese state-owned enterprises, and Russian state-affiliated magnates. All are experienced negotiators and lobbyists at their respective capitals and financial centers.  The result of the first Tavan Tolgoi tendering process left Japanese and South Korean corporations unhappy while the latest made Americans and Russians disappointed.  These players have different interests and leverages over Mongolia.  Russia, a traditional ally, wants to keep its influence in mining and infrastructure, especially, the railroad. It is the only source of Mongolia’s fuel.  China, a new strategic partner, desires to secure the closest resource deposit and to link Mongolia into its regional rail network.  China is Mongolia’s only market and its infrastructure offers the closest link to the East Asian market.  Japan, the most proximate third neighbor, longs to get access into Mongolia’s mineral resources.  The US companies also make attempts to operate in new economic frontiers.  Both Japan and the US are vital partners for Mongolia’s sovereignty and international visibility. As all these Great Powers began to back up their corporations, Mongolia fails to impose its rules for foreign investors.

Second, the election logic presented another major challenge for politicians and bureaucrats because political parties in power need to win hearts and minds of their supporters and the population.  Prior to the parliamentary election of 2012, Prime Minister Batbold’s cabinet loaned 350M USD from the Chinese SOE Chalco and distributed it as cash-transfers to the public fulfilling the party’s campaign promise of mining revenue benefits.  A new cabinet of Prime Minister Altankhuyag cancelled the loan contract with the Chalco, but his action resulted in a debt because of the falling coal price.  The 2012 government revoked all major decisions in regards with Tavan Tolgoi mostly in order to discredit previous politicians who were in power, its opponent party (i.e., Mongolian People’s Party), and the coalition cabinet of 2008-2012.  Also, the newly-established SOEs, Erdenes Mongol and Erdenes Tavan Tolgoi, now follow the examples of former SOEs such as the Erdenet copper and molybdenum factory in generating funds for politicians and political parties in power as well as serving as an administration to post party officials and affiliated supporters. In 2013-2014, executives of these SOEs were investigated and fired mostly because of their political party affiliations. As a result, bureaucrats, especially at the senior level, have a little courage and autonomy to implement new policies, to uphold business principles, and even to take initiatives.  Therefore, structurally, all politicians come under pressure of safeguarding the party’s interests in winning elections and feeding its clientelistic network.

The domestic business groups and entrepreneurs appeared to be a major challenge for  effective mining governance. The railroad is a good example.  With the mining boom in Mongolia, the railroad became the most attractive business as it generates funds to do multiple feasibility studies, especially in Mongolia’s case (mainly for money-laundering), to construct the railroads, and later to own the infrastructure as well as to operate the trains.  To win these funds, domestic business entrepreneurs, corporations, and political-business factions successfully geo-politicized the railroad projects because Mongolia falls into the Russian broad gauge 1520mm infrastructure while Chinese narrow gauge sits next to its major mineral deposits.  Despite costly feasibility studies and alleged corruption investigations against these interest groups, factions, and individuals, the Tavan Tolgoi deposit remains unlinked to any rail networks. While the railroad decisions were politicized, there are a number of Mongolian companies still making fortunes from their small mining operations at some parts of Tavan Tolgoi.  These companies also have strong political representations at key political institutions, for example, the parliament.  Also, Tavan Tolgoi presents the case of the labor union’s interests.  For instance, a self-immolation of the union leader of Erdenes Tavan Tolgoi truckers at the press conference in November, 2015 caused quick action from the SOE Erdenes Mongol to revisit its contracts with foreign operators. Mongolian truckers opposed the Chinese company’s take-over of the coal trucking business because it will leave them unemployed. Clearly, the transportation of coal by either by Mongolian or Chinese trucks have been causing substantial negative impacts on the environment, health and livelihood of locals, but the government is still unable to enforce its decisions of efficient, environmentally sound mining governance.

Tavan Tolgoi is going to remain a failed case of Mongolian mining governance unless the parliamentary election of 2016 or the next commodity boom changes conditions.  It may continue to fail unless politicians unite to provide autonomy for bureaucrats and professionals and to increase the institutional resilience of Mongolian mining governance.  Because none of the political parties could solve this deep-seated institutional problem alone and enforce the decisions, political parties must insulate major projects like Tavan Tolgoi from the election timeline and business interests.  The populist type of pleasing all – external actors, domestic business groups, and the population – politics could not be a solution, but ‘making sacrifices for a long-term benefits’ seems to be the right solution for a small state in complicated geopolitical and economic scenario. Therefore, all players, especially politicians, must make a sound, timely decision and then provide an environment for the decision to live at all cost.

About mendee

Jargalsaikhan Mendee is a Deputy Director of the Institute for Defense Studies of Mongolia. He holds a PhD in Political Science from the University of British Columbia, and MAs in International Relations from the US Naval Postgraduate School and in Asia-Pacific Policy Studies from the Institute of Asian Research of the University of British Columbia.
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