Whiff of corruption hangs over Mongolia's mining license auctions

By bne IntelliNews March 17, 2015

Terrence Edwards in Ulaanbaatar -


“How fast can you type?” That was the question Baatar received in a phone call early one February morning. It was the first time in more than four years that Mongolia was accepting new applications for mineral exploration licenses, and his uncle headed one of dozens of mining outfits scrambling to get their application submitted online before everyone else.

Although Baatar – who did not want his real name printed over fears what might happen to his uncle's company – is technologically savvy and light on his fingers with the keyboard, his skills were of no help. The Mineral Resources Authority of Mongolia (MRAM) was no longer accepting applications by the time he made his first go at it. “There's many coordinates, but many overlap, too,” says Baatar of the map locations the government is making available to exploration. “So even if I fill out the form fast, it's not enough.”

Baatar reckons he and his uncle were outclassed by companies that were armed with more capital, technological might and – crucially – political connections.

Mongolia had hoped to attract a mass of new foreign investment when it announced last year that it was lifting a 2010 moratorium for new licenses to explore for minerals such as gold and copper. The country’s economic growth slowed to just 7.8% last year – still relatively robust but a far below the world-beating 17.5% of three years ago – and a big factor has been the waning interest in the country's minerals and mining sector amid public disputes with investors.

But this latest attempt at generating interest in the mining sector with new exploration opportunities hasn't resulted in any sea change in investors' appetite for Mongolia’s vast natural resources. The government's claims of open and transparent auctions to win licenses to explore 10.1mn hectares of land have been refuted by foreign investors, who claim the process has been unfair and opaque.

Problems from day one

Although the government boasted that the online platform for the auctions would prevent corruption, investors claim the whole process has been hobbled by dodgy implementation and unfair advantages given to certain groups.

A former deputy mining minister, Oyun Erdenebulgan, told bne IntelliNews last September that Mongolia could attract up to $1.5bn in 2015 from investments into exploration. But the more likely end result, investors say, is that the licenses will fall into the hands of speculators who will sit on them until they can be flipped for a tidy profit.

Mongolia had drawn up strict criteria for the kind of companies that could compete for the licenses in order to bar speculators and poor-quality investors from participating. That included clean criminal and tax records, no outstanding debts to government agencies such as the social insurance agency, and a bank statement showing that the company held enough funds to undertake a legitimate exploration operation.

However, the strict criteria were dropped just days before the applications process was launched. The requirements had “created quite an uproar [which] essentially pressured MRAM to drop those requirements by Friday night,” read an internal memo of one of the mining companies involved that was shared with bne IntelliNews on condition that the firm’s name would not be revealed.

MRAM has accepted applications on select days for a pre-selected set of coordinates since late January. But a disastrous launch of the website because of technical problems soured investors from the outset. Investors complained that the website was down for the first ten minutes on the morning of launch day, on January 26. And many foreign and local investors were enraged when they failed to even access the website before it closed out 19 minutes after its launch, when the first 30 applications had been received.

Shortly before MRAM began accepting applications, local software companies had begun touting offers that their software could guarantee that applications would reach MRAM within the window. An IT engineer working for a mining company that was applying for licenses said he knew of one piece of software that cost MNT4mn to buy, plus an additional MNT500,000 per application that was submitted to MRAM.  “I don't think it's illegal, but I don't know how much of a conflict of interest it is either for the software developer. Maybe they have contacts with MRAM,” he said, adding that the window has been expanded to accept the first 120 applications, but that takes less than a minute to happen.

Mongolia's Agency for Fair Competition and Consumer Protections confirmed that it was looking into the licensing process by MRAM, but declined to comment while the investigation was ongoing. MRAM was contacted for comment but has not responded in time before publication.

Reputation on the line

For many investors, the license application process has been more of the same rather than the new start that they were promised.

Mongolia has struggled to rid itself of the whiff of corruption that swirls around its business environment. A report on corruption published in March 2014 by local pollster the Sant Maral Foundation reported that nearly 30% of respondents said that giving bribes would help an individual or company beat “unjust regulations,” while 38.2% said bribes were needed to overcome bureaucracy.

Mongolia's reputation as a place for doing business has also suffered from the numerous disputes with miners. The government is still deadlocked over the $127mn (later reduced to $30mn) in various taxes and penalties that it says it’s owed for country's largest project, Rio Tinto's Oyu Tolgoi copper-gold mine. Three foreign former employees of another Rio asset, SouthGobi Resources, received prison sentences for tax evasion. In both instances the charges have been denied.

Disputes in the mining sector are no doubt headaches for Mongolia's top government officials, who some investors believe genuinely seem interested in directing change. Mongolia's president pardoned the three SouthGobi employees a month into their sentences, each of which was for more than five years. And Prime Minister Chimed Saikhanbileg has been careful not to harp on about the tax dispute at Oyu Tolgoi, preferring to stick to the idea that Mongolia is willing to do whatever it takes to end the dispute and get work at the project started again.

Despite these efforts, the influence of government chiefs can only reach so far into the depths of Mongolia's byzantine bureaucracy. How well it responds to the corruption allegations will send a message as to the kind of investors it wants to see return to the country.

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