(G.Temuulen has interviewed with MMJ before he relinquished his position of Deputy Director for the Erdenes MGL .)G. Temuulen, Executive Director of Erdenes MGL, tells S. Bold-Erdene freedom from Government control is the key to the commercial success of any State-owned company. If necessary, there should be a legal bar on any form of Government involvement in a company’s daily work.What companies’ shares does Erdenes MGL hold? Erdenes MGL represents the Government in strategic deposits under either a prospecting or a mining licence. Companies where we have ownership at the moment are ErdenesTavanTolgoi and ErdenesOyuTolgoi,and Baganuur and Shivee-Ovoo coal mines. The first two were established in 2010 and 2011 respectively as daughter companies, specifically to participate in the operation of the TavanTolgoi and OyuTolgoi deposits respectively. Last year the Government transferred to us its holdings in the Baganuur and ShiveeOvoo mines.
What about the TavanTolgoi-Gashuunsukhait road and the Gashuunsukhait port?Aiming to increase coal export while reducing the transport cost, and to protect the ecosystem of the Gobi, the government has taken the decision to take ownership of the road and the port, and the process of transfer of shares in the name of Erdenes MGL will soon be completed. Developing the infrastructure for optimal use of these strategic deposits is a complex matter and many issues of policy and regulations are involved. Infrastructure is not just road and transport facilities;it also covers the energy needs necessary to operate the TavanTolgoi, OyuTolgoi and Naransukhait deposits, processing plants, and many other allied issues that have to be approached in their totality and holistically if the maximum economic benefits are to accrue to each individual deposit. We must find quick solutions that are comprehensive.
How healthy are these companies?Baganuur and ShiveeOvoo are beset with problems, but in spite of this, both have achieved their work targets. Indeed, last year the performance of both in earth removal, coal mining and selling was 110%-120% above target.
It is mainly their financial condition that is very weak. This is because the Government keeps the coal price artificially low, and the resultant loss of revenue does not allow them to conduct fresh geological studies or to do proper maintenance of equipment, about 90% of which should be immediately replaced or upgraded. This severely impacts production and increases expenses.
That way, Baganuur and ShiveeOvoo are clear examples of how our Government-owned companies lack good management and corporate governance. Both have large enough reserves, and a reliable and captive market, but they are not allowed to run on purely business principles, charging market rates for their product. Their present crisis is the result solely of poor corporate governance and the lack of freedom to go by purely business principles.
So how do we rescue Baganuur and ShiveeOvoo from this financial crisis? First of all, the Government should stop fixing the price of coal. Once the companies start getting a fair price for their output, they would operate like a business and a mine would work like a mine. We are working towards that direction.
Second, good corporate governance can never be possible without operational independence from the Government. Even at the policy-making level, there should be a limit on the role of the Government. Commercial decisions must be free from political influence. Any company should be allowed to work independently to make a profit pursuing fair business principles.
There is no quarrel with Government ownership, but this does not mean the Government has to interfere in purely business matters. Erdenes MGL certainly favours giving a free hand to a qualified management team.
How do you plan to dissuade the Government from setting the coal price?We are preparing our case and shall shortly submit a request to the Government and the Ministry of Energy to lift the restrictions and to allow us to charge market prices for the coal. We shall also be demanding the adoption of specific policies to help develop the energy sector. If the Government wants to raise energy costs, it can offer price subsidies to the consumer industries, without controlling coal price. If the Government says it is impossible to lift all restrictions on coal prices within one year, we shall request them to consider some easing of controls periodically. Even that would give a chance to Baganuur and ShiveeOvoo to come back from lossmaking.
What improvement did the State Property Committee expect by consolidating under Erdenes MGL the state’s shares in mining companies, when ownership continues to be with the state?To understand this, we should see how things were in Baganuur and ShiveeOvoo before Erdenes MGL was established.The shares were held by the State Property Committee, which was an agency of the Ministry of Industry and Agriculture,and thus directly under the Government, offering no independence of management.Today, it is a legally registered business entity that holds the shares, a very significant step in corporate governance. Substituting a State agency by a company to run strategic deposits through subsidiary companies is the first step in conducting business without any direct involvement of the Government.
There may be various ways of deciding whether it was good or bad when the Government owned these companies. From our standpoint, it was not sensible business practice to use tax payers’ money to make good the loss these companies made because of government policy. In the free economy that we have chosen to adopt, there is no role for the Government in actively running businesses.
With shares transferred to our company, a burden has been lifted from the Government. Now it is Erdenes MGL which would make policy, once the legal environment and regulations are put in place to allow State-owned companies to operate as full-fledged business.
What is the difference between Government ownership and Government involvement?Ownership and involvement are two different concepts. Governments anywhere own property, including companies, especially in sectors such as oil, energy, mining that are important for national and economic security concerns.The level of the Governments’ involvement in the day-to-day running of these companies shows a wide variety. Most Governments see laying down policy as their main, if not only, function, and do not interfere in the company’s daily operations. Being a shareholder or even the major investor should not give the government any special rights. It must be left to the board of directors and senior executives to run a business entity on professional lines.
Last year Erdenet Mining Corporation posted a profit of $100 million and distributed half of this in dividends. MIAT also made a profit. Will Erdenes MGL succeed in turning government owned mining companies into profit making concerns? And what methods will you follow?
As I have said, the mining companies have been running at loss because the Government did not provide them with good management and did not allow them opportunity to operate as a business independently. Appropriate corporate governance principles have to be followed if we really want to increase the assets of a Government-owned company, to expand its operations, to make it financially sustainable and also profitable.
We should develop transparency and a sense of commitment and responsibility. A clear cut governance structure should be set up, and shareholders, executives, and board members should well understand their distinctrights and responsibilities. A clearly defined mechanism would ensure there is no friction, no overlapping. Choice of board members and senior executives must follow transparent procedures and the selection criteria should be fair and unamuous.
Principles of good corporate governance will not be concerned with the Government owning the company.
I get your point, but proper management principles are rarely applied in Mongolia, not just by Government-owned companies but also by private companies registered in the Mongolian Stock Exchange. How will you make them popular?Mongolian business development is at a crossroads today, after 20 years of successes and failures. Our President has thrown a challenge to every level of the government to make a switch from ‘ government to smart government’. I see our job as part of the response to the challenge. It is not a matter of changing the governance structure in a few Government-owned companies. A good governance mechanism must be there at every level of management in every business.
It would be appropriate if a beginning was made in Erdenes MGL, at the government-as- shareholder level. The Government should not concern itself with the daily operations of our subsidiary companies. This means the Government will not use its shareholding status to have any direct dealings with ErdenesTavanTolgoi, instead allowing its legal representative, Erdenes MGL, full freedom to provide adequate and successful leadership to the coal miner, in cooperation with the board. The Government needs to understand it will achieve more by staying aloof.
The Government made its intentions clear by transferring the control of companies from the State Property Committee to Erdenes MGL. Now it should show some real courage by giving legal sanction to its conviction that Government-owned companies can be profitmaking concerns only if they work on strictly business principles. It should pass a law prohibiting government involvement in their operation.
There should be similar clarity on the rights and responsibilities of the executive leadership and the board of the subsidiary companies.Erdenes MGL will also not be a meddler, but its authority in, say, ErdenesTavanTolgoi or Baganuur will be exercised only through representatives on their boards. There could be another law prohibiting our involvement in these companies’operational affairs.
It is very important to clearly identify the separate responsibilities of, and expectations from, the executive leadership, the board of directors, the shareholders, and other investors. There should be enough for everyone to do, without intruding into another’s territory. No section will have an axe to grind, and it could be a good idea to set down in black and white what the various relationships within the company, including those with the Government, should be. A mechanism to monitor such interactions is also a good idea.
There were so many rules and regulations under the SPC, and now you say we need a new legal environment for State-owned companies. Do we really need more laws?I have explained the background in detail and I do believe it is very important to keep company operations free of Government interference. A legal prohibition is the best guarantee for this in today’s political and social situation in Mongolia.
On the other hand, I would say we could do with fewer laws regulating the operations of State-owned companies. Actually, one business entity law should be enough for both the private and public sector, but for us in the latter, there are endless rules and regulations from different Ministries. Indeed,stricter and more complicated laws and regulations create more difficult conditions for Government-owned companies, making it impossible for them to be commercially profitable.
The simplest example is the Law of Procurement that applies to all Government organisations as well as to all Government-owned companies. It stipulates that we buy the cheapest products and also clarifies how and when we should buy. A new and more well-reasoned legal environment could dispense with such short-sighted measures, giving us the same freedom as private sector companies.
Maybe we could have a temporary law to meet the special needs of the current situation. It will prohibit direct Government involvement in the operations of Government-owned companies at strategic mineral deposits, but at the same time it will also identify some specific issues where Government participation is a must.
How do other countries regulate Government involvement in their State-owned companies?It seems to be an issue everywhere, but my feeling is that countries such as Malaysia, Singapore, China, and Russia have donethe best in allowing their State-owned companies broad operational independence. Another recent good example is Kazakhstan.
These countries have put legal limits on Government involvement in the business operations of State-owned companies. Some have made it a Constitutional imperative even. In Singapore, the same Company Law applies to all, making no distinction between private companies and those owned by the State, including Temasek, the massive investment company fully owned by the State. Kazakhstan has a Procurement Law like we have, but its provisions do not apply to SamrukKazina, a company that oversees 500 government-owned subsidiaries. The individual companies’ bylaws and the Company Law regulate their decision making. Such operational freedom has seen productivity rise in State-owned companies, and assured their long-term sustainability.
But surely the Government has some legitimate interests as sole or principal shareholder?Undeniably, but the modes of interaction to protect or further these should be clearly defined. As regards Erdenes MGL, the Government should have a say in approving financial reports, in preparing company bylaws, in appointing the board of directors, and in distributing dividends. These are the legal rights of shareholders, in both private and State companies. Such acceptable Government influence in Erdenes MGL can then percolate to our subsidiary companies indirectly.
The Erdenes MGL Board of Directors comprises state secretaries of different ministries. They really cannot be expected to be independent and would always try to follow the Government agenda. How should we solve this issue? What happens in other countries?The only way the Government, as sole shareholder, will associate with the company is through the board, whose members it will appoint. They will then choose the executive leader. This is common practice and perfectly acceptable.
The important thing is that board appointments should be people with experience, knowledge, and skills relevant to the company’s business. In our case, these would be accountancy, and all aspects of mining. So the Government should pick people who would be useful for the company. In countries like Norway, Belgium, Finland, Singapore and others, they have put in place a mechanism that would find the right persons. The decisions are made at the highest level of the government. For instance, in Belgium, the king – and in Canada, the Governor-General-- appoints the board of directors for Government companies after discussions with a committee of ministers. In Denmark, a cabinet committee led by the Prime Minister does the job.In Singapore, the Constitution requires the Prime Minister to consult with the President when making appointments to the board of Temasek.
So, the highest authorities in the country are involved, and this means they also have some accountability. The present Mongolian practice is for all board appointments to be made by the State Property Committee, a Government agency, which has no obligations to explain its choices, who, in their turn, will appoint the executive directors of all State-owned companies.
A public debate is now on to decide whether members of Parliament should hold a position in the Government Cabinet. Of similar importance is the issue of how appropriate it is for Government staff to be on the board of a Government-owned company.
What should be the ratio between independent and non-independent members on a board?Our Company Law requires at least one third of board members to be independent, but the international approach is to have a majority on the board from independent persons with proven business acumen. There will always be companies that need direct Government involvement, and these could choose one or two Government staff. Actually, in Finland, the board of any Government-owned company must include one Government employee. Some countries provide for half the board to consist of independent members and other half to represent business. For all practical purposes, these business representatives could be independent, so such boards will actually be 100 percent independent.
The remuneration for board members is an important issue as their responsibilities can be onerous. Somebody receiving MNT150,000 per month cannot be expected to care enough for the company’s future. Their compensation should give them an incentive to help the company follow the right course of action. In this, there should be no difference from the practice in private companies, in that board members’ benefits and salaries would depend on the financial performance of the company. This is a most sound principle of good corporate governance.
What kind of people forms the board of directors of Temasek Holdings?This Singapore behemoth is 100 per cent Government-owned, with a 10-member board. Two of them are foreigners. The Swiss member is Marcus Wallenberg, Chairman of SAAB. The American member is Robert B Zoellick, a former president of the World Bank. The others, called Executive Directors, are from Singapore’s business community. The only person who could be counted as a representative of the Government is the Chairman, who had once been a Government minister.
KhazanahNasional in Malaysia is Government-owned and has a net worth is $38 billion, and over 50 subsidiary companies. They are trying to make it more independent of the Government and Ministries. They upload all information on their website, and any Government official with a special code can log in, without having to call anyone in the company for information. With no excuse for personalinteraction the chances of Government officials exerting pressure on company executives become considerably lower.
A final question.Can you give us a brief update on the status of the OyuTolgoi shareholders’ meeting? The discussions started in September, with a total of 30 issues submitted by both parties to be resolved. Agreement has been reached on 21 but the remaining nine are the most contentious and important. Of these, three relate to the source of funds to develop the underground mine, approval of the overspending on the first phase of development, and incorporation of changes in the Feasibility Report. OyuTolgoi and Rio Tinto are working very hard to prepare the blueprint of the underground mine, to complete the construction plans and to write the feasablity report for the extension work.