August 2012
The new Parliament has approved the names recommended by Prime Minister N.Altankhuyag to be in his government. A careful study of the names makes it clear that fear was the predominant force behind every choice of the Prime Minister. He has accommodated the most ambitious members in each fraction in the Democratic Party. This makes the government like an egg, in that the slightest mistake in handling will break it.
The biggest of the DP fractions is the Mongolian Democratic Association (MDA), known to represent the business interests of the Genco Group. Its members now control the Ministry of Industry and Agriculture and its implementing agencies. In an interview, Kh.Battulga, MP and head of the MDA, has said, “It is important for related ministries to act in unison.” This expresses Battulga’s desire to be involved in the construction of the new railway network and Sainshand industrial complex. To that end, he made a deal with Altankhuyag right after the election to get A.Gansukh, former Deputy Minister of Road and Transportation, appointed its Minister. Apart from this, Battulga has been trying hard to get the Government adopt a new structure that will allow the State Property Committee to be transferred to the Ministry of Industry and Agriculture, which he leads.
The State Property Committee (SPC) is in charge of the few big State-owned companies that are not yet privatised. This Government is likely to keep 51 percent ownership of these companies and sell off the remaining share. Major business interests of the country are keen to make the best acquisitions and are carefully monitoring the last years of the SPC’s life. It is likely that the SPC will begin with disinvesting 49 percent of its shares in MIAT Airlines, a move that was part of the DP’s election programme.
The Bodi Group, like Battulga’s Genco Group another big player in the Mongolian business world, has recently set up Mongolian Airlines and wants to capture several flight routes to dominate parts of the Mongolian sky. Major business players will compete strongly with one another to grab shares of the remaining State-owned entities as they come on the market.
The Bodi Group now has a strong presence in Parliament. Group president L.Bold has been appointed Minister of Foreign Affairs, and several of his business associates have been elected MPs. However, issues regarding foreign trade have been transferred from his Ministry Battulga’s, thus giving the latter an advantage and more authority in the new Government. He will be in charge of both the Railway Authority through the SPC and of the State-owned Mongolian Railway.
The Japanese are happy that the Ministry of Mining is led by D.Gankhuyag, president of the Bridge Group, but his appointment poses risks for Oyu Tolgoi. He is widely expected to order a review of the OT investment agreement. At his very first meeting with the Minister’s Council he is believed to have asked for an export tax on coal. This will bring in more revenue to the State budget, but foreign and national investors fear that more such major changes are in the offing, and the mineral sector can no longer expect the current level of treatment from the government.
N.Batbayar, called the “smartest member” of the MNDP fraction of DP, is leading the Ministry of Economic Development. He is considered to be the one who can foresee Mongolia’s development direction best. His “allergy” to foreign investors is well known. He has also been against the idea of the Development Bank since the beginning. His “patriotic” touches to the investment policy could see more support for national investors. His Ministry will also have the final say in approving projects that need funding by the Development Bank. During initial negotiations, the Ministry was assigned to a different fraction of the DP, but Batbayar staked his claim strongly and with success. Now he needs to strengthen the position he fought so hard to acquire and his first job would be to get the right people to work for him. Among them would have to be competent and qualified people to give the right direction to the National Development and Innovation Committee when it formulates policy.
These are the ministries that are certain to be the most controversial. At the first session of the State Great Khural, the Prime Minister stressed the need to work as a team. N.Altankhuyag does not have the personality of a powerful leader but he is a pragmatic man with good managerial skills and can be accommodative and flexible to forge a consensus. He has put the most ambitious and wealthy MPs and fraction leaders in his team, banking on their spirit of self-preservation and self-interest to keep the boat from rocking.
That is not to say that Parliament sessions will not be full of heated debates. There are several MPs known to be fiercely critical of some major developments in the mineral sector in the last four years and who seek to raise taxes. The Government has a healthy majority, so the opposition has to be permanently on its toes.
President Elbegdorj wanted more Government members to come from outside Parliament but Altankhuyag decided to do the opposite and fished from among MPs, especially those who control big businesses. The President has agreed, for he knows what problems a fragile Government could pose. He has experience of leading one which finally forced him to resign as Prime Minister.
It is to be noted that the Government takes office when the Law on Conflict of Interests is in force. Only time will show how ambitious and powerful individuals can keep their business and political interests separate.
In a welcome move, the new Government will now be issuing mining licences, taking away from the Mineral Authority a power it has enjoyed since its establishment. It will hence forth focus on conducting studies and inspections, and reviewing resource estimates to clear up the mess around licences already issued. The time has come to bury the belief that the Agency had a bigger brain than the Ministry.
The new Government will have authority to sanction foreign investment. Foreign companies that want to invest in the mineral sector, banks, media and communications will first apply to the Foreign Investment Authority which is to evaluate them and forward them to the Government, which now has the final authority on a decision.
Foreign companies that seek to buy 5 per cent or more share in any Mongolian mining company will have to get permission from the Government. If the investment amount exceeds 49 per cent of the company’s share value, the decision will be made by Parliament. Such encroachment on the Government’s exclusive authority is a huge responsibility for Parliament, and the opposition will have to be extra vigilant to keep out external influence or corruption.
The coming four years will have to deliver in a big way, if development is not to be put back.The Government has started work on preparing its action plan, which would combine elements of the action plans of the parties who are in the ruling coalition. Happily, this should not cause too many problems as the action plans of the DP, the Civil Will Green Party, and the Justice Coalition hold similar views on several policy changes. They all want to reform the ‘system’ and also change the ‘rules of the game’. Prime Minister Altankhuyag said as much in his speech at the first session of Parliament.
There are differences in detail and emphasis. The Justice Coalition wants the reform to come through five revolutionary acts, and the CWGP also favours a “five-phase policy of reforms for Mongolia that has strayed from development”. The DP reforms plan also has five pillars and leaders of the party are working hard to ensure implementation of their promises. Now that the DP is the major partner in the coalition, its responsibility to the public rises along with its authority.
Parliament will be watching carefully. It has “revolutionary” members from all parties who will assail the Government if they see it going wrong. The official opposition force, the MPP, has a somnolent leadership, making it more important for those who were protesting in the streets to let their voices be heard inside Parliament. The reason people chose them is that there is a general faith that it is possible to actually reform the body politic. The Government has to use its mandate wisely and its action plan will be the first evidence of its commitment to implementing the reforms.
Altankhuyag already has piles of documents on his desk. There is no doubt that most of them are reports on and from foreign invested companies. The Law on Regulation of Foreign Investment in Business Entities of Strategic Importance came into force on May 17. Foreign companies that have already invested a lot in the banking, media, communications and mineral sectors, need to be registered before November 17. We don’t know how busy the Foreign Investment Authority has been and can only hope that a very important law is followed scrupulously.
As we write this, Dai Bin Guo, a member of China’s National Council, isexpected in Mongolia, possibly to check out how strictly the Government intends to observe the law. His mission is to persuade the Government of Mongolia to approve Chalco’s purchase of 60 per cent of SouthGobi Resources. Hoping for a positive outcome from the visit, Chalco extended its deadline to sign the agreement until the beginning of September. Z.Enkhbold, Speaker of the new Parliament, will be receiving Dai, and we hope that as one of the initiators of the law, he would explain its provisions carefully to his visitor. It is possible that Dai Bin Guo would tack the Tavan Tolgoi Baruun Tsankhi tender and other coal purchases with SouthGobi matters. It is significant that before coming to Mongolia, he visited Russia to discuss strategic cooperation. It is important for us to find a diplomatic way to avoid being the victim of our neighbours’ tactical deals. However, Mongolia is somewhat hamstrung by the strategic partnership agreement it signed with China last year.
One clause in the new law seems to refer specifically to the Chalco issue. Article 6.1 reads: “Permission is needed in the following cases…Negotiation that is likely to create a buyer and seller monopoly in international and Mongolian mineral raw materials and products trade… Negotiation that is likely to directly or indirectly influence the export market of mineral products of Mongolia and the price level.”This is a test case for Chalco, and all foreign state ownedcompanies that follow it. The time has come for the State to be more assertive. It is essential to have active media and public participation to complement Parliament’s efforts in this direction.
The following are widely expected to be included in the Government’s action plan:
1. The DP and the CWGP both have a pro-businesses agenda. The DP favours waiver and reimbursement of taxes for entities earning less than MNT1.5 billion. This has generated enthusiasm among small and medium enterprises. The CWGP also has ideas for providing incentives and better conditions. However, the DP has a stricter attitude to petroleum importers and alcohol producers. The latter will have to pay even higher tax. The DP also wants no reduction in taxes for telephone service operators, cigarette businesses and mining companies. The Mongolian People’s Party wants companies operating strategically important deposits to reimburse the State its exploration expenses, while the DP’s election platform called for a change in theMinerals Law to make the Mongolian state’s and companies’ ownership of strategically important deposits to be no less than 51 percent. This can be used to reduce the State’s direct involvement and to support national businesses, while giving more teeth to regulatory and inspecting work.
The first two years hold several risks for the Government. The Bank of Mongolia raised the policy rate to 13.25 in April and its consequences are now felt by both businesses and individuals. Commercial banks became more careful about issuing loans, fearing failure in repayment. XAC bank raised the initial repayment of apartment loans to 40 percent from 30 percent. There has been a rise in both foreign trade balance and state budget deficits. USD price is likely to drop at the end of the year. The effects of reduced foreign investment are clearly felt. In such circumstances, the Government must take immediate measures to make its policies more open by explaining the contents of the law on the Regulation of Foreign Investment for Entities of Strategic Importance and its implementation procedures.
2. The new Minister of Social Welfare will have to reform the pension system, to make sure social welfare cash payments go to those who need it most. It is certain that personal pension insurance will be introduced. Social insurance and health insurance funds will be made independent. All parties in the new Government are agreed on this. There will be a mechanism whereby the citizen will know the amount in his retirement account and be able to circulate it. The Government is also likely to take steps to create a Treasure Fund to provide future pension savings.
3. The fiscal year will begin on October 1. That way the next year’s budget will be approved early and tenders can be announced at the beginning of the year so that all work can start in the spring without any delay. The capital city has already changed its fiscal year to resolve the problem of this delay.
4. Local authorities will get more power. Locals will have more say in issuance of licences. However, grant of land permits for licences will be under the Prime Minister’s supervision. That way, there will be no overlapping of licence areas and pastureland and conflicts on that score between companies and citizens will be eliminated. Special protected areas will be clearly demarcated according to law. Up to 40 percent of the resource usage fee will be put into the local fund. Governors will be appointed directly by the State. With such moves on the way, the coming local elections will be nothing short of a “bloody war”.
5. There might be no immediate consensus on where the first railway will be built. The DP favours the State policy of building it to the north, but may not wish to halt work already begun in the south between Tavan Tolgoi and Gashuunsukhait under the supervision of the Railway Authority. This may be a good idea as there will be large imports for construction of the Sainshand complex in 2013 and it will be easier to transport them from the south.
6. The Speaker has said that fresh amendments to the Minerals Law would be approved within this year. The President also wants this. The new law might herald a brand new attitude to the mining sector. Most likely, the term “strategic deposit” will be replaced by “strategic raw materials”.
7. One advantage for the Government is that its initiatives are likely to be supported by all three members of the National Security Council. This will be crucial when changes are sought to be made in the Oyu Tolgoi investment agreement, to raise the Mongolian side’s share to 51 per cent after adjusting investment expenses five years from now. Last year, all changes made in the investment agreement were opposed by Rio Tinto and also opposed bythe National Security Council. This time, MPs who wanted to implement Parliament’s Decrees No.40 and No.57 are in a majority and their demand has a more than fair chance to be included in the Government’s action plan.
It is important in this context that Z.Enkhbold, one of the 20 MPs most vocally supporting the demand, is now in the National Security Council. However, even if Rio Tinto decides to take a soft line, not taking any risks to one of their biggest projects, there are other imponderables around Oyu Tolgoi. First of all, the mine will have to get its electricity from China for the next five years, but supply may depend on how China reacts to the ultimate resolution of the Chalco-SouthGobi Sands issue. Anticipating a sterner political environment, and fearing that copper prices might fall, Rio Tinto started ore extraction before the election and will soon start on its processing plant. In a way, this is good as revenue will start coming in but it also reflects tension and uncertainty in the overall economic environment.
8. The new Minerals Law could also break the impasse over the Tavan Tolgoi Baruun Tsanhi tender. If the Mongolian state or companies are to own no less than 51 percent of all mines, all claims from foreign interests will automatically have to be reviewed under new terms. Mongolia acquiring control of 51 percent of the railway structure will perhaps mean an end to Russian offers of developing infrastructure. Russians have proposed providing $7 billion to build a road from Tavan Tolgoi to Choibalsan, but this is conditional on Russia and Mongolia both owning 50 percent of the railway. If Russia becomes a minority shareholder, it is likely to drop its offer of a loan from the Russian VnesheconombankBank, with shares from Tavan Tolgoi Baruun Tsanhi as surety. Russia will strongly resent Mongolia taking 51 per cent share of the railway structure and it will be no surprise if we soon receive political visitors from the northern neighbour seeking to influence our decision.
The new Government would be working in an environment where popular expectations are high and people outside Parliament are ready to put pressure on it. The next four years will not be easy for either the Government or Parliament. Manipulating standing committees .with few members from the opposition is no longer possible. The State Great Khural has eight Standing Committees, each with 16 members on an average. That means any proposal will need the support of at least 9 members to be approved. The opposition may be weak but cannot be written off. But the main forces to ensure that Parliament and the Government keep to the right path in the coming four years will have to be provided by the media and the civil society.