ANALYSIS OF THE TAVAN TOLGOI TENDER

Introduction to Tavan Tolgoi

The Tavan Tolgoi project is important for Mongolia’s growth, as its development may help put Mongolia on a path to increased prosperity.  In some ways, the Tavan Tolgoi deposit is more important than other major deposits in Mongolia.  First, Tavan Tolgoi may go into production even earlier than Oyu Tolgoi, another very major project.  It is also important to note that this strategic deposit and the license over it will forever be one hundred percent owned by the Mongolian state. 
Tavan Tolgoi consists of two independent mines, with production in east Tsankhi being the responsibility of contract miners to be selected by the Mongolian state controlled company, Erdenes Tavan Tolgoi.  The contractor’s job ends with the extraction of the coal.  The marketing and selling of the coal is to be done by Erdenes Tavan Tolgoi, meaning that Mongolia will develop east Tsankhi largely by itself.
The present choice of consortia relates to west Tsankhi and will be for a term of 30 years, pursuant to the 39th Order of Ikh Hural.  According to Prime Minister Batbold, a limit on annual output will be imposed, likely to be around 20 million to 30 million tons per year.  Thus, in 30 years, 600 to 900 million tons of the 6.4 billion tons of minerals in the Tavan Tolgoi reserve will have been mined. 

The Selection Process for the Tavan Tolgoi Bid

The invitation for prequalification for the Tavan Tolgoi tender was announced on 8th December, 2010, under the title of Prequalification for Company/Consortium Represented by International and Domestic Investors to Cooperate in the Tavan Tolgoi Coal Deposit (“Prequalification Document”).  The Law of Mongolia on Procurement of Goods, Works and Services with State and Local Funds (“Tender Law”) is the only legal source that regulates the tender.  The process under the Prequalification Document can be seen as a preliminary selection of bidders. 
The Tender Law, Article 13 gives the Mongolian government the power to conduct a preliminary selection for the tender.  The Mongolian government has done this through the Prequalification Document.  Article 13.1 states that the “customer,” meaning the government in our case, “may, for the purpose of verifying the qualifications of the persons interested in tender selection, conduct a preliminary selection.”  Article 13.2 gives the Prequalification Document the status of a tender document by stating, “for the purposes of preliminary selection process, the term ‘tender invitation’…shall be interpreted as ‘preliminary selection invitation,’ whereas the term ‘tender documents’…shall be interpreted as ‘preliminary selection invitation…”.  Therefore, the Prequalification Document appears to have the same legal effect as a tender document.
Initially, eleven companies and consortia expressed interest in Tavan Tolgoi.  These bidders were Extrata (Australia); Peabody Energy (USA); BHP Billiton (Great Britain); Vale (Brazil); Sojits (Japan); Marubeni and Itochu (Japan); COPEC (South Korea); Mitsui and Shenhua Energy (China and Japan); Jindal Steel and Power (India); Russian Railways (Russia); and Sumitomo (Japan).  Many domestic companies were expected to submit bids.  However, no domestic company expressed interest in participating in the tender. 

The aforementioned eleven bidders were evaluated per the selection criteria set out in the Prequalification Document.  Those obtaining adequate scores were selected to be part of a shortlist, and negotiations were carried out with the shortlisted bidders pursuant to Resolution Number 39 of the Ikh Hural of Mongolia, dated 2010.  The shortlist consisted of Peabody Energy (USA); Mitsui and Shenhua Energy (China and Japan), Russian Railways, Japanese and Korean Consortium (Russia, Japan and Korea); Vale (Brazil); Extrata (Australia); and Arcelor Mittal Limited (Luxemburg).

In early July, 2011, the Mongolian government appeared to reach a tentative proposal which granted China’s Shenhua Energy Company, U.S. Peabody Energy Corporation and a Japanese-Korean-Russian consortium (sometimes referred to as the Mongolian-Russian consortium) respectively 40 percent, 24 percent and 36 percent shares in the Tavan Tolgoi project.  However, subsequently, President Elbegdorj said that the proposal does not meet the requirements of the National Security Council and that it is not compliant with Mongolian laws and regulations.  The proposal was thus submitted to the National Security Council on 22nd July for review.

The tentative investment agreement with international miners on stake ownership and production of the deposit was rejected by the National Security Council, comprised of the president, prime minister and speaker of the legislature, the Ikh Hural, on 9th September, 2011.  It is not clear whether the Mongolian government will renegotiate with the international bidders for the development of West Tsankhi area of the deposit.
Pursuant to the 39th Order of Ikh Hural, the Mongolian Ikh Hural has the final say on any such agreement.  However, if it is true that the participating bidders have been selected, two important questions arise: (1) how did the Mongolian company suddenly join the tender when it had not expressed any interest in the past? and (2) why has the government split the Russian-Japanese-Korean consortium to exclude Russian Railways. 
As mentioned above, there was no Mongolian company or consortium in the initial bid for the tender.  According to the Prequalification Document, Article 1.3, negotiations shall be conducted with shortlisted bidders. The Mongolian company was not among the shortlisted six consortia and companies.  Thus, the government’s choice of the Mongolian company as a winning bidder may be a breach of the Prequalification Document. 
According to the Prequalification Document, Article 2.1,  the “Bidder (all members in the case of a consortium) shall prepare and submit one set of prequalification proposals only.”    According to the Prequalification Document, Article 17, only shortlisted bidders have rights to mergers, partnerships, and consortium in the course of negotiations.  Thus, while Bidders on the shortlist have such rights, it seems that the Mongolian company, which was not on the shortlist, pursuant to Mongolian law, should not be a winning bidder.  The Russia-Korea-Japan consortium was one bidder from the start, and the Russian part of the consortium should not have been able to break off and bring an outside party (the Mongolian company) into a winning bid.  Any such winning bid may be considered invalid.

Conclusion
Any breach of the Prequalification Document by the government or the bidders is a breach of the tender rules and the consequences invalid.  According to the Tender Law, Article 54, in the event that a tender participant believes that a “customer,” meaning the government in our case, is in breach of the duties related to the tender, within five working days from becoming aware of such breach, such tender participant may submit a written complaint to the customer with documentary evidence attached.  Following submission of such complaint, no contract shall be awarded unless the customer decides that the continuing of the tender without interrpution is in the public interest.  If a decision to proceed with the tender is made on the grounds of public interest, the complainant shall be officially notified of its grounds within at least five working days prior to such decision taking effect.
Tender Law, Article 55.1, provides that if the complainant disagrees with the decision made by the customer regarding the complaint, or no decision is made within ten working days from the receipt of the complaint, or the customer awards the contract, a complaint may be made within five working days to the state central administrative body in charge of budget matters.  The state central administrative body in charge of budget matters, upon reviewing the complaint, shall issue one of the following decisions if it deems that the customer has committed a breach: (i) to rescind or modify, in whole or in part, an act or decision of the breaching customer; (ii) to indicate the legal provisions to be applied to the given matter; or (iii) to require the customer to proceed with the tender.
Tender Law, Article 56, provides that if the state central administrative body in charge of budget matters fails to make a decision within fourteen days from the receipt of the complaint, or if the complainant disagrees with the decision made by the state central administrative body, the complainant may file a complaint with a court having jurisdiction over the matter. 
Tender Law, Article 55.3, is the only provision within that Law speaking to the cancellation or modification of a tender offer.  The law states that events of breach allowing for such cancellation or modification are set forth in the Competition Law.  However, upon examination of the Competition Law, nowhere are events of breach mentioned.  Thus, there is a gap in Mongolian law, and it seems that there is no provision allowing for the cancellation or modification of a tender offer in such cases.  Thus, it seems that the selection by the government of the winning bidders is a political decision that may well breach the law.  However, as there exists the aforementioned gap in Mongolian law, the government may try to circumvent this potential breach.