April 2012
In this informal and wide ranging conversation with L.Bolormaa, Minister of Mineral Resources and Energy D.Zorigt looks back at his years in office, marked by a shift in the popular perception of mining.
A shift seems to have taken place in the popular attitude to mining. Some years ago people wanted a curb on both exploration and extraction, but now the dominant concern is use of appropriate technology. Do you think there has really been a change?
I agree that time has brought about a change in how the majority of people view the mining industry. This is apparent in several areas. Back in 2006 and 2007, the main debate in society was on whether large mining projects were at all necessary. Now there is general agreement that projects liked Oyu Tolgoi and Tavan Tolgoi are beneficial and they and other mining projects should be encouraged. This does not apply to big projects only. Numerous local mines have started operating and people appreciate the economic significance of, say, the Bayangol and Altain Khuder iron ore deposits, spar and coal mining projects and of medium- and small-size mines. They want the mining sector to expand.
Ideas about mineral licences have also changed. Professionals prefer the area of operation to be large. However, political compulsions may be different. To be honest, licences had become a business commodity, changing hands without any real investment being made. This kind of profiteering had to stop, and that is why the Mineral Law of 2006 made it mandatory to spend a certain minimum amount every year on mineral exploration and licence holders were asked to submit an annual report on their exploration activity. Non-compliance was likely to lead to the licence being withdrawn.
All this imposed some order into issues related to exploration. After companies lost their licence for not following legal provisions, the percentage of the territory of Mongolia under licence has dropped from 44.5 to 13. Some feel this restricts mining, but others notice an improvement in the quality of the mines. Issue of licences is no longer a topic of interest. The discussion has moved to a more mature level.
For example, today we argue about processing plants. This was not a subject when our mining sector was both small and underdeveloped. We had Erdenet and Mongolrostsvetment and some small coal mines to supply domestic demand. Today Mongolia is on its way to becoming a major coking coal exporter. We also export iron ore and are exploring for oil. Processing the raw output takes on urgency at this phase of development.
As minister responsible for the sector, I am aware of the difficulties it faces.In the 20 years since the changeover from the controlled economy, the Government has not provided financial support or offered tax incentives to help entrepreneurs in any sector. We left them entirely at the mercy of the market, where competition would always be stiff. Now, we realize that such incentives are necessary to get investment in processing plants. The Development Bank should give loans on easy terms, and the state build adequate infrastructure in industrial areas. We have to compete with our industrialised neighbours. Plants will not always come up on their own, the Government must support them. The State Great Khural rejected our proposal to waive tax on importing equipment for processing plants. I personally think it was a big mistake. We will submit the proposal once again. We shall also support some MPs’ draft to free industries adding value from paying VAT and customs tax when it is discussed during the Spring session.
Should the mining sector be the State’s sole priority, or should the State take steps to improve the total business environment?
State support can come in several ways, depending on the needs of a particular sector. For the mining sector, a stable legal environment is much more important than tax benefits. In this, I have to remind you that despite constant demands, we have not made any changes in the last six years in the Mineral Law. This is quite an achievement, when set against the fact that theearlier Mineral Laws were amended far more frequently. If the present Law is kept untouched for another three or four year, it would signify to investors our consistency.
Secondly, if we wish to attract investment, it is crucial to keep our business environment competitive. Mongolia is not ranked highin the business rating of the World Bank and the Global Competitiveness Report of the World Economic Forum. Corruption continues to be high, and though there has been some progress over the years, we are listed close to former Soviet Union countries like Armenia and Kyrgyzstan, one or two countries of the CIS, and African countries. We need to do much better than be listed at 90-something out of 200 countries. One way of improving the business environment is to reduce the number of laws and regulations.
As the examples of Singapore, the U.S. and West European countries show, an advanced business environment needs far more than just fewer laws. The contents of the laws are equally important. Areas where Government officials take subjective and independent decisions have to be restricted. Their power to take all kinds of decisions is a major factor behind the corruption. The law and regulations should be equitable, unambiguous and not subject to contradictory interpretations.
Government support to setting up processing plants has priority in mining. Here investors can rightly demand a tax holiday. All material and equipment for copper smelting and metallurgy plants have to be imported and heavy VAT and Customs duties would substantially increase costs for an individual or a company trying to build a plant that will generate employment and contribute to faster economic growth. I think I would be right to waive VAT and import tax in such cases.
The Government has decided to establish industrial zones in six places: Sainshand, Choir, Umnugovi, Darkhan, Erdenet and Choibalsan. The National Development and Innovation Committee has said that Bechtel Corporation’s feasibility report on the Sainshand complex will be ready soon. After such studies covering all the other zones are over, a lot of money will be needed to develop infrastructure there. Industry cannot thrive without power and water. So support from the Government has to be spread over many areas.
Having said this, I must make it clear that I see no merit in the demand for the State to set up an organisation to prepare technical and economic feasibility studies for mining companies. The State has no business toissue decrees on where to set up what factory. I see the supportive State role as basically limited to devising tax incentives and developing infrastructure.
The State is becoming a major player in the mining sector. Is this right?
We do need to issue public shares in State-owned companies without delay. Closed entities cannot have operational transparency and cannot be economically profitable in the long run.
You see, capitalism has many different forms. Mongolia has so far followed what can be called “free capitalism”, which means we have had a very liberal and open economy where privately owned companies have to be highly competitive to survive. In“State capitalism”, on the other hand, most companies are owned by the State. Both China and Russia are good examples. The companies operate withlarge political support, and often serve political needs and demands. My personal wish is to divest State ownership of companies like Erdenet and Erdenes Tavan Tolgoi. Only when anybody is free to physically own their shares, shall we have “people’s capitalism”.
Is it a new term?
The word public means two quite contradictory things in English.State service is public service but a “public company” is one where shares are owned by private individuals or institutions.I also wish to allow the people access to shares in State companies. Prime Minister Batbold talked about the same thing at the recent congress of the Mongolian People’s Party. If we donot make this move and persist with State capitalism, the results will not be good.
That is why Parliament decided to sella certain percentage of the shares of Erdenes Tavan Tolgoi and other daughter companies of Erdenes MGL on stock exchanges. Distributing Erdenes Tavan Tolgoi shares to the people is also one way to get people involved in the company’s governance. Only more openness and a wider base of shareholding can save our State-owned companies from the dangers of State capitalism.
Negotiations on two huge mines were the high points of your tenure as Minister. What does one need most at such negotiations — political savvy, economic expertise or diplomatic perseverance?
Oyu Tolgoi was debated in the State Great Khural in 2007, after having been discussed at the Government level several times before that. So in many ways, State organisations were prepared for the negotiations. These also lasted for several years and we built on existing information and estimates as we went along. Progress picked up under the coalition government, because we had inputs from senior leaders, in or out of office, such as S.Bayar, S.Batbold, N.Enkhbayar and Ts.Eldegdorj, and from the majority of the MPs. It also helped that the Government and the National Security Council always took decisions in a spirit of urgency, without losing time.
I, personally, was a little bit disappointed with my own performance. Ifear I was hampered in the initial stages by my lack of experience in politics. Since most of the arguments and differences were of a political nature, maybe someone with more political skill would have handled them better. However, I learnt on the job and today we can say all important issues concerning Oyu Tolgoi and Tavan Tolgoi have been satisfactorily resolved.
I remember the winter of 2008. It was the most difficult time of the economic crisis and talks on Oyu Tolgoi appeared to be going nowhere. Today you are relaxed and talk about successful resolution of differences. As you look back, what do you see as your proudest achievement? And what remains to be done?
What remains to be done concerns the power sector. We shall use the time until the election to focus on oil issues. As of now, Mongolia will have to depend on imports. The crude available in the Far East of Mongolia can meet a certain part of our demands. We could set up a refinery there only for the needs of that region, as transport costs to other parts of the country will be prohibitive.
We shall have to pay the most attention to coal liquefaction and oil shale extraction. The U.S. consumes so much more energy than we do, but it has become almost self-reliant with proper planning and use of technology. We have to be similarly focused and make up for the attention we could not devote to this issue in the last four years.
Work on Power Station 5 will start in May. As you know, this is the first time in Mongolia that a private company will be building a power plant in Mongolia.
To return to mining, people usually notice big projects like Oyu Tolgoi and Tavan Tolgoi, but I personally feel more gratified at how small and medium-size mines have proliferated. The National Commission has approved operation of more than 50 such mines in the last two years. More than 9,000 people have got jobs there. In its turn, construction of the big mines has forged a supply chain and encouraged ancillary services to thrive, leading to expansion of the economy. Investment-friendly tax measures will be the first and foremost issue before the next State Great Khural.
The power sector looks healthier after its debts have been paid. Investors in the mining sector feel it is their turn now, and thereshould be some adjustments in the Mineral Law. What do you think about this?
The passage of the Energy Law in 2001 was a historic step on our path to the market economy. Since then, with increasing revenue and a growing economy, the State found it could afford to financially support the sector, and we agreed to a rise in electricity rates. This allowed the electricity companies to pay off their debts. We hope to clear up by the end of this year all outstanding debt issue between coal mines and power stations. That private companies are interested in building power stations shows there is profit in the sector, if it is run according to principles of a true market economy. Construction of a 50-MGw wind power station is to begin soon in Salkhit. Here, too, a private company is taking the risk of investing in a field often considered uncertain. This confidence will have a positive impact on other sectors as well.
Yes, a new Mineral Law draft is being discussed but I wouldn’t say more on this, lest I should create any misunderstanding. Wait until the first draft is ready to be debated in public. Certainly businesses need a peaceful environment to work in. But I will not say anything more as even a small statement could lead to unnecessary speculation.
Two laws passed on the budget give more authority to local governments, including the right to take initial decisions on mineral deposits. Do you foresee any conflict? For example, what happens now that the Citizens Council of Umnugovi aimag is not enthusiastic about letting water from Balgas Red Lake to be used for Tavan Tolgoi work?
With our centralised system, revenue from mining doesn’t seem to reach the local residents. Even if it does, it can be used unwisely. I will be honest about Umnugovi aimag. They are not using the budget wisely. With so much money, they should be improving their infrastructure and power stations, not buy houses and big cars and give apartment loans. Their priority should be providing electricity to soums that don’t have it. They also need to improve roads and develop businesses.
On the other hand, it is also true that all the money does not reach them. I’m definitely not against giving authority to the locals. We can talk about responsibility only when they have the authority. But some aimags are using the money for the wrong purpose. The Citizens Council of Umnugovi needs to let local residents know more and decide before the election whether their officials have spent the budget prudently. The kind of discussion and debate that takes place in the State Great Khural should be replicated in aimags, especially where there is now much more money. Officials there must explain how they are spending the money and how they fix priorities. The budget stability law can succeed only when local citizens openly ask blunt questions and force the authorities to spend only after a debate, if not a consensus.
As for mining projects, they will work only when the locals offer support. The local government must exercise its new authority only after discussions and explanations. For example, if the Citizens Council is against use of the water of Balgas Red Lake, it should be told there will be no power station. No power station means no industrial park and no factories. What is our future without industrial growth? Or does the council prefer to keep digging the coal, without ever processing it? This kind of discussion needs to take place. Only then will residents of Umnugovi understand that using the Balgas Red Lake water will not be harmful for the environment as they fear, as there is enough water to meet the needs of both mines and residents. It will not be effective for us to say from Ulaanbaatar that the decision to use the Balgas water is right. It must be locally explained, debated and understood.
One reason why the Oyu Tolgoi project has popular sanction is that its pros and cons were discussed threadbare for almost five years.
Surveys by foreign organisations say Mongolia is now much more transparent in its mining industry and is the second most transparent country in Asia. But inside the country, there is still suspicion of the sector. Why should this be so?
Foreign surveys focus on big projects and it is true that our record with major projects is clean. They take care of the environment and observe labour laws. The needle of popular suspicion is aimed at the small mines that are seen as contaminating the water and destroying pastureland. This is true of both foreign and Mongolian companies. Indeed, it is the latter that did the most damage in places like Uvurkhangai. We must devise ways to ensure that both monitoring and assessment by the Ministry of Environment and the Professional Inspection Authority are more effective. They do have the legal right to stop operations of small mines that violate the law. Our Environmental Law is not that bad. We just can’t implement it well.
But the Environmental Law reads like a list of prohibitions.
We have to clearly state what cannot be done and what the penalties are for breaches. The problem is that we ignore violations and then order companies to stop operating because they harmed the environment.
Not all the blame rests with the mining companies. Sometimes they are not aware of the harmful effects of what they do. We should improve the inspection process to give it more teeth. The work should be entrusted to trained professionals. Local inspecting officials must have, and be seen to have,more authority to enforce the rules at an early stage and then take stern action against persistent offenders.