Mongolia resource sales hit headwind
By Steven Borowiec
ULAN BATOR - As Mongolia is cashing in on its enormous resource wealth,
tensions are building between the Mongolian government and foreign investors.
Strain is also growing in Mongolian society in general, as citizens push their
government to closely regulate foreign businesses and more widely distribute
revenue from resource deals.
The Mongolian government is moving forward on a number of projects to turn its
minerals into money. None of its endeavors are bigger than the privatization of
Erdenes Tavan Tolgoi, the state-owned firm that controls one of the world's
largest deposits of coal, which is expected to raise US$300 billion. Tavan
Tolgoi's initial public offering has been delayed until at least the first
quarter of 2012 and will likely be made on three different exchanges: Ulan
Bator, London and Hong Kong. Mongolia seems to be looking to put its eggs in a
number of baskets.
The first proposals for the development rights to Tavan Tolgoi, submitted by
consortiums from China, Russia, and the United States, were rejected by
Mongolia's National Security Council.
Thailand's biggest coal producer, Banpu, hasn't been deterred by the challenges
of working in Mongolia. It recently committed to buying all remaining shares of
Hunnu Coal, of which it currently owns 12%. In order for Banpu to gain full
control of Hunnu, the bid must be approved by Mongolia's regulatory council.
Hunnu has 11 coking and thermal coal projects in Mongolia, which will be fully
controlled by Banpu if the acquisition is approved.
How to split the spoils of Mongolia's extractive industries is a sore point
between foreign firms and the Mongolian administration, and there are signs
that the Mongolian government might be getting more selective about what terms
it is willing to accept. A group of 20 members of Mongolia's parliament are
petitioning for changes to an agreement with Australian firm Rio Tinto over the
Oyu Tolgoi mine. The members of parliament hope to get the Mongolian government
a larger share of the revenue from Oyu Tolgoi.
The toughening government stance is believed to be inspired by displeasure
among the public who see their country's resources being carted off without
tangible improvements to their quality of life.
Relations between the government and foreign investors could worsen
significantly if a ban on mining in Mongolia's river and forest areas, which is
set to expire at the end of 2011, is extended in October when the Mongolian
parliament convenes for its autumn session. The ban went into effect in 2009
and interrupted the workings of firms whose licenses were suspended. Intended
to protect forests, rivers and lakes from harmful mining projects, the deal has
been roundly criticized by investors who called it unfair and claimed it cast
unhelpful doubt on their ability to do business in the country.
The Mongolian government appears to be making an earnest effort to help
citizens who aren't directly benefiting from the current influx of revenue.
Resource-rich countries have always grappled with the question of how to build
a broadly successful society from a source of wealth that doesn't employ many
people and is controlled by a small group. In Mongolia, the extent of
inequality and challenges of distribution are severe.
In an attempt to boost domestic, non-mining businesses the Mongolian government
has raised 108 billion tughrik (US$85.5 million) in bonds as part of a 300
billion tughrik bond issue. The bond sale began on August 9. The bonds are
being sold on the Mongolian Stock Exchange.
The 300 billion tughrik will be distributed as assistance to small and
medium-sized enterprises, producers of wool and cashmere products, and herders
who provide unrefined camel and sheep wool to domestic factories.
In July, government revenues were $199.8 million more than had been projected.
While the coffers are swelling, many Mongolians are living in poverty.
Mongolian officials have allotted a portion of the country's new riches to
programs intended to address poverty and unemployment. Many of Mongolia's poor
live off government benefits and are driven to alcoholism by boredom and
purposelessness.
From July's budget surplus, $74.4 million will be used for initiatives to boost
employment and health programs. About $2 million will be used to develop small
communities in the hinterland and therefore discourage rural to urban
migration.
The Mongolian government is sponsoring job fairs in the capital and has
declared 2011 the "year of employment". The recent Job Fair 2011 targeted a
certain kind of job seeker: well-educated, fluent in English, and recently
returned from studying abroad. Few Mongolians fit this description.
Mongolian officials are in the midst of a difficult balancing act. They are
trying to maintain good relations with its foreign business community while
assisting citizens and protecting the country's environment as they seek to
profit from it. With business and government digging in their heels as a series
of high-profile agreement are pending and citizens discontent apparently on the
rise, it remains to be seen if they can make everyone happy.
Steven Borowiec is a South Korea-based writer.
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