October 2010
Many working for the Ministry of Mineral Resources and Energy, and the Ministry of Transportation and Urban Development, and researchers at the National Development and Innovation Committee have been kept from taking a vacation during the summer and the autumn, as they help the Government prepare the ground for feasibility studies of mega development projects. Still, the work is not going as fast as it should, and reading between the lines of the decisions taken at Cabinet meetings in September suggests that unless the process is somehow accelerated, the studies may not be finished during the term of the current Government.
The meeting on September 1 noted that studies are still being made on identifying the major infrastructure areas, while in several other areas proposals are beginning to be evaluated, with no indication when work on a proper feasibility study can begin on one finally selected. This was followed by the meeting on September 8 asserting that international standards have to be followed in preparing infrastructure projects, and then passing a resolution to select a reputable international legal consultant firm to advise on drafting agreements on major projects. This was particularly significant as showing that the Government wants to proceed carefully if slowly, so that feasibility studies for projects worth USD8 billion are beyond debate. Onlyrealistic and reliable studies will interest investors in projects that require huge funds.
It has become clear that the Prime Minister and his Cabinet colleagues will not be involved in work on these studies. It seems experience and study of global norms have taught them that such work is better left to specialist professionals than to all-purpose politicians. In its Spring session, Parliament gave the Prime Minister the responsibility to complete a feasibility study of a copper smelter in six months’ time. A busy political leader getting such a brief period of time to prepare a feasibility study of a major facility worth USD300-400 million is the perfect example of how such work should not be done. There are another 25 major projects approved by the Government exactly a year ago. The full list can be found in the November 2009 issue of the MMJ, but they include the Tavan Tolgoi mining project, a metallurgical complex, a coking coal unit, a chemical facility, an oil refinery, a construction material factory, the new railway, the Tavan Tolgoi power station, the fifth power station, and the residential apartment project. Their total worth will not be less than USD200 million. One hopesMinistries and Agencies will stay away, or be kept away, from working on their feasibility study.
The Tavan Tolgoi project is moving forward steadily while the budget for the New Ulaanbaatar project has been announced, and tenders for several projects are being floated. The dream list made by the National Development and Innovation Committee is turning into realty as they come to the implementation phase. The Government has accepted its inability to do the work and has decided to hire an internationally experienced consulting company on each project.
Investors have been flocking to Ulaanbaatar to make sure they get a piece of the pie. A conference of banking and capital market investors was followed by a German delegation meeting Foreign Ministry officials on specific topics that included supply of machinery and equipment to the mining sector, and investing in infrastructure and construction sectors. Parties interested in investing in the new railway other infrastructure projects met on September 11, but this turned out to be a comparatively low-key affair. This could be because of the growing awareness that despite official silence, it has already been decided that Russian and Korean consortiums/companies will get the contract for the construction of the 1000-km railway. Their hard work for two years has paid off and they have begun raising funds for their work. The tender that is to be announced will be just a formality.
Once the wheels of the railway project get moving, it will be time to focus on the feasibility studies for the large units that will comprise the Sainshand industrial complex. The preferred concept is that of clusters of interdependent units. International experts will be hired, and a large amount of money has been earmarked to pay their fees. Finance Minister S.Bayartsogt has said talks are on to utilize a major part of3 million Euros of German aid and a World Bank loan to pay the consulting service fees.
As I have said, a good feasibility study should secure offers of funding. The next question then is what principles are to govern funding for mining and industrial projects. This revives the issue of preconditions as the state looks for funding to start the Tavan Tolgoi project as its 100% owner. The selected foreign operator for this and the investors in others will certainly be asked for a large advance payment and also advance tax. The state is likely to get a better deal than it managed with the Oyu Tolgoi agreement.
The Government plans to use the advance payments thus received for two other main purposes, apart from Tavan Tolgoi. The first of these will be to start up capital-intensive projects such as New Ulaanbaatar. The secondwill allow the Government 51% equity ownership of the development bank. Once the bank gets going, it will be a source for further capital for projects. The Japanese are likely to manage the bank and also contribute capital. The World Bank is also interested in owning equity.
The advance payments will also be used to replenish the Human Development Fund, so as to cover students’ tuition fees. The nearer the election comes, the more such welfare programs will be announced, such as apartment loans and health care insurance. Tavan Tolgoi will hover over the election of 2012.
The advance payments from Oyu Tolgoi, the first of the 26 mega priority projects of the Government, have already been eaten up. They have brought only a meager cash benefit to the people. Now the Government will have to repay the loan it took to pay for its 34% share of the investment. With the plans I have mentioned of using the other advance payments, how will the remaining major projects be funded? The Government plans to issue bonds on the international market. The Ministry of Finance has high hopes that these will be in great demand. The Government is also considering the introduction of a new financial mechanism of issuing guarantees to major infrastructure projects. All will be clear once the International Monetary Fund Stand-By program is over. The program has achieved its objective of pulling Mongolia out of the crisis. The meetings held by the Prime Minister and the Finance Minister in New York and Washington pave the ground for the influx of large investments.
Another way of raising money is to issue shares of state-owned companies on international stock exchanges, but this can start only after a certain period. But the Government is getting ready for an investment inflow. This has to be kept in mind when the resolutions adopted at Government meetings are considered and the outcome of meetings of investors reviewed. One has also to keep track of high-profile visitors dropping in. International consultant firms and financial services providers, from those in the big league to junior companies, are opening their office in Ulaanbaatar. Winter will not cool their enthusiasm.