October 2009
These are people whose business is providing different types of services around a mine. If conditions continue to be favourable, they hope to have a long-term presence in Mongolia. They could even become strategic investors themselves. The generic name for these undernoticed but essential people is “suppliers”, though they come in many shapes. Supplier companies know very well the great potential Mongolia’s mining sector has and their enthusiasm has been charged by the announcement that the investment agreement on Oyu Tolgoi deposit would at long last be signed.
Any individual miner eats bread, washes himself with soap, needs appropriate clothes for work, a house to live in, fuel to fill the tank in his vehicle, accesses banking and medical services, and so on in daily life. The list of the non-mining requirements in a mining establishment will be a very long one. The suppliers are there to meet these myriad needs. Theirs is business that gives immediate returns. The demand is big and will get bigger. It is time now to start seriously talking about letting domestic small, medium and large businesses to access this huge opportunity. A detailed study is yet to be made of the value added production to be generated from the large mining projects in Mongolia but it would be a pity if most of the income from this is allowed to go out of the country.
At a rough count the Oyu Tolgoi project uses the services of almost 300 companies. And this figure relates to a stage when actual mining operations are yet to begin. According to D.Zorigt, CEO of Tuushin Company, most of these 300 companies are Chinese. Foreign investors naturally prefer to deal with a network of established suppliers. A large number of Chinese companies that can supply everything to mines have grabbed the opportunity. What steps can we take to encourage Mongolian businesses to make a bid for a piece of the cake, the bigger the better? Why cannot our national companies be such tactical investors?
Office rent in Ulaanbaatar is already extremely high, offering a bonanza to those who own space. Mines will require many and big storage facilities, so real estate prices in the Gobi region will hike in the next few years. Unlike until recently, when a broken drilling machine was sent to Australia to be repaired equipment will need to be serviced and repaired on site. Unlimited opportunities crop up when we think of Tavan Tolgoi and Oyu Tolgoi. Foreign supplying companies are preparing to invest millions of dollars and I would urge Mongolian businesses, small, medium or big, to throw their hat in the ring.
The competition will not be easy. The quality of the service sold will have to meet international standards. So also must the accounting system and methods. In the opinion of the Managing Partner of Frontier Investment and Development Partners, Mandar Jayawant, among Mongolian companies MCS works very successfully with foreign investors, as its accounting and financial operations areofworld standard. He added that this has come after years of experience. It is clear that Mongolian companies should start preparing themselves without delay if they want to take advantage of the big changes at home that will come as world-level operations of global-size projects begin.
One of biggest concerns for investors in the mining sector of Mongolia is how their supplies will be channelled. Construction material and equipment for gigantic mines cannot be simply “pushed“ through the single gate called Zamyn Uud. People still remember how almost 400 containers got stuck at that border point in 2007. This is only one example of the myriad problems that will arise when large deposits are exploited. The signing of the investment agreement is just the launch of the ship. The uncharted ocean lies ahead, with situations and problems which we may not even know of.
It will not do to be unprepared. Challenges have to be anticipated and the wave of investment that we are expecting in Mongolia can be put to the best use only when we put in place a whole new infrastructure network comprising border ports, roads and railways, a dependable and efficient financial system etc. The capacity of Zamyn Uud needs to be increased and the ports of Gashuun Sukhait and Shivee Khuren have to be made permanently operational, even before connecting them with a railway, another priority necessity. The State Great Hural will lay down infrastructure development regulations when it debates the Concession Law at the present session. The law calls for extension and expansion of areas of public-private partnership in infrastructure development. An amendment in the previous session now allows private companies to invest in the construction of roads that are to be later transferred to the state in return for maintenance and repair. If private funds are similarly allowed to construct the 260 km of railroad connecting Ukhaa Hudag and Gashuun Sukhait, it will become not only one of the largest supply network channels but also contribute to the environmental protection of the Gobi region. The European Bank of Reconstruction and Development and the Asian Development Bank have agreed to invest in this railroad.
The Government is preparing to put in place regulations to govern the inflow of financial capital that will come along with supplier networks. Large scale structural changes have to be undertaken by the commercial banks, including international audit for transparency, and merger of smaller banks with one another or with bigger ones for efficiency. This “cleaning up” has to precede the arrival and disbursement of new loans and grants from international finance organizations. Once Mongolia has a reliable and competent financial market in place, investors are certain credit lines will open, much to the benefit of SMEs hungry for cash. We do not need bakers from China to deliver bread to the mines every morning. Mongolian companies surely can do this. And not all SME requirements can be met by foreign loans. The proposed national Development Bank will play a large role in setting up domestic entrepreneurs in business.
Mongolians are waking up to the new realities of the new wave of investment. They are going to be totally different from what they have known so far. Tactical, institutional investment is about to arrive. The money is there but Mongolians will have to brace themselves to use it efficiently, effectively and optimally, something that is possible only when they set their standards at the world level. New opportunities for the private sector in Mongolia beckon but they can be embraced by only the skilled and the well-qualified.