“My personal wish is to have people’s capitalism”

A shift seems to have taken place in the popular attitude to mining. Some years ago people wanted a curb on both exploration and extraction, but now the dominant concern is use of appropriate technology. Do you think there has really been a change?

I agree that time has brought about a change in how the majority of people view the mining industry. This is apparent in several areas. Back in 2006 and 2007, the main debate in society was on whether large mining projects were at all necessary. Now there is general agreement that projects liked Oyu Tolgoi and Tavan Tolgoi are beneficial and they and other mining projects should be encouraged. This does not apply to projects only. Numerous local mines have started operating and people appreciate the economic significance of, say, the Bayangol and Altain Khuder iron ore deposits, spar and coal mining projects and of medium- and small-size mines. They want the mining sector to expand.

Ideas about mineral licences have also changed. Professionals prefer the area of operation to be large. However, political compulsions may be different. To be honest, licences had become a business commodity, changing hands without any real investment being made. This kind of profiteering had to stop, and that is why the Mineral Law of 2006 made it mandatory to spend a certain minimum amount every year on mineral exploration and licence holders were asked to submit an annual report on their exploration activity. Non-compliance was likely to lead to the licence being withdrawn.

All this imposed some order into issues related to exploration. After companies lost their licence for not following legal provisions, the percentage of the territory of Mongolia under licence has dropped from 44.5 to 13. Some feel this restricts mining, but others notice an improvement in the quality of the mines. Issue of licences is no longer a topic of interest. The discussion has moved to a more mature level.

For example, today we argue about processing plants. This was not a subject when our mining sector was both small and underdeveloped. We had Erdenet and Mongolrostsvetment and some small coal mines to supply domestic demand. Today Mongolia is on its way to becoming a major coking coal exporter. We also export iron ore and are exploring for oil. Processing the raw output takes on urgency at this phase of development.

As minister responsible for the sector, I am aware of the difficulties it faces.In the 20 years since the changeover from the controlled economy, the Government has not provided financial support or offered tax incentives to help entrepreneurs in any sector. We left them entirely at the mercy of the market, where competition would always be stiff. Now, we realize that such incentives are necessary to get investment in processing plants. The Development Bank should give loans on easy terms, and the state build adequate infrastructure in industrial areas.

We have to compete with our industrialised neighbours. Plants will not always come up on their own, the Government must support them. The State Great Khural rejected our proposal to waive tax on importing equipment for processing plants. I personally think it was a mistake. We will submit the proposal once again. We shall also support some MPs’ draft to free industries adding value from paying VAT and customs tax when it is discussed during the Spring session.

Should the mining sector be the State’s sole priority, or should the State take steps to improve the total business environment?

State support can come in several ways, depending on the needs of a particular sector. For the mining sector, a stable legal environment is much more important than tax benefits. In this, I have to remind you that despite constant demands, we have not made any changes in the last six years in the Mineral Law. This is quite an achievement, when set against the fact that theearlier Mineral Laws were amended far more frequently. If the present Law is kept untouched for another three or four year, it would signify to investors our consistency.

Secondly, if we wish to attract investment, it is crucial to keep our business environment competitive. Mongolia is not ranked highin the business rating of the World Bank and the Global Competitiveness Report of the World Economic Forum. Corruption continues to be high, and though there has been some progress over the years, we are listed close to former Soviet Union countries like Armenia and Kyrgyzstan, one or two countries of the CIS, and African countries. We need to do much better than be listed at 90-something out of 200 countries. One way of improving the business environment is to reduce the number of laws and regulations.

As the examples of Singapore, the U.S. and West European countries show, an advanced business environment needs far more than just fewer laws. The contents of the laws are equally important. Areas where Government officials take subjective and independent decisions have to be restricted. Their power to take all kinds of decisions is a major factor behind the corruption. The law and regulations should be equitable, unamuous and not subject to contradictory interpretations.

Government support to setting up processing plants has priority in mining. Here investors can rightly demand a tax holiday. All material and equipment for copper smelting and metallurgy plants have to be imported and heavy VAT and Customs duties would substantially increase costs for an individual or a company trying to build a plant that will generate employment and contribute to faster economic growth. I think I would be right to waive VAT and import tax in such cases.

The Government has decided to establish industrial zones in six places: Sainshand, Choir, Umnugovi, Darkhan, Erdenet and Choibalsan. The National Development and Innovation Committee has said that Bechtel Corporation’s feasibility report on the Sainshand complex will be ready soon. After such studies covering all the other zones are over, a lot of money will be needed to develop infrastructure there. Industry cannot thrive without power and water. So support from the Government has to be spread over many areas.

Having said this, I must make it clear that I see no merit in the demand for the State to set up an organisation to prepare technical and economic feasibility studies for mining companies. The State has no business toissue decrees on where to set up what factory. I see the supportive State role as basically limited to devising tax incentives and developing infrastructure.

The State is becoming a major player in the mining sector. Is this right?

We do need to issue public shares in State-owned companies without delay. Closed entities cannot have operational transparency and cannot be economically profitable in the long run.

You see, capitalism has many different forms. Mongolia has so far followed what can be called “free capitalism”, which means we have had a very liberal and open economy where privately owned companies have to be highly competitive to survive. In“State capitalism”, on the other hand, most companies are owned by the State. Both China and Russia are good examples. The companies operate withlarge political support, and often serve political needs and demands. My personal wish is to divest State ownership of companies like Erdenet and Erdenes Tavan Tolgoi. Only when anybody is free to physically own their shares, shall we have “people’s capitalism”.

Is it a new term?

The word public means two quite contradictory things in English.State service is public service but a “public company” is one where shares are owned by private individuals or institutions.I also wish to allow the people access to shares in State companies. Prime Minister Batbold talked about the same thing at the recent congress of the Mongolian People’s Party. If we donot make this move and persist with State capitalism, the results will not be good.

That is why Parliament decided to sella certain percentage of the shares of Erdenes Tavan Tolgoi and other daughter companies of Erdenes MGL on stock exchanges. Distributing Erdenes Tavan Tolgoi shares to the people is also one way to get people involved in the company’s governance. Only more openness and a wider base of shareholding can save our State-owned companies from the dangers of State capitalism.

Negotiations on two huge mines were the high points of your tenure as Minister. What does one need most at such negotiations -- political savvy, economic expertise or diplomatic perseverance?

Oyu Tolgoi was debated in the State Great Khural in 2007, after having been discussed at the Government level several times before that. So in many ways, State organisations were prepared for the negotiations. These also lasted for several years and we built on existing information and estimates as we went along. Progress picked up under the coalition government, because we had inputs from senior leaders, in or out of office, such as S.Bayar, S.Batbold, N.Enkhbayar and Ts.Eldegdorj, and from the majority of the MPs. It also helped that the Government and the National Security Council always took decisions in a spirit of urgency, without losing time.

I, personally, was a little bit disappointed with my own performance. Ifear I was hampered in the initial stages by my lack of experience in politics. Since most of the arguments and differences were of a political nature, maybe someone with more political skill would have handled them better. However, I learnt on the job and today we can say all important issues concerning Oyu Tolgoi and Tavan Tolgoi have been satisfactorily resolved.

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