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