By S.Bold-Erdene
The European Bank of Reconstruction and Development (EBRD) has once again deferred releasing funds for expansion of the underground mine at Oyu Tolgoi, from February 27 to March 31. That will also be when 15 commercial banks decide whether to defer the funding or even to cancel the financing deal.
Many wonder why the Government of Mongolia should keep dragging its feeton accepting the $4.2-billion loan fromthe 15 banks. Mining circles know that a huge amount of money is needed to build the OT underground mine and that it is not easy to get hold of that kind of money in these times.
The formal statements issued by both sides make no mention of the actual reasons why OT is not ready or able to receive the loan. There have been reports that Rio Tinto has agreed to begin construction of the underground mine if the Government accepts certain conditions, but there is no confirmation of what these conditions are or if any conditions have indeed been presented. The Government’s formal position remains that it would be violating the law to agree to taking the loan before the Feasibility Report for the underground mine is ready. If neither side makes an effort to make a move, the financing deal may very well lapse, but it seems both sides are privately reconciled to this.
Why is the Government not agreeing to accept financing for the underground mine construction? A year ago, four Ministers of Mongolia sat at the OT shareholders’ meeting and haughtily demanded that Rioanswer 15 questions. Nothing is heard from them today. What has happened during this past one year?
Unofficial sources say several fresh agreements have been talked about to resolve these 15 issues. Jean-Sebastien Jacques, Chief Executive of the Copper Division at Rio Tinto, made an undisclosed visit to Mongolia right before Tsagaan Sar, and met the Prime Minister and other ministers. Whatever was discussed has been kept under wraps, but it is widely believed thatJacques had asked for a guarantee that the Government will in future allow the OT project to proceed without interference. Naturally enough, the Ministers refused.
A year ago, the Ministers also said that Mongolia was against borrowing money for the underground mine because repaying the loan would not allow Mongolia to enjoy dividends before 2033. It’s difficult for a Government’s representatives to go back on such a clearly expressed stance.The fear of losing face is paramount in a politician, and that could be one reason why the Government cannot bring itself to accept the bank financing. People elected on their anti-OTIA posturing must not be seen as making a U-turn on coming to power, even if that means sacrificing the nation’s interests.
Let’s see what the economy looked like last year. FDI came down 54%, exports decreased for the third consecutive year,and this meant nearly a billion dollars less from sellingjust coal products abroad. True, both the economy and the GDP showed a double-digit growth, but much of this was neutralised by the falling MNT, and inflation, too, is likely to rise. Indeed, the economic crisis forced business owners and investors to demand that the Government approve the additional financing for OT and let the project go forward.
The Government has also failed to startwork on the railway, the power plant and a coal liquefaction plant because the anticipated foreign and/or national investment has not materialised. Parliament has now passed laws on use of the national currency and on providing legal safeguards for already approvedforeign investments asnegotiated between the Government and the Multilateral Investment Guarantee Agency (MIGA). The authority to signthese agreements was granted to N.Batbayar, minister of Economic Development. MIGA is a member of the World Bank Group and stands surety for investments in developing countries.
All this makes it obvious that foreign investors do not have faith in the Government and are wary of a repetition of the OT experience. A guarantee from MIGA could allay their fears to some extent but to regain investors’ trust the Government will have to go beyond promising a better investment environment and improvement to the legal climate. Approving the additional financing for OT is just the sort of thing that can do the trick. Prime Minister Altankhuyag will naturally have to consider the political fall-out of any such bold move. Will he be able to say, “I take full responsibility for whatever might follow”, as one of his predecessors, S.Bayar, did?
The wait for the Feasibility Report cannot be given as the compellingreason behind the Government delaying construction at the underground mine. One recalls howthe OT investment agreement was signed in October, 2009, before the OT Feasibility Report had been approved. Many eyes had to be kept closed for the sake of a ger interest. It was imperative for Mongolia then that money started flowing into the OT project. We havea similar economic crisis now and need a similar brave thrust to get out ofthe mess.
Not that the Government has been twiddling its thumb, watching things take their course. It is reliably learnt that it was willing to approve the additional financing and forget the Feasibility Report if Rio Tinto would sign a pledge to never leave OT. Rio refused, and the result is today’s stalemate.
It is not an idle fear for the Government in the context ofnational security and the so called third neighbour concept. It is certainly not inconceivable that Rio Tinto would sell its holdings in OT and quit Mongolia. No other mining company has the financial resources to manage this huge project. State-owned companies of Russia and China would jump at the opportunity, and that is certainly not to Mongolia’s comfort or interests.
Such unspoken suspicions have marked the recent relationship betweenthe two partners of OT, resulting in demands from either side for untenable guarantees. One side wants to be assured that OT will never again be made a political playing field and the other wants a pledge for lifelong fidelity. The stakes are too high for either partner to have implicit trust in the other. Banks will release the loan for additional financing, if and when the Government gives its go-ahead, only after receiving OT’s licence as collateral. Mongolia can do nothing if Rio leaves OT and Mongolia with the banks in possession of the licence.
In this atmosphere of absence of trust, rational thinking is difficult and decisions tend to be put off. It is quite on the cards that the funding imbroglio will carry on even after the end of this month. The Government, according to an unnamed source, has already started writing to the 15 lending banks requesting them to keep the offer pending until it reaches an agreement with Rio. The decision of the banks will have a major impact on the Mongolian economy, but we can only keep our fingers crossed.