Mongolia's next step - fame to fortune

By bne IntelliNews April 20, 2011

Oliver Belfitt-Nash in Ulaanbaatar -

As the world waits to hear in May which firms have won the rights to develop Tavan Tolgoi, one of the world's biggest untapped coal deposits, Mongolia's citizens and international investors are pressuring the government to change its outdated legislation and prepare the country for the boom ahead.

The high level of interest in Mongolia's coal reserves and the country as a whole was exemplified by two conferences over the past couple of months - "Coal Mongolia" gathered private and state representatives to discuss the country's rich source of coking and thermal coal for China, while the "Mongolian Economic Forum" opened up government house to discuss the state's decisions and future role in Mongolia's development.

Introducing the latter, Prime Minister Sukhbaataryn Batbold outlined the year ahead. "Mongolia's GDP per capita is $630, under the average of developing countries. We have high goals in front of us. Our focus must be on governance, and government regulations need to be clear," he said. "Our strategies cannot be based on a wish list but on research, and the development must be sustainable and direct to the people. We will eradicate corruption and clearly define the boundaries between state and private sectors. Last year, these issues were like a half-killed snake."

Last year's political mantra was "improving the business environment" and gathering interest for international investors to financially support the coming resource boom. As we head into 2011, however, it is becoming evident that the interest is already there. Mongolia has quickly become a hot spot for those investors looking for high returns in emerging markets.

On April 13, Erdenepurev Amarkhuu, director-general of fuel policy at the Ministry of Mineral Resources and Energy, told reporters in Beijing that Mongolia will probably choose in May more than one of the six groups short-listed for the Tavan Tolgoi project. The shortlist includes Peabody, a Shenhua Group-Mitsui joint venture, Vale, a Russia-Japan-South Korea group, ArcelorMittal, and Xstrata. "Definitely not one," Amarkhuu said. "It'll be a combination of the companies."

The giant Tavan Tolgoi coal deposit contains an estimated over 6.4bn tonnes of coal, 25% of which is coking coal used for steel production. With China only 240 kilometres away and desperate for more coking coal, Tavan Tolgoi is the name on every Mongolian's lips. The current tender is for the central and western part of the site, while the eastern half will be 51% kept by the Mongolian government, 10% given as shares to citizens, and 10% sold to domestic companies. The remaining 30% of this half will be sold on international exchanges, and the underwriters' shortlist includes BNP Paribas, Macquarie, Goldman Sachs and Deutche Bank.

Dutch Disease

Despite the bold plans, there are still some major concerns in Mongolia. With such a young judicial system and hazy implementation methods, citizens and investors are calling for the government to deliver on reforms so that this investment boom won't end up wrecking the economy. "Good governance is just a catchphrase in Mongolia," complained Sambuu Demberel, CEO of the Mongolian National Chamber of Commerce and Industry, at the "Mongolian Economic Forum". "There is a need for speed. We have become too comfortable with the revenues from mining and are caught in this 'mining mania'. We must go deeper into the economic issues."

Over the three days of panels and Q&A sessions, the problems that Mongolia faces in this next step became evident. The Mongolian Stock Exchange (MSE) is inefficient, infrastructure is dire, corporate governance is under par and political attitudes are outdated. Threats of "Dutch Disease" and high inflation are on the horizon. Last year, the ruling party promised over $1,000 cash to each citizen, widely condemned as a vote "bribe". This year, Mongolian President Tsakhiagiin Elbegdorj stood at the podium to apologise, saying: "We know now that promising cash is the wrong mechanism. We will never ever promise cash again."

A serious quantifiable error in many concerns was the timing of the government's proposed plans. The recently passed "Concession Law" listed over 120 public-private partnerships (PPP) to begin the huge infrastructure development needed to support the mining boom. "This is not a working document, but a political remark," says Phillip ter Woort, head of the Mongolian office for the European Bank for Reconstruction and Development (EBRD). "PPPs are not easy instruments. People think it's to transfer burden, but it's not a free ride. It takes 18-24 months to finalise just one."

None of the proposed PPPs yet have sponsors, and the infrastructure issue is fast becoming a serious bottleneck. The government promises that Tavan Tolgoi's extraction will begin this year, but with no rail line to ship the loads, people are beginning to wonder: are these promises, along with the 10% stock "gift", another of the state's dodgy pledges? There was open and blunt criticism from audience members who expected more from their government, and they received direct replies assuring them that Mongolia was on the right track. "The private sector wants to show how well it can work without corruption. We have an open, democratic system and that's why it will work," the president said.

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