April 2012
Work on the Tavan Tolgoi project continues to progress, belying talk that it is in limbo, and despite efforts by vested interests since 2008 to halt it through trying to take control of the whole railway construction work.
It is as well to remember the background. On December 6, 2008, a partnership agreement was signed by the Mongolian Ministry of Road, Transport, Construction and Urban Development and Russian Railways Union, calling for work to begin on establishing the Infrastructure Development Company. This was to be a joint venture, with both sides putting in USD1.5 million. (Some Russian media erroneously put this at USD1.8 million.) The amount on the Mongolian side was to come from Erdenes MGL and Mongolian Railway SOSC.
The peak of the world economic crisis in 2008 found the Ulaanbaatar Railway Association in the red as it had less freight to carry. Russian Railways Union, too, was running at a loss. It began laying off some employees and asking some others to go on unpaid leave. At that time, V.Yakunin, its president, visited Mongolia several times, making tall promises every time. He pledged to make every effort to provide more freight for Ulaanbaatar Railway to transport and called for widening areas of partnership. Eventually Infrastructure Development was registered in Mongolia in the spring of 2009 as a Mongolia-Russia Joint Venture Company (JVC). That summer, the then Russian Prime Minister, V.Putin, visited Mongolia and expressed high hopes about the future of the new company. In the time that S.Bayar held the office of Prime Minister in Mongolia, two more agreements were reached to set up two Russian-Mongolian joint ventures. One was to build a base structure to transport southern Gobi’s minerals and another one to establish a 50-50 joint venture in the Mongolian uranium industry.
In 2009, before the Oyu Tolgoi Investment Agreement was signed, Yakunin was quoted in the Russian media as confidently saying, “We will own a certain percentage of Mongolia’s Oyu Tolgoi and Tavan Tolgoi exploration licences by virtue of our stakes in their infrastructure development. The projects are worth up to USD7 billion.”
Vitaly Morozov, called “Meat” Morozov by Mongolians, was appointed CEO of Infrastructure Development JVC. His work as head of Buryatmyasoprom Company had earned him considerable influence in the Russian Ministry of Agriculture when A.Gordeev was Minister. Mongolians were wary of his credentials because of his record in the meat business here. Now this man represents Russia in the Tavan Tolgoi negotiations. L.Khangai, a former Mongolian ambassador to Russia, was appointed Morozov’s deputy in the JVC, indicating the importance authorities inboth countries placed in it.
Some time later, Yakunin requested the Russian Government to sanction the USD1.5 million investment in construction of the railway. The State Duma held back its approval. No confirmed account of what subsequently happened is available. One version says the Mongolian Government was ready with its share of the capital investment, but another contradicts this. What we do know is that with the resignation of Prime Minister Bayar, interest in Infrastructure Development waned and the JVC was quietly forgotten. Most Mongolians were happy and relieved at the death of this particular dream.
A country’s railways are a major national security concern. Every country controls its main power line, as also major communication and other infrastructure facilities. Mongolia should and would do the same but Ulaanbaatar Railway remains 50 percent owned by Russia. Its technology and equipment are all from the last century, but the Mongolian side had to refuse America’s Millennium Challenge funds for their renovation as Russia put its foot down. Fresh from that experience of a great opportunity lost, Mongolia was not at all keen to share the ownership of the new railway project with Russia again.
If the Government of Mongolia had persisted with Infrastructure Development JVC, it would have had to share control over the 1100-km railway from Tavan Tolgoi to Choibalsan via Sainshand. Russia was upset at Mongolia’s lack of enthusiasm and felt worse when the Government made it clear that mineral deposits in the southern Gobi were not up for grabs. The Russian unhappiness at this turn of events led to the imbroglio over the first international bid for Tavan Tolgoi.
The Government took several clever steps to pre-empt any move by others to checkmate national interests. Even as the Mongolian-Russian JVC was established, Mongolia created its very own Mongolian Railways SOSC. The bilateral agreement allowed Russia to have joint control over the railway construction, but Mongolia made it clear its new State-owned company would be responsible for moving material and equipment, commercial freight and maintenance of tracks. The first director of the company was an experienced railwayhand, A.Batbold, who has been helped by other professionals such as MP R.Rash.
However, Yakunin knew how important control of the construction is, and wanted to make sure he would have the final say on supply of iron during construction, thus retaining a grip on the pace of work when laying the tracks from Tavan Tolgoi to Sainshand. Infrastructure Development was supposed to float a tender and select the builder. The JVC would own 25 percent of the company chosen which will hold the remaining 75 percent. Yakunin’s plans came to nought when he did not get his USD1.5 million from the Russian Government. In the meantime, Mongolians stopped being extra nice to him for they had started talking to China regarding the investments.
This happened in the spring of 2009, when Infrastructure Development was still an active proposition. Kh.Battulga, Minister of Road, Transport, Construction and Urban Development, held a meeting with Lu Dungfu, China’s Deputy Minister of Railways, to explore possibilities of cooperation in building the railway. This meeting was around the time when Yakunin was interacting with international investors in Ulaanbaatar. It was also the time when delegates from a consortium that consisted of 11 major Korean companies arrived in Ulaanbaatar to offer cooperation in the railway construction. They had made the first offer the year before to Prime Minister Bayar and followed it up at every subsequent opportunity. They also had a work plan ready and I remember representatives from nearly 20 companies from South Korea had visited Mongolia to make an on-site study of the project.
It is clear that many companies and/or countries are interested in building the railway which will transport an enormous amount of Mongolian minerals over a long time. Among the alliances that have been made, one of the most interesting is a China-South Korea joint company that was registered in Hong Kong under the name Mongolian Railway Infrastructure. Its investors are China’s Dandong Port LLC and South Korea’s Moric-Korea LLC. Moric stands for Mongolian Railway Infrastructure Company.
These words seem to hold a special attraction for investors. But this new company has gone one step farther than others because B.Batzaya, the new director of Mongolian Railways SOSC, has signed a partnership memorandum with it. One cannot but remember how Infrastructure Development was born of an agreement between two prime ministers, and now a Chinese-Korean company has followed talks with China by the head of a Mongolian agency and a minister. No one in the Government of Mongolia was aware of this company with whom an agreement has been signed. Minister Kh.Battulga presented everybody with a fait accompli, while many others were still making plans. Ministry officials wonder what part in the deal was played by the personal relations between Battulga and the director of Moric-Korea LLC. Also to be noted is that Batzaya, who signed the agreement on behalf of Mongolian Railways, was a trusted assistant of Minister Battulga when he was its deputy director.
So what Prime Minister Bayar did for Russia then, (former) Minister Battulga has now done for China and South Korea. Moric-Korea LLC is nominally registered in Korea but it does very little business there. It basically trades mining stocks in Hong Kong. It is surprising that the Director of Mongolian Railways signed a memorandum with a company with no proven experience in infrastructure development. Kh.Battulga showed a document on TV and said, “This is not an agreement, but just a memorandum of understanding”. He also signed “just a memorandum” with Zhou Menbo, deputy to the general manager of China Railways LLC. The word “acknowledged” was seen on one corner of the “memorandum” and Battulga explained this by saying, “This just means I got a copy of this.”
A Minister certainly has the right to sign a memorandum or even an international agreement on behalf of the Government but not if he has kept the Government in the dark and does not have its express authorisation to do so. The whole thing reeks of a scam. There are several clauses in the document which the Minister must justify. For example, it says China will fully fund the construction of the Tavan Tolgoi-Sainshand-Choibalsan railway, in return for the mining licence of Tavan Tolgoi, and that a Chinese mining company would be allowed to operate in other areas of Tavan Tolgoi. How can a Minister sign a memorandum on the Government’s behalf if the Government does not know any of the termsit contains?
The Cabinet meeting on February 27, 2012 authorised the Government to establish a new agency to resolve all issues relating to construction of the railway. It is to be named Agency for Construction of the National Railway. As of now, it exists only on paper and nobody has as yet been named to head it. The main purpose of announcing the decision is to indicate that the Chinese-Korean company in Hong Kong with which Kh.Battulga signed an agreement or, as he says, a memorandum, has nothing to do with construction of the railway. The Governmentwillissue a tender to select the construction company and it may also decide to conduct fresh studies, including geodesic ones.
The Development Bank bonds, backed by the Government, are doing well in the international market, so funds for constructing the railway should be no problem. The State will own 51 percent of the company entrusted with the construction. Erdenes Tavan Tolgoi – which now fully owns the Tavan Tolgoi deposit — will have no restriction on the number of shares it can buy, but others that participate in the international bid will be allowed to own no more than 10 percent of the newly planned company. So neither Yakunin nor Lu Dungfu will own more than 10 percent of a company that they once dreamed of controlling.
It is a very welcome move that the Mongolian state will retain 51 per cent ownership of both railway companies. This will put at rest all further efforts to delay the Tavan Tolgoi project and remove many uncertainties that have contributed to the present mess. The new company will provide 51 percent of the iron for the construction and Mongolian Railways will own 51 percent of the moving components.
Thanks to bold moves by the Government, obstacles to putting the Tavan Tolgoi deposit into economic circulation are being dismantled. A new era is all set to begin. Erdenes Tavan Tolgoi will start soil removal work at Baruun Tsankhi within this month. They are successfully operating the mine at Zuun Tsankhi and gaining experience. Furthermore, Germany’s Siemens has just signed a contract to build a 300-MW power station based on Tavan Tolgoi coal.
The Governmenthas changedthe guidelines governing the international bid on Tavan Tolgoi three times. Its initial stand was that the State would own 51 percent and the rest would be offered to investors. But in February, 2010, Prime Minister S.Batbold said that the State will own 100 percent and foreign investors would work as contract operators. The interesting thing was that investors did not lose interest even after this drastic reversal of position.
In April 2010, only two months after the previous amendment, the Government announced a set of six conditions that an investor should meet. These included advance payment, and suitable conditions in transit transport. Soon after this, before Naadam of 2010, the Government decreed that foreign investors should form consortiums and only these will be allowed to bid. It has to be noted that every time the guidelines are revised, they bring more benefit to Mongolia.
The Government has been under a lot of pressure from both locals and foreigners. The mischief by Kh.Battulga is the latest example. In this connection, I must make it clear that the Democratic Party is not involved in the scam. It is something that Battulga did only as an individual for his personal interests.
It is now clear that the Mongolian Government will have superior rights in all areas of the railway construction. The days of Infrastructure Development are behind us and Battulga’s Hong Kong-based company has also been shown the red card. This is all to the benefit of Mongolia. Work on Tavan Tolgoi will pick up steam once the Parliament election is over. No matter which party forms the next Government, the clock cannot be turned back. Professionals will run the show once the various forms of pre-election posturing are over. Tavan Tolgoiis set to serve the national interest and no partisan or individual chicanery will derail its progress.