S. NARANTSOGT: THE LAW ON NATIONAL WEALTH FUND PLACES NO RESTRICTIONS ON INVESTMENTS

Interview with S Narantsogt, Executive Director of Erdenes Mongol Group, on the newly approved Law on National Wealth Fund and its implications for foreign investment

The recently enacted Law on the National Wealth Fund, and amended related regulations has faced criticism for potentially deterring foreign investors. As you were involved in drafting this legislation, what is your response?

According to the Constitution of Mongolia, mineral deposits-whether small or large cannot be owned by individuals or companies. Instead, companies are granted rights to utilize and operate these deposits for a specified period. The Constitution clearly designates both surface and subsoll resources as public property. In other words, no legal entity can claim sole ownership of mining resources. As a result, the benefits derived from these resources should be accessible to all citizens.

In 2019, the Constitution was amended to include a provision stating: "The exploitation of the mineral deposits with the strategic importance shall be in compliance with the principle, under which natural wealth is to be subject to the people's control/power, and the legal basis to allot a majority of the benefits gained from it to the people shall be determined by laws."

The approval of the Law on the National Wealth Fund can be viewed as implementing this constitutional provision. In this context, amendments were made to two or three provisions of the Law on Minerals, including the addition of the term "possess free of charge." If mineral reserves are identified through private funding. state ownership could be up to 34%. Conversely, if the reserves are identified using public funds, state ownership could increase to 50%. These percentages are not fixed but represent potential ownership shares based on the source of funding.

Does that mean state ownership could be as low as one percent?

State ownership could even be as low as zero percent, as the fundamental arrangement remains essentially unchanged. The mere addition of the term "free of charge" has been mis- interpreted by some as implying that "investment has been blocked and stifled."

Can the share of the deposit owned by the government "free of charge" be negotiated with investors on a business basis?

First, let me explain the rationale behind adding the term "free of charge." The Law on the National Wealth Fund specifies that up to 34% of state dividends will be allocated to the Savings Fund, effectively distributing these benefits to the public. This aligns with the constitutional principle that "surface and subsoil resources are the common property of the state or the people," ensuring that the resources are managed in accordance with this mandate.

This is a straightforward principle. The concern that "not all citizens benefit from mining wealth, and only a few are becoming wealthy" has sparked significant debate and division within society. There is widespread criticism that "only 30 families are benefiting from natural resources." However, it is important to note that the enacted Law on the National Wealth Fund has already addressed these issues.

Any investment should operate on a "win-win" basis. Investors are expected to recover their expenses and earn a profit. At the same time, citizens of countries that permit the exploitation of their non-renewable resources deserve a fair share of the profits. This principle that resource owners should receive a share of benefits-is widely implemented in countries the with developed mining industries.

When a substantial capital investment is required to exploit a deposit, the wealth owners may receive a smaller percentage of the benefits. Conversely, if the investment required is lower, the share of benefits for the public can be higher. This is an issue that can be addressed through business negotiations with investors on a case-by-case basis. 

There is no need to perpetuate the false belief that investment is being hindered. Instead, we need to achieve a common understanding ave provide accurate information to address any concerns.

Can we infer that the Law on National Wealth Fund will not hinder future investments?

No one will and should prevent the private sector from making high profits. However, it's important to recognize that the social climate requires that the benefits of the mining industry be shared with everyone.

It's said that removing conditions for recovering initial investments and ensuring profitability discourages investment. However, we have never done that. Instead, we propose evaluating the efficiency and profitability of invested capital for strategic mineral deposits before deciding the level of government ownership.

The Oyu Tolgoi Investment Agreement is the first signed by the Government of Mongolia with foreign investors. Has this Agreement been profitable enough to distribute dividends to the wealth owners?

Let us compare and clarify using data. The Government of Mongolia is currently negotiating with the French state-owned company Orano Mining, which invests in Badrakh Energy LLC, regarding the draft of the Investment Agreement.

Although the investment agreement for the project has not been finalized, some terms have already been agreed upon.

The Orano group plans to provide us with Incremental at no cost and will also pay royalties. This agreement is better than the Oyu Tolgoi contract, and registers 34% of government ownership es debt, accruing interest on it.

The Oyu Tolgoi copper deposit is a valuable pisset for the Mongolian people, but extracting and exporting this resource has led to Increasing debt due to accumulating interest.

34% of the initial investment, estimated at approximately $1.4 billion, is recorded as 'debt with accruing interest. Mongolians have been informed that this debt could reach $22 billion by 2037 due to accumulated interest. Although previous negotiations showed some progress, this debt continues to grow. Therefore, there is no basis for considering the Oyu Tolgoi agreement as "excellent."

Mining companies involved in extraction activities claim that they generate most of the state's budget revenue through substantial tax payments. What are your thoughts on this?

All businesses are required to pay taxes. While it's true that mining companies contribute significantly to the state budget, it is also a fact that the main burden falls on a few state-owned mining companies within the Erdenes Mongol Group. Additionally, "Erdenes Tavantolgoi" JSC has distributed 1,072 dividend shares to Mongolian citizens.

In the future, these companies will be major contributors to the National Wealth Fund. Responsible investors understand and support the Law on the National Wealth Fund, which requires holders of strategic deposits to pay taxes and distribute dividends to the public.

Let me say it again. For each mining deposit, we will conduct detailed calculations to determine the required investment, potential profitability, and the share that can be allocated to the state while still ensuring a profit for investors. Based on these calculations, we will set the level of "free-of-charge ownership" for the government. Investors will not be operating without making a profit.

There is a view that the mining sector should be liberalized and the concept of strategic deposits abolished. What is your opinion on this?

Government intervention should be reduced in sectors like finance, banking, small and medium industries, food, and agriculture, allowing for liberalization and increased competition. However, the mining industry is fundamentally different and requires government intervention and control.

For instance, 17% of Mongolia's proven copper reserves are owned by the state- owned Erdenet Mining Corporation, while the remaining 60% is divided between Oyu Tolgoi and Tsagaan Suvarga, with Oyu Tolgoi holding the larger share. In terms of copper exports, Erdenet Mining Corporation handles 40%, whereas Oyu Tolgoi LLC accounts for 60%. However, the tax revenue from copper is split differently, with 60% coming from Erdenet Mining Corporation and 40% from Oyu Tolgoi.

"Erdenes Tavantolgoi" JSC owns more than 10% of Mongolia's coal reserves but is responsible for 40% of coal exports. As a result, "Erdenes Tavantolgoi" JSC alone contributes 70% of the total tax revenue from coal exports. Additionally, the company has distributed dividends to citizens twice.

Erdenet Mining Corporation covered citizens' electricity bills during the COVID-19 pandemic. Additionally, state-owned companies within the Erdenes Mongol Group contribute around 70% to the Mongol Bank's foreign exchange reserves. I wish you to consider and compare these contributions before criticizing the government as a "bad manager."

This is a clear example of why we need to discuss the Constitutional principle that the majority of benefits from natural resources should be directed to the people