Эрдсийг эрдэнэст
Ирээдүйг өндөр хөгжилд
Mining The Resources
Minding the future

Ts. Tumentsogt: Foreign Investment Has Declined Because All Mega Projects Are Under State Control


The state budget for 2023 has been approved, and the issue of state-owned enterprise (SOE) governance is at the center of public attention. Journalist of the Mongolian Mining Journal J. Munkhtsetseg spoke with the Chairman of the Board of Directors of the Mongolian Business Council (MBC) Ts. Tumentsogt about the governance of SOEs, next year’s budget and the business environment


Thank you for accepting our magazine’s invitation for an interview. You have worked for many years in senior positions in the energy and mining industries. You are currently the chairman of the Board of the Mongolian Business Council. Could you tell us about the Mongolian Business Council?

The Mongolian Business Council is a non-governmental organization that works closely with the government, the private sector, embassies, NGOs and business associations. We are now in our 15th year and have over 250 member organizations, including international investors, large domestic enterprises and start-ups. In terms of internal organization, MBC has a Board of Directors consisting of representatives of member organizations, and the Board manages 6 working groups and a permanent management team. I am honored to be interviewed by your magazine on behalf of the MBC Board of Directors.

Difficult times await us: COVID, border restrictions, war, and next year’s bond payments. The Parliament recently approved the state budget for 2023. What are your thoughts on the budget?

The state budget is the most important policy document for achieving the social and economic goals of any country, as well as the main driver for defining, driving, activating and revitalizing the economy. The 2023 budget is unique in that it is approved in a difficult internal and external environment. External factors include the war between Russia and Ukraine, China’ ban on crossing the border due to COVID, and internal factors include the depreciation of MNT against foreign currencies, rising prices and inflation, and expected bond payments. A coordinated fiscal and monetary policy is very important at this time. This year, for the first time, the Parliamentary Standing Budget Committee held an open discussion about the budget with citizens and businesses, and I think this was a very innovative idea. Mongolia’s export earnings are 90% dependent on commodity prices, and I think our budget for next year was approved with somewhat more optimistic expectations at this time, when the entire world economy is threatened by the crisis. Thus, it may be necessary to revise the budget, including income and expenditure again.

Although they said they would cut spending in the 2023 budget, the actual budget that was approved is higher than the previous year, right?

If you look at Mongolia’s budget for 2023, there are very few fundamental changes in social welfare policy, but spending is still high. Next year is expected to be difficult for the budget, which is heavily dependent on external factors such as next year’s bond payments, mineral prices, and the situation at the border. Nor have there been any fundamental changes, such as greater involvement of the private sector in major development projects and programs. The government is currently implementing and financing all major projects in the country, including railway and energy projects (Tavantolgoi power plant, Erdeneburen hydropower plant, oil refinery, oil pipeline, coal processing plant at the Tavantolgoi deposit, etc.). This is a huge financial burden on the government, and when the government is saddled with debt, projects are likely to be delayed and their cost will increase.

Will we be able to repay the bonds next year? Will the cost of refinancing be high?

According to a study by the Asian Development Bank, Mongolia’s economy is expected to grow by 4.9% next year. However, the government has drafted next year’s budget based on a growth estimate of 5.3%. I expect next year to be difficult. International financial institutions have advised cutting social welfare programs, stopping unnecessary investment, operating in austerity mode, reducing over-dependence on imported products, and producing some consumer goods domestically to emerge from the crisis with less damage. In terms of bonds, since 2016, Mongolia has been implementing many projects and programs by issuing debt obligations or bonds on the external market. Among them are projects that created many jobs and contributed to economic growth.

But there are also projects whose benefits and impact cannot be measured, as well as loans taken out by state-owned enterprises and classified as uncollectible. I expect the bonds to be repaid next year and some parts of the bonds to be refinanced. There is no other option. The IMF has presented its conclusions and recommendations in this regard. I believe that cooperation with the IMF will remain important in the coming years. I agree that refinancing is likely to be expensive, as you say.

You worked as the CEO of Erdenes Mongolia LLC. What is your opinion about the situation at Erdenes Mongolia LLC and Erdenes Tavantolgoi LLC today, and about the governance of SOEs?

Since the 1990s, when Mongolia transitioned to a market economy, the reorganisation and privatisation of state enterprises has been discussed, and Mongolia has received many projects and technical assistance from international financial institutions. However, energy, aviation, railways, large coal mines and public utilities are still under state and local ownership. The Parliament passed a series of decisions to sell up to 20% of Erdenes Tavantolgoi shares on domestic and foreign stock exchanges. However, the fact that this decision has not yet been implemented demonstrates a lack of political will. The Tavantolgoi coal deposit is considered a global deposit and asset. Therefore, in order to become an efficient and valuable company and bring more benefits to Mongolia and its people in the long term, it must adopt globally recognised corporate governance standards, become independent of politics, and operate in a transparent manner.

Erdenes Mongolia is currently working as an operational company. Many subsidiaries are taking losses, accumulating debts, and are in dire financial straits. Projects implemented by McKinsey International and the Asian Development Bank resulted in recommendations and concrete work for the step-by-step transformation of Erdenes Mongolia into a sovereign wealth fund. However, this work was delayed and the necessary structural changes are still pending. In order to become an international sovereign wealth fund, a company must first strive to be financially sound, debt-free and, most importantly, have corporate governance capable of attracting investment. It takes a long time to build a wealth fund. it takes time to build capacity that meets international standards of corporate governance, business planning, execution, financial management and human resources that can attract and retain foreign and domestic investment.

Today, the government is doing the work that a Board of Directors should be doing, because corporate governance principles don’t work at SOE? Excessive government interference will certainly have a negative impact on foreign investment.

The problem of governance of state-owned companies has become a common problem for all state and local companies, such as Erdenes Mongolia LLC, Erdenes Tavantolgoi JSC, Development Bank, Erdenes Silver Resources, Erdenet Industry SOE, MIAT company. State-owned companies suffer losses, are in debt, cannot operate in accordance with business principles, and are obliged to implement government welfare policies. Foreign investors are not interested because investing in a company with such management is not in line with business principles and does not inspire confidence that the capital invested will ECONOMY 81 The Mongolian Mining Journal November 2022 be used for business purposes.

Foreign direct investment has been steadily declining in recent years because all our major projects attracting foreign companies are state-owned. It is time to realize that corporate governance has certain rules and standards worldwide. If we do not follow them, there will be no trust and investment.

You were the CEO of Erdenes Oyu Tolgoi LLC and a member of the Oyu Tolgoi Board of Directors. Oyu Tolgoi is our only hope for the coming year, but there are also problems if you dig deeper. Members of the working group are keen to end the Dubai funding plan and increase benefits for the Mongolian side. Also, it is still unclear how the Oyu Tolgoi arbitration dispute will end...?

Based on the experience of countries with a history of more than a hundred years of developing the mining industry, the respective countries are more focused on creating jobs and expanding the tax base by developing the value-added production chain that will develop alongside the mining sector (energy, infrastructure, urban construction, processing, beneficiation, refining) and is based on the mining industry. The construction of the Oyu Tolgoi underground mine will be completed next year and the stable production phase will begin, but it will probably not be enough to generate a significant portion of the state budget revenue. In the Oyu Tolgoi project, thousands of young people are involved in world[1]class field development, mastering new methods and new technologies, learning and practicing modern management techniques, which cannot be measured in money. Parliament passed two resolutions on the Oyu Tolgoi issue and a working group was established. Studies and assessments have been carried out on many levels to increase the benefits for Mongolian side from the Oyu Tolgoi project. Most importantly, the question of how mining benefits should be distributed to the population is a fundamental and conceptual one. Based on the experience of countries with more than a century of mining history, they pay more attention to job creation and broadening the tax base by developing a value-added production chain in the mining sector (energy, infrastructure, urban development, processing, enriching, refining),

Regarding our country, we are paying more attention to stakes in strategically important deposits and buying stakes and shares with borrowed funds, which significantly affects our revenues. On the other hand, there was little knowledge and experience of financing schemes and instruments when the initial contract was signed, which affects revenues. It should be stressed here that a common problem in multi-billion-dollar projects and contract negotiations is that we don’t get help from internationally recognized, highly qualified, professional legal, financial, and mining (technical) consultants. This creates many problems. In addition to the Oyu Tolgoi project, I believe we need to properly plan how we manage state ownership, develop the concept of fundamental agreements such as investment agreements and shareholder agreements, and assess the financial implications.

Regarding the Oyu Tolgoi tax arbitration issue, the London Court of International Arbitration is discussing the taxation of a company incorporated in Mongolia and operating in Mongolia. Litigation in international arbitration is time-consuming and expensive.

What is the first step the government should take to support the mining sector?

It is difficult for our country’s mining sector to move forward without foreign investors. Therefore, it is necessary to attract foreign investors and create a favorable investment environment. There is also a need to sort out tax reliefs, exemptions and some double taxation issues. Most foreign investors want taxation and political stability. Our legislators know this. The members of the Mongolian Business Council are mainly large mining companies with foreign investments. We act as a voice for our members, protecting their interests. In October 2022, the MBC’s Legislation and Taxation working group, together with other chambers of commerce, developed specific proposals to address tax challenges faced by domestic and foreign mining companies and submitted them to the Parliament, relevant standing committee and the government. A meeting was held with the relevant ministries and representatives of MBC member organizations in this regard. We hope to see the results in the near future.

There is a big shackle hindering the development of the mining industry called the mining royalty. AMNAT is bringing many businesses to their knees, isn’t it?

A discussion was held with the Mongolian National Chamber of Commerce and Industry (MNCCI) and representatives of the coal industry on October 25 of the last year, and certain proposals related to royalties were submitted to the government. https://www. mongolianminingjournal.com/a/71818. However, in the future, before drafting any changes to legislation, we must gather the views of our business entities, study international experience, and conduct necessary research. For example, in Victoria state, Australia, the royalty on gold mining is zero per cent. Because as long as a gold mining company is operating, jobs are being created, taxes are being paid in this state, and companies supplying equipment and various services are busy working. The benefits in terms of job creation, paying taxes and building the tax base are thought to outweigh the income from royalties.

Royalties have wide-ranging impact and are not just measured by budget revenues. England originally introduced a royal tax (royalty) with the concept that it should be paid as long as natural resources are used. Therefore, instead of arguing about the size of the royalty, more research is needed to determine what the direct and indirect impacts on jobs and tax payments would be, as well as the level of financial pressure if the businesses continue to operate, and the social impacts on jobs and the tax base in an economic sense if the businesses cease operations.

Since you are on the board of the MNCCI and the Mongolian Business Council, you know more about the situation there. How do you support business entities, even in a situation where there is no choice but to pursue a tight monetary policy?

The Mongol Bank has decided to pursue a tight monetary policy due to the impact of external and domestic factors on the economy, inflation and balance of payments. If tight monetary policy is not implemented in coordination with fiscal policy, businesses and entrepreneurs will find it more difficult to operate. It is important to pursue a tax policy that supports domestic producers and exporters, provides them with certain benefits and helps them retain their jobs. Other countries protect their national companies by providing a variety of financial support with a focus on preserving jobs and supporting their operations.

Our government released subsidized financing during COVID, but demand is high. In particular, demand for construction, housing and mortgages remains high. Therefore, it is necessary to work on finding sources for long-term loans with low interest rates. In recent years government securities, corporate bonds and new shares are being issued and the Mongolian stock market is developing and expanding rapidly. The development of the stock market will play an important role in attracting financial resources.

A bank’s IPO is a form of raising funds from internal sources. What are your thoughts on this?

IPO is a form of fundraising for banks. From my observations, these IPOs look simply like some sort of formality where the public is offered a very small portfolio, with no voice or participation in decision-making. There was no IPO to attract a major institutional investor to the Board. Also, there is no expansion, quality improvement, and growth of banking services. But in any case, it is important that this work has begun. There is hope that after a certain period, the IPOs will grow and expand based on competition, and provide returns. In international practice, this type of IPO is a step to increase financial capacity, improve management and corporate governance to a new level, attract the necessary infrastructure investment to enter a regional or entirely new international market, become a major player, and take the business to a whole new level.

Can you tell us about Mongolian Business Council plans for next year?

In 2023, the MBC will continue to serve its member organizations, work to improve the business environment and focus on business recovery after COVID. MBC will work with business owners to improve the business and investment environment in Mongolia, provide information on taxes and other issues facing businesses, and act as their voice. In terms of our activities, the MBC plans to work on developing the green economy, renewable energy, green hydrogen, the agricultural sector including food provision, value-added mining production and services, participate in the Billion Tree Program, transition to digital public services and the promotion of technology companies internationally. One activity of MBC is to introduce and promote Mongolia’s business environment internationally and attract investment.

Thank you for your interview.