“There must be a legal mandate for transparency”

The Mongolian Government has said some changes will be made in the Shareholders Agreement on Oyu Tolgoi. MMJ’s N. Ariuntuya asked N.Dorjdari of the Open Society Forum, which had made a thorough study of the agreements on the deposit,  what these changes are and what their significance is.  

What are these changes that have been agreed upon by both parties?

There are three separate agreements governing the Oyu Tolgoi Project: an Investment Agreement, a Shareholders Agreement, and another on Advance Payment, which is almost a loan agreement. I must confess I have no information on the changes other than what the Government has made public, and that is not much.

The first thing to be said is what some Members of Parliament have been complaining about for long. Why should there be so much secrecy about the Mongolian version of the Shareholders Agreement? The country’s natural resources are the property of the people of Mongolia and the Government or Parliament acts as their custodian on behalf of the populace. Why should things be hidden from the real owners, especially when the terms of the agreement are of such momentous importance for the nation’s economic and social development? Do Mongolians not have the right or the capacity to judge what is good for them?

This is not possible as the terms and conditions of the Shareholders Agreement are not known, and no assessment of how things stand in their entirety can be made on the basis of just the Investment Agreement. So, first of all, we have to be told what is contained in the shareholding agreement. The lack of transparency has been justified on the ground that the company cannot afford to reveal such details to its rivals. However, the English version of the Shareholders Agreement is very much there on the website of Oyu Tolgoi LLC. Many companies also sell copies of such agreements at a high price. So business rivals can have access to facts that are closed to the real owners, the people of Mongolia. 

The second thing to note is that the agreement is being changed only a few months after it was made. That means the original terms had been put in without due consideration. Could Mongolians have asked for more initially? The impression we get is that the rush to make the agreement was guided by political reasons. 

Are the changes in the funding and loan terms going to benefit Mongolia?

The Government has announced 6 or 7 changes. At present, Mongolia has paid for its 34 per cent share of development costs with a loan from Ivanhoe Mines. This carries an interest rate of 9.9 per cent, which has to be adjusted against the inflation rate in the USA and so will be higher. Right from the beginning, we have been saying this is too steep, more so as at the time, interests rates on bank loans were generally much lower. It seems the Government has now come round to our view and the payment rate after the change will be LIBOR (the London Interbank Offered Rate) plus 6.5 per cent. We consider this 6.5 per cent to be still too high. When negotiations first began there was talk of LIBOR plus 3.5 per cent. 

Mongolia’s chances of getting a loan at favourable terms are now much higher than when the OT agreement was made, at a time of deep financial crisis. With the crisis almost overcome, there is once again money in the international market, and I  think the Government should explore such sources for the best deal, instead of being stuck with its loan from Ivanhoe.  

Inflation in the USA can also be negative, in which case the  9.9 per cent must go down. Right now, LIBOR is low, but if it rises, the total interest payable can reach 10 per cent. Still, this will be less than paying 9.9 per cent plus inflation in USA. So this change is welcome.
 
Is it correct that preferential shares have been removed from the agreement?

These shares usually help raise funds but my understanding is that they have been done away with because of political reasons. There was also some misunderstanding about just what there shares represented in the agreement. Mongolian politicians considered them to be shares but Ivanhoe thought of them as loans. Since the people were not kept informed, the suspicions deepened  and now it has been decided not to have them at all. These can be paid for with some fresh loan from a new source, but there will again be the question of the interest rate. The interests paid are usually deducted from the taxable income, so high interests also mean less tax revenue. We can only hope that our Government takes these factors into consideration.     

Is it true, as some have said, that the change in interest rates will mean Mongolia saving $1 billion?

The Finance Minister did say this. It is hard for me to say anything definite when I have limited information. We do not know the bases on which the Government relies for its estimate. It is also not clear whether this $1 billion will be saved today or 30 years later, when it will be worth just $300 million at present purchasing power. Politicians must reveal the whole truth. In any case, if there is a saving of a billion dollars, then the Minister is admitting the agreement was faulty.   

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