Friday, July 31, 2009

Who is to blame for the floods?

Jargalsaikan D.


UB Post

Printed on 31 July 2009

THE Economist, an international news and analysis journal, starts each issue with the following: “First published in September 1843 to take part in ‘a severe contest between intelligence, which press forward, and an unworthy, timid ignorance obstructing our progress.”

The fight started 166 years ago in England, is just being heated in the Mongolian society at present day. Unfortunately, at this unequal competition, the intelligence side is suffering a losing battle thus far.

There is a small group of people that appear to be concerned, but harbor great interest in keeping society ignorant. They come to political power in turns, and co-act very articulately, embezzling public property for many years. Their sneaky and well-covered actions are beginning to cause serious damages to people’s security and freedom in Mongolia.

The most clear and recent examples of this are the floods of Ulaanbaatar city.

Less than two hours of rainfall turned into a flash flood and impeded city life over the course of a few days, causing a number of deaths, and massive damages to property. Flooding wiped out of gers in the hillsides of UB, and stirred wastewater into the city’s downtown. When the sun emerged again, pollution reached the lungs of citizens and increased the frequency of itchy eyes and other cold-like symptoms.

Both in gers, and in newly constructed houses, people are catching water leaks from their roofs with buckets, shocked by broken walls and the masses of dirt that washed onto their floors. People are shocked by looking at broken walls and flooding dirt masses on their floors.

As we help the people who survived the floods while repairing the damaged roads and bridges, we, Ulaanbaatar residents, still have to discuss the real reasons why it happened, and how to make sure this disaster does not happen again. This is a challenge.

We are quick to accept that the flooding was due to Mother Nature.

The higher ranking government officials instruct the lower ranking ones to find out why the dams are not functioning, who is responsible for the flood breach, and to hold them accountable. In short, it ‘s another dramatic show by the government to solve a problem on a surface level.

While the government fingerpoints, we must address the real reason for the flooding in order to assure it does not happen again.

The truth of the matter is, the flooding happened as part of a public governance crisis which is rooted deep inside the political establishment.

Those who created this crisis will be responsible not only for this flooding, but also for possible collapses of newly constructed houses, too.

We, the citizens of Ulaanbaatar city, are witnessing how our city officials have been selling public property with bribes. Every piece of land that can be connected to the existing infrastructure is gone. Instead of creating new infrastructure around the city, the government is busy with its own interest. City planning does not exist for their gain.

As long as you’re willing to foot the bill, you can buy any stretch of land-even on dams, children’s playgrounds, on the top of major heating and waste pipes, and in any valley of the so-called ‘protected areas’.

In outskirts of downtown where the infrastructure does not exist, the local officials and district/khoroo governors enjoy a level of privilege, while allowing the new settlers to place their fences anywhere in the ger districts if they are willing to pay the price

As a result, all old dams are filled with waste, and buildings are being constructed in them. The contractors ‘forget’ to build the drainage system under the new roads, and the old road drainage system is destroyed by illegal buildings on or near the new ones.

As a result the city has no dam to allow rainwater to flow out of the city, which caused flooding by any medium-level rainfall.

These disasters are the direct result of mismanagement by nominees of political parties (the mayor of UB city is not elected by the city residents but nominated), who have been embezzling the public properties, instead of protecting and taking care of them. You can only harvest what you plant.

Underdeveloped infrastructure serves the interests of our city management, and not citizens.

Developing a good road, water and waste management infrastructure around the city in the world’s 17th largest country will make the lands in the center of this capital worthless compared to the mass of money made today. In turn, proper infrastructure would make political positions valueless. There would be few public service if they didn’t make their money somehow.

However, we all know how to get out from this public governance crisis.

The rulers in this county hold accountable all the public officials who have been embezzling public properties. That is understood by the rulers very well by now. The reason that these people don’t act is that they are probably part of the problem.

If there are still some sober-minded, “clean” members in those ruling political parties, it is a time to clear their parties’ names by getting rid of the criminals.

It is the way that the political parties will remain active in the future. Otherwise, the history will hold them accountable for their nonaction and these parties will disappear along with all the members. If you are seriously sick, either you treat it or you die.

In history, intelligence always takes over ignorance in the end. It is only a matter of time. One ay there will be no gers in Ulaanbaatar.

There will be no room for corruption in our public governance. Each resident will live in a house that has water and bathroom. At that time, nobody can become a city resident by pitching their ger wherever they please.

There will be no chance for small rain to become a flood. The people will live in safe houses. The only issue is, when will it happen?

Tuesday, July 28, 2009

Another Tax Load

Jargalsaikhan.D Economist.
Printed on July 28, 2009

A tax that enforces penalty fines for late taxes was approved a year ago in Mongolia. The penalty is 0.1 percent of the total tax amount per day of delay. The new loss payment will begin to be enforced this August. The fines will be set by the government every year from now on, and this year it is 0.06 percent of the due amount per day. No government officials have talked so far about this tax, and yet it is set by law. A tax authority executive warned on TV that since this payment in embedded into the software and no one can change it, the best way is to pay the total sum shown without argument. In any case, the taxpayers are expected to pay triple on a single tax. 
When the issue of tax collection comes up, our government performs brilliantly by innovating many procedures by adopting all possible new laws and regulations. You can really admire them for this. But when the issue of tax spending is raised, it is hard to find any evidence of efficiency. Taxpayers of Mongolia are unsatisfied with unwise spending of resources, non-transparency and the lack of accountability with the government.
Originally, the budget law covers both side of equity. It directs the way revenues are spent and specifies what money is allocated where. The spending part of the budget is always vague, but under the name of periodical “re-lightening of the budget”, it always becomes even more unclear. This practice has become a habit in our public governance in the last few years. The officials always tried for the best, but each year things were business as usual. 
Today, the single largest factor hindering Mongolian society’s progress is our own ever-growing government. It enforces tax collection from people, but never gives a clear report where those money go, and with what interest rates those funds are kept. Because of this unclear condition of public funds, corruption stems from the government walls. The government is keeping our development stalled instead of facilitating it. 
Though they put on serious and concerned faces for the Mongolian public, our politicians are more concerned with how to take the largest piece of the pie from the mineral wealth of the country. They work alone or with close allies and divide the remaining residuals to the people under attractive name tags: “Motherland Gift” by the Revolutionary Party, and “Rich Mongolian’s Share” by Democratic Party. They find it so easy to divide something that does not belong to them. No wonder the coalition government is surviving.
Ordinary people believed so much in the song the government is singing that some even try to make those “gifts” as collaterals for loans. In the old Mongolian saying, “a fox, which waits for the one under a bull to fall down will always dies of starving”.
This sort of irresponsible political campaigning competition by the ruling parties in Mongolia makes the Mongolian people believe in unrealistic, windfall incomes. They make the public believe that one shiny day will erase an individual’s responsibility for his or her own life, encouraging people to have more children, and to be poor instead of working. It also creates unhealthy measures of values in society.
The taxpayers of Mongolia, who are paying for the luxury consumptions of our officials (a separate healthcare system that flies them to Japan and Singapore for treatment), and for the education bills of their children (college education for one child of public officers are paid by government, here or abroad), are asking kindly for our government to make clearer the spending report of the budget. The level could be even one degree less (0.006 per night).  
We, the people of Mongolia want the government to do at least its basic duties: to protect property, people and freedom in exchange of ever-increasing tax burden.

Friday, July 24, 2009

Will Sharing be to Mongolia's Benefit?

UB Post
Printed on July 24, 2009

THE Mongolian Parliament agreed to approve the Oyu tolgoi agreement after the Naadam festival, 2 weekends ago. If that deadline wasn’t met, a different partner would replace Ivanhoe, as the minister responsible for those negotiations warned. It looks like Rio Tinto – Ivanhoe’s partner that owns a 10 percent equity stake – may back out from the option of 30% shares of Ivanhoe Mines, which was agreed a few years ago. In any case a “dog barking” is getting close” as we, Mongolians say.

The nation is coming to a crossroads after a long ride with irresponsible mining in the past, and its time to choose how much the government should share with the company that found and estimated the huge reserve of gold and copper in the southern mine of Oyu Tolgoi.

The question is, is it worth sharing? It is the duty of society to contribute their opinion when choices are being made in a democratic country, but the final decision is in the government’s hands.

Profit sharing

The Oyu Tolgoi agreement has been focusing mainly on profit sharing for the last few years.
Our political leaders have been dividing the ”skin of a bear, which is not dead”. Meanwhile, the general public has been confused on whether the government will own shares of the company, or own shares of the reserve.

The more estimated amount of gold and copper in the Oyu Tolgoi deposit increased the, hungrier Mongolians were to own a larger share of the mine. There has been an attempt at majority share, and now it has been settled to be a large chuck of the total profits. If the government didn’t receive this larger share, political powers threatened not to give permission for further operations of the mine. Furthermore, they made a law saying not only Oyu Tolgoi’s, but also all “strategic deposits” must be owned at a minimum 34 percent by Mongolia.

The reply from the investor was simple: The government has to buy shares of the company and take responsibility as equity owner. The government’s share of the investment will be about US$ 1.7 billion. If the government cant invest now, they are given the option to borrow from Ivanhoe and pay later, with an interest rate of 10 percent per year.

This means that if the government does not pay anything in 10 years time (which is likely since it’s running a deficit), the country will be subject to interest payment equal to the principle sum, which in 20 years is two times the amount –in 30 years, three times. In such case, the total required investment for the project (US5.1 billion) will be paid in time and in total by the Mongolian side. If this is the case, it would be domestic investment, rather than the expected foreign investment.
Even after the money is invested by the country, Mongolians still only receive 34 percent of the profit.

There is also a technical problem of owning 34 percent of Ivanhoe Mines because it is part of a bigger picture. Ivanhoe is listed on the New York Stock Exchange and the Toronto Stock Exchange, owns a number of mineral mines and deposits in several countries. It has a coal mine in Australia, a coal deposit in South Mongolia (South Gobi Energy resources) and a gold mine in Kazakhstan (Bakhychkir), along with the Oyu Tolgoi project Mongolia. It is technically hard to separate one already listed company.

The only responsible solution to financing the project is fund, which should be raised at the capital market by Ivanhoe Mines, with the company’s Mongolian shares being owned by another entity like the Government of Mongolia. This would the investment into debt, which can be paid back to a mother company.

Production sharing

The first country to use a production sharing agreement as payment for extracting mineral wealth was Bolivia in the early fifties. Since then, this type of agreement has proven to be the best way of meeting the interests of a foreign investor, as well as a host country.

Mongolia used the same production sharing concept in petroleum law and regulations that were adopted in the early nineties. The contributor of this article had first-hand experience working with a team from Mongolian Petroleum Company, which had translated and studied some 60 countries’ petroleum laws and regulations in order to draft the law.

A mineral production sharing agreement is used successfully in a number of countries nowadays, including the Congo, Ghana, Kenya and Libya. The best example is n the Philippines, which uses the agreement as model form with foreign and domestic investors.

The concept of production sharing is first to stabilize the terms and conditions of the agreement and the taxation environment. Secondly the investor is to take full risk of exploration under the laws and regulations of the host country. Third, if they find a substantial reserve of minerals, the investor will have the first right to develop and produce. Upon production, the company will deduct its costs and expenses, and the balance is shared with the host country.

Both sides would agree to whether the whole production goes to full recovery, or a part thereof. In the case of Mongolian petroleum production law, they proceed to 40 percent of total production of a site. The balance is shared by a ratio that is agreed on between the company and the government. The government may receive its share in the form of product, or in internationally convertible currency from the sale proceeds of that mineral. From the day that cost recovery is attained the sharing ratio is reversed in the favor of the government. In general the sharing percentage is in favor of investors up to the recovery, and reversed thereafter.

The sharing ratio is also dependent on whether royalty payments are made to the host country before or after cost recovery. According to Mongolian mining laws, that royalty payment is five percent from the first day of production.

The government could start with that five percent when the OT mine achieves cost recovery, with the balance shared 40:60. After recovery, te ratio could be changed to 70:30 in favor of the government. In any case, the important factor is to run the daily journal of total production very accurately n the manner mutually agreed, as well as to hold periodical, independent audits.

The sharing ratio can be changed in the process of negotiations which is a principle of the typical of production sharing contract. Another important term that should be agreed is how many times the agreement can be extended and for which period in each extension. In this way both parties would concretely know the exit strategies beforehand.

What is next?

We must complete the agreement as soon as possible. The coming two weeks will be a good time for taking the initiative in the final negotiations. The proffered choice should be production sharing, non profit sharing, as it suits our current conditions. The Mongolian negotiation team is running simulation models with the all terms on the table at the moment, much of which is unknown to the public. This team needs to act fast the current delay is not because of Mongolian side. Our name on the international capital market shall not be hurt once again.

Monday, July 20, 2009

Two distinct news on Oyu Tolgoi project

UB Post

July 17 2009

The most important event in the economic life of the country prior to Naadam (the national festival, July 11-13) was the permission given to the government to go ahead with the agreement with Ivanhoe Mines by two major parties that have seats in the Parliament.

This news was a good one at least for owners of shares of Ivanhoe Mines at the New York Stock Exchange and made them happy as it was increasing their share values for one third over night.

But the issue is if the news made Mongolians happy to that extend or not? According to the framework of the agreement draft up to the date, Mongolia will own 34% of the shares without down payment at the beginning, but it will be a loan from the investor (Ivanhoe Mines) for a long term with almost 10% per year and will be paid back in many years from dividend.

What is the economic meaning of owning shares of a company? Do we have any other choice? How can we complete this long waited agreement as soon as possible? These are the questions we face for already four Naadam festivals in row.

Frankly, the news of getting 34% of the Ivanhoe Mines Mongolia shares was not the best news for informed Mongolians. Many of citizens, and a number of civic society organizations say that we Mongolians as the principle owners of the mineral wealth of the country must own majority shares of a company, as only holding share enables us to control the revenue and expenses, then profit sharing in proper way.

We Mongolians underestimate the fact that owning certain shares in a company means we do share to the same portion the economic costs and risk of the company and will be responsible for investment and management failure and success. In such case, it looks like we invest 34% of the required investment at the first glance, but with the suggested terms of loans, we actually are paying 100% for all required investment.

This means Mongolians will get much less in total from the revenue from the Oyu Tolgoi gold and copper deposit, which is already, regarded the largest in the world by its reserve size. This also means a slow shifting of the risk of the foreign investors onto the shoulders of Mongolian taxpayers down the road. This means that nobody will be responsible if there is environmental damage. It will increases operation costs of the company in vain, and will only help the ruling political parties looking good by delivering the election campaign promises of handing cash to everyone. This is a classic approach of many poor countries governments that used to get political and personal advantages from such a large mining project. Take almost any poor African or Latin American country for illustration.

According to agreement draft, Mongolia is to cover the cost and expenses of the Oyu Tolgoi project occurred up to the date, which is hard to estimate to agreeable amount, or to be estimated by the third party since Mongolia is to become 34% owner of that company. Mongolia is to invest into the project 34% of required investment in the future.

Mongolian entrance into the company as a shareholder enables the mother company (Ivanhoe Mines Ltd Canada, listed in Toronto and NY Stock exchanges) to convert its investment to its daughter company (Ivanhoe Mines Mongolia, the license holder of the mine), into a loan with certain percent. Source say the mother company had already claimed that it had invested almost a billion dollars into the project by the date. It means 34% of that loan is expected to be paid by Mongolia sooner or later6

According to foreign investor of the project, estimated 5Bln USD will be required for completion of the project. One third of the investment is to be paid by Mongolians, and the rest later on will be paid by us also as interest payment. With 10 percent per year, one pays interest, equal to principal in 10 years. In 30 years 3 times. The government will not pay back the loan as soon as possible because it knows that it can be delayed, or paid at the end. Our government had been running the budget almost always with a huge deficit. The most irony in here is that all these terms and conditions are initiated and pushed aggressively by the Mongolian Government.

Another provision suggests that the Mongolian side may increase its share at the completion of the contract in 30 years for another 17% in order to get the most wanted majority. May be again under the same condition, and the one side no-risk game will go for the second around. In fact, under these terms all investment, costs and expenses are slowly shifted not to the Government but onto the back of Mongolian tax payers at the end. Taxpayers like you and me, will take the risk.

Actually we were seeking for foreign investment for the project, but it is going to be a domestic investment at the end. Wanted the best, got the usual.

Governments in general, the Mongolian government in particular, was never a good manager because to every company with government participation, the political nominees enter into the company and usually take care of their own interests first instead of the company’s one and increase dramatically operation costs and making company into the red in very short time. If you do not agree, please point out one single government company in this country that is thriving, competitive, effective and profitable. Who that is thriving, is only top management which never bears any responsibility for own bad action.

If there is any single mining company in the country that had recovered the land after production of minerals to the original conditions or as in some countries even better than the photo taken before the land was touched. No single one yet. Recovery of the land is the job that the government is supposed to enforce.

But our government is never does the job it should do, only does the job it must not. As result we got lost over 400 rivers and lakes since the mining boom started 15 years ago. The people and herds had to run away from their land and migrated to the capital city, where over a half of the country population piled up already. By the way we are the 17th largest land in the world.

When the government is inside of the company that will develop the largest copper and gold mine in the world, do we trust that government can enforce the environmental requirement. No. The government officers cannot enforce the rules when they are not inside of a company. How they enforce themselves, when they are inside of the management of a company. It never happened, at least.

For recent years, we are witnessing the strong trend of increases of the government participation in all businesses and strong wish toward making everything in this country public. The reason for that is an increasing opportunity to deliver political election campaign promises to distribute cash. Once the politicians have a large power then they tend to spend all resources without proper accountability. Unrealistic promises of cashes by the political parties at election are forbidden by law in many countries.

Our politicians, both large two political parties who created the coalition government at the moment, seek for down payment upon signing the agreement in order to make their election campaign promises possible. Earlier the government asked 225Mln USD, which negotiated to 120 Mln this time. If this down payment is not paid during 30 years it will be 3 times more with interests and will be billed to taxpayers again.

One possible version of the agreement is stability agreement which is exists in the country already for making sure that future legal conditions change will not apply for the company. Any tax discount, provision of special conditions to that company are hard to implement and even harder to control and will not make discrimination against the native companies.

While we have not yet have a competitive economy, instead of investing all available scarce resources into one project, when even it was not asked, or exempting the investors from many taxes, we would be better off if we just collect related taxes as any other company, and get paid 5% of royalty for consuming the mineral resources of the country from the day one of production.

Concerning the preferences of purchasing Mongolian services and products if available, or hiring Mongolians as first priority, construction of required infrastructure under the Mongolian government planning, making those infrastructure open to other consumers, and not creating a monopoly right etc, all these issues can be included in that stability agreement.

There was second news on Bloomberg that could accommodate all the above mentioned concerns if implemented. In his first interview with the western major press, the newly sworn President Ts. Elbegdorj said that Mongolia would pursue a policy of not taking an equity interest in the Oyu tolgoi project.

This news was a good one for not only Ivanhoe mines shareholders, among which thousands of ordinary Americans who invested in pension funds, but also many Mongolians. Because ordinary Americans and Mongolians both wish own governments spend their tax money very wisely.

We do not expect our government to be a good businessman that will bring a lot of profit to us, but our only wish is put not us into a big debt.

Mongolians for fair taxes, wise spending (FTWS), a non-governmental organization