L.Bolormaa
Decisions expected to have been taken by the government and Parliament in the first half of 2015 would be vital for Mongolia’s economic development but some of them are yet to be made (at the time of writing), keeping the fate of some projects uncertain. The government’s stand on some of these is known, but whether it will have its way is an open question.
The government and Rio Tinto have finally agreed on developing the second phase of Oyu Tolgoi after prolonged negotiations, with this journal’s previous issues covering and analyzing the positions of both sides. However, corresponding progress on an agreement between the government and investors in Tavan Tolgoi was dramatically stalled at almost the last moment, when Speaker Z.Enkhbold called for a review of the negotiations and the terms of the agreement reached. It was on April 6 that Z. Enkhbold ruled that all this must be discussed in Parliament, and not be left to the government alone, and since then Mongolians have realised how deeply divided senior politicians are over how to develop the coal deposit.
Political factions squabbling over mega projects is not new in Mongolia, but the present tug of war, with parliamentary elections due in 2016, is making it obvious that the differences are not really over party policy or political belief. Rather, it is a proxy war among business groups eyeing the mega money that mega projects will generate.
Let me give you an idea of how these groups want to grab the spoils of, say, Tavan Tolgoi.
You may have heard of ‘fictitious firms’, the term used for companies that show no clear assets or business. Established simply to be used as conduits for dubious financial transactions, they usually describe themselves as offering “financial consulting services”, or help in “capital raising”. As mega projects appear on the horizon, with billion-dollar investments in sight, such companies start proliferating.
The first one relevant to us made its appearance in 2012, bearing the name “Mongolian Railway Infrastructure”, established in Hong Kong by Mongolia, with promises of investment by Dandong Port LLC of China and Moric Korea LLC of South Korea. The then Minister of Road and Transportation, Kh.Battulga, asked B.Batzaya, CEO of Mongolian Railways JSC, to sign an agreement entrusting the new company with managing all railway tracks in Mongolia. Moric (Mongolian Railway Infrastructure Company) was to be responsible for transportation and thus for renting and purchasing of all moving equipment. Nobody cared to notice that this ‘Korean’ entity was an unknown name in Korea itself. Thus was begun the murky process of money laundering in the name of raising capital for profitable projects.
No wonder that the race is on to set up such firms for the Tavan Tolgoi mega project.
The TT coal basin has eight deposits, with Erdenes Tavan Tolgoi holding the licence for seven of them, bearing Nos MB 011953, MB 011954, MB 011955, MB 011956, MB 016881, MB 016882, MB 016883. The latest controversy is mainly on the two squares of West and East Tsankhi and also the Ukhaa Khudag deposit square of Energy Resources LLC.
Two and a half months after the Speaker’s move, it was agreed that the other five licences held by Erdenes Tavan Tolgoi will go to Japanese companies, in return for agreeing to build a 1300-km railway to the east. This condition will be included in a Parliamentary resolution, thus making it part of state policy, and giving the green light to politicians to raise the capital. Even though no resource estimate of these five squares has been made, nor has there been any work on preparing a mining plan, preliminary negotiations on building the eastward railway were arranged and held, only to enable a new resolution to be submitted to Parliament.
Another move by the political group was to ensure that 51 percent share of the 267-km Tavan Tolgoi-Gashuunsukhait (TT-GS) railway will be held by state-owned Mongolian Railways JSC. Their interest is not in finishing construction early, but they are keen on having control because this railway will make the most money and thus appeal most to investors.
It is not clear if the decision to entrust construction of the TT-GS railroad to Mongolian Railways was one that Energy Resources (ER) took on its own, or under pressure. If ER could start the project in 2009, coal movement would have begun in 2013 and control would have vested in the state after 18 years. There was another chance in 2012 to start construction. In that case, too, work would have been finished by now, and ownership would have been transferred to the state after 19 years. Maybe this time ER preferred to compromise with Kh.Battulga’s group, so that their most profitable export route is ready for use.
Shenhua Energy, part of the consortium that bid for TT and that included ER, was not very happy that Mongolian Railways JSC would cooperate with it in construction of the 267-km railway. Shenhua wanted an audit of the railroad bed construction work done by Mongolian Railways JSC since 2013 before agreeing to accept responsibility for reimbursing the state-owned company $200 million spent on the work. It now seems that Mongolian Railways will continue to be part of the railway construction project, and there would be no audit.
Sumitomo remains the choice to invest in Ukhaa Khudag, and West and East Tsankhi, the three major squares of Tavan Tolgoi. It is clear by now that signing of the agreement was held up mainly to force the railway construction issues.
Parliament Speaker Z.Enkhbold has given other reasons for his action, but nobody is convinced that his actual concern was the 1072 shares, or how to allay Russian concerns, or why Peabody was “unfairly” treated. He acted only and simply, as borne out by events since, to make sure the fictitious company had its finger in the railway construction projects. In other words, the government was forced to bow to the selfish demands of one faction of MPs.
This faction has got the government to change the agreement but this now has to be ratified by Parliament. Prime Minister Ch.Saikhanbileg has assigned Cabinet Secretariat Chief S. Bayartsogt to hold talks with other political factions, as he himself visited the USA and the UK, giving the impression that he is above such wheeling-dealing. “It was all play acting,” has been the cynical comment of M.Enkhsaikhan, member of the government.President Ts. Elbegdorj was more forthright, recalling the proverb, “Too stale food goes toxic” as he hoped Parliament and the government would agree so that the project can finally take off.
There have been voices critical of the Prime Minister and calling for his resignation over all this, but he is working to a plan, avoiding political confrontation. At the St. Petersburg International Economic Forum in, he held talks with President Putin and reached some important agreements. One of these was for technological upgrading of the 1100-km Trans Mongolian Railway owned by UBTZ, where an electronic signalling system will be installed along its single track. Bids for the $70million-$100 million project will be invited soon, maybe even before Naadam. Once the new system is in place, work on laying double tracks will be taken up. The two leaders also agreed to seriously consider UBTZ’s suggestion to relate taxes to mining product prices.
Leaders of Mongolia, Russia, and China will be meeting on July 8-9 in Ufa city, Russia and will discuss the 2000-km long Ulaan-Ude-Ulaanbaatar-Jinin rail corridor. It is likely that a tri-national company will be set up for the work. Also on their agenda will be plans to raise the average speed along Trans-Mongolian Railway to 200 km/h and other technological changes facilitating movement of heavier and longer trains.
It would appear that progress is being made on getting a transit transportation deal with China and Russia. So, who kicked up the fuss about alleged Russian complaints and about building the 1300-km railway to the east to carry TT coal?
Look at Picture 1, which shows the planned rail route supported by Russia. It passes from the Mogoin Gol deposit in Khuvsgul, to the west of the Trans Mongolian railway, to Arts Suuri. A wide-gauge railway to the Mogoin Gol deposit is to be built by Aspire Mining under a concession agreement. It will be exclusively for mining products and will remain under UBTZ control. Some time in the future it will be connected to Kyzyl Railway, falling in with long-term Russian plans to link Kyzyl Rail to Urumqi in China, passing through Khuden in Uvs and the southern side of Khovd.
Picture 2 shows how Russia plans to use the Trans-Chinese Railway (also called the Trans-Asian Railway or the Silk Road) to reach its products, mainly minerals, to Kashgar, India and Pakistan.
Russia eyes other routes also, and has offered to build half of the 450-km TT-Sainshand railway. There are reports that the Mongolian government was expected to choose Dornyn Gobi or Bold Tumur Yuruu Gol to construct the rest, but its tender was not announced.
Another Russian interest is in a new railway, from somewhere south of Zuunbayan or a little west of Zamyn-Uud, where once the Khangi-Mandal port was, again for their mining product transportation. In the event that China downsizes the importance of Ereen port in transporting mining products, Mongolia could use this projected 380-km railway to move its bulk mining products.
If these are the areas of Russian interest in rail routes in Mongolia, why did L.Erdenechimeg, assigned by the Speaker to head the working group, insist that the 1300-km eastward TT-Sainshand-Khuut-Choibalsan-Ereentsav railway must be built, if Russia is to be kept happy?
The simple answer is that his brief was to serve the deep interest of a group of politicians in continuing their dubious operations by establishing New Railway LLC as subsidiary of Mongolian Railways JSC. UBTZ and Mongolian Railways should actually be competitors but since its inception in 2008, the latter has not done any real work on the ground, focusing instead on raising capital, signing MoUs with foreign companies, entering into hugely expensive consultancy agreements. It would be wrong to blame its executives – it must be noted that in its seven years of life, Mongolian Railways has had seven directors –for they merely carried out instructions of Kh.Battulga, who has run the transportation sector since 2008, directly or by remote control. Media reports over the last two years have revealed that some of the companies with whom agreements were signed did not exist in fact, and used the identity of international companies.
The most blatantly dubious agreement was signed by B.Batzaya and P.Bat-Erdene on borrowing $200 million of Chinggis Bond money to construct the bed for the TT-GS railway, and its repayment mode. $6.2 million of interest is paid from the state budget twice a year, in May and November. Remember that this $12.4 million is just the annual interest. The principal amount of $200 million has to be fully repaid by April, 2022, bringing the total cost (principal plus interest)of the TT-GS track bed project to $316 million. Since Mongolian Railways now stands to own 51 per cent of the railway, they are likely to ask Development Bank of Mongolia for more Chinggis Bond money.
Mongolian Railways under its politician lord Kh. Battulga claims to have spent some $55 million on work associated with its favoured eastward railway, but reimbursement for this has also been arranged, naturally with public money. The $55-million payment for the consulting service came from Chinggis Bond money, and the annual repayment of $16 million-$18 million (including part repayment of principal and interest) comes from the state budget. The repayment schedule was agreed on between Minister of Road Transportation A.Gansukh, the Ministry’s State Secretary B.Batzaya, Mongolian Railways CEO P.Bat-Erdene, and Development Bank CEO Kim Jang Jin. There has been no audit of any part of the whole process, including how and when the consulting companies were selected, among which, interestingly enough, is Liberty Partners. It belongs to Ch. Ganbat, known for his proximity to Kh.Battulga, and was contracted for very high fees.
So, even though not a metre of new railway track has been laid, more than MNT45 billion is paid annually from the state budget for that. Another $20 million from Chinggis Bond sales was spent on mapping and planning for an east-west railway and Sainshand complex.
So far, there has been no investor interest in the 1300-km Tavan Tolgoi-Sainshand-Khuut-Choibalsan-Ereentsav railway. There are suggestions to offer Japanese companies the remaining five Tavan Tolgoi licences in return for their commitment to build the railway, but this is unlikely to tempt anyone, given that there is no promised freight to transport, and annual maintenance costs might reach MNT400 billion.
Back now to what this editorial started with: fictitious entities. Most of you will recall that a project unit, with the sole responsibility of developing the Sainshand Industrial Complex, was set up in 2013 under the Industry and Agriculture Ministry. You may also remember that a certain Shanghai-based TBF International Group was reported to have offered a $5-billion loan to Mongolia, including $2 billion to finance the Sainshand complex, if they were given guarantee with TT coal. Some reports also said executives from the Sainshand complex and some high ranking people in the Ministry of Industry and Agriculture had visited Shanghai in March, 2014 to sign “another agreement”.
Several such “project units”, under different ministries, were set up by Ministers after 2013, ostensibly to raise finance for projects. They are still there but there has been no effort to monitor their performance, or to coordinate their work, or to just collect information.
With the economy at worse than a standstill, people’s morale is being kept up by regular announcements of new mega projects that need capital investment of an amount that dwarfs even TT and OT. The Sainshand complex will need $5 billion; a consulting company has been selected for a $10 billion-$12 billion infrastructure project; a pre-feasibility study has been made of the $34-billion coal gasification project, and a preliminary agreement is about to be signed; that project unit under the Mining Ministry would soon become a subsidiary; GerMonGas LLC – a joint venture between state owned CTL Mongol (holding 51% share) and a German company (holding 49%) – has been established to run a coal-to-liquid fuel plant project... we are told of these huge projects soon to come up, but there is never any information about any of them being discussed in Parliament. Nobody but the concerned Minister knows anything about the progress of these mega projects. It certainly helps to be a Minister and to have a devalued State Property Committee under you!
The Mega Projects section at the recent Mongolian Business Summit heard Marcel Venhofen, CEO of the German-Mongolian Business Association (DMUV), express his “astonishment” to the Minister that GerMonGas, after reportedly talking to industrial giants like Siemens, Lurgi, and ThyssenKrupp, should finally decide to seek the help of BB Potsdam, which basically runs real estate operations in Russia, in raising capital for the CTL plant.
Actually, there is no mystery. BB Potsdam is another TBF International (of Shanghai), which will raise the capital for the Sainshand complex. It seems the mega status in Mongolia carries with it the right to forgo transparency. As projects already begun stay stuck, others at the proposal stage select consulting companies and transfer to them millions of dollars in fees. Regular foreign trips are taken to raise capital. Interestingly, these investor hunters never fail to add that the Mongolian government would be responsible for the projects.
This is no idle talk. According to the terms of the shareholders’ agreement recently signed between GerMonGas and BB Potsdam, the Mongolian government is now responsible for putting up10-15 percent of the estimated investment of $4 billion in the CTL plant. One does not know if simple and modest project units established by ministries can or should have the authority to negotiate such huge amounts and commit the government to stand guarantee.
It was announced in the last week of June that Maidar Eco City, a private project originally initiated by Kh. Battulga, would now be guaranteed by the government. Please note that the announcement came at same time when the new term was included in the TT agreement.
People can only wonder how the government that cannot even register the mega projects, hopes to keep a check on them. Parliament is nullifying the government’s executive functions and is putting pressures on it to stand financial guarantee which it can ill afford at the moment.
The only way to stop this game of pressure politics is to amend the constitution to formalise a system that will give executive independence to the government, protecting it against well-planned but ill-intentioned moves. Many politicians watching the drift with despair see such amendments as the only way to provide the balance essential for good governance.
The 25th anniversary of the establishment of a full-time Parliament in Mongolia will be celebrated on September 13. We can only hope that parties with seats in Parliament will seriously consider the necessary changes in the constitution. Otherwise, governments will continue to have a short life. Only two governments in the past 25 years have lasted their term, while 14 fell before time. One reason why Mongolia has not had a stable economic policy in a quarter century is that every new government asserts its newness by overturning its predecessor’s decisions.
For all these 25 years, our political leaders have been announcing their openness to investment and inviting and welcoming investors from the whole world. This Editorial is followed by the President Elbegdorj’s address before an international audience. I can only express my regret that his impressive words should be preceded by my sad account of the Mongolian political world.