Is ‘Wild Growth’ at Erdenes Mongol Good for Mongolians?
Монгол »
This blog post appeared in a modified form on 5 July in the print edition of The Mongolian Mining Journal and is not available online.
Everyone can agree that mining in Mongolia should benefit all Mongolians. On top of the jobs and business growth that come from mining, the government should use the enormous revenues from the sector to pay for schools, hospitals, clean energy, faster internet and other services that make for prosperous societies. In this way, Mongolia can become a place where everyone can live comfortably and without worry.
Erdenes Mongol, the country’s largest state-owned mining company, is central to this vision. For more than a decade, Erdenes Mongol has been responsible for handling the government’s interests in major mines, managing mineral licenses, and marketing the sector to private investors. Today, the company controls approximately 10 percent of Mongolia’s mineral production—mostly from the Tavan Tolgoi coal mine and the Oyu Tolgoi copper mine— and is exploring for other minerals such as uranium and gold.
However, its influence has spread well beyond the mineral sector. Many people may be unaware that, today, Erdenes Mongol is one of the main companies driving industrial change in Mongolia.
Initially, the company focused on its core mining mandate. But Erdenes Mongol has been expanding rapidly into new sectors of the economy. So far, it has established subsidiaries or partnerships with the private sector in roads, border crossing facilities, hotels, restaurants, power generation, engine repair, steel, unconventional oil and gas, trade promotion and asset management. Most of this expansion has taken place since 2016.
It is unclear whether these investments represent “value-for-money” for Mongolians. After all, there are no criteria for what Erdenes Mongol can invest in and no framework to help company managers decide which investments make sense. What is clear is that these new business ventures represent a choice on the part of the government to allow the state-owned enterprise to invest in industrial projects, rather than channel its profits to the state treasury.
This situation prompts many questions. Should Erdenes Mongol be investing in these projects, or should the money be spent through the budget on other priorities, such as education or healthcare? Does the company have the experience or technical skills to operate in all these different sectors? Are there other public or private entities in Mongolia that may be better suited to do the work?
Related to such wild growth are Erdenes Mongol’s weak profits. Since its founding, the company has only declared profits over the last three years—a miniscule MNT 41 billion (USD 16.3 million) from 2016-18—and accumulated more than MNT 877 billion in debts as of the end of 2017.
Erdenes Mongol could be more profitable. Costs are likely bloated due to insufficient controls and audits. Revenues are dependent on shipments of coal to China from Tavan Tolgoi; a crash in coal prices could put the company back into the red. Erdenes Mongol could refocus on its core business, though the practice of swapping the board and senior managers after each change in government makes such coherent decision-making more difficult.
But even if profits were higher, Erdenes Mongol and its subsidiaries might still fail to pay regular dividends to the Mongolian treasury. Currently, there are no rules for what percentage of profits from the company’s subsidiaries should go to the parent company, and what percentage of the profits from the parent company should go to the treasury. In comparison, most other state-owned mining companies in the region, such as China’s Shenhua Energy, Coal India and Indonesia’s Antam, regularly pay 30 to 100 percent of their profits to the state treasury as a dividend, which can amount to hundreds of millions or even billions of dollars each year.
Mongolians bear the costs of these inefficiencies. Each tugrik wasted in high costs and each tugrik reinvested by the company means one less turgik being spent through the budget, for instance on social services and infrastructure.
Reforms are needed to transform Erdenes Mongol into a successful company that generates value for the Mongolian government under modest commodity price scenarios. In our just-released report, Wild Growth: An Assessment of Erdenes Mongol, we outline a few, including: (1) Pass a new Erdenes Mongol or state-owned enterprise law that would clearly identify company goals, guide purchase and sale of assets, and clarify company governance and oversight; (2) Restructure the company based on project-by-project assessments of commercial viability and strategic importance, among other factors; (3) Develop a policy for establishing new subsidiaries; (4) Develop clear criteria and an open process for appointing board members and managers; and (5) Disclose greater information on finances and activities, especially for subsidiaries.
We believe that these reforms would help Erdenes Mongol become a successful national mining company, one that better serves the interests of the Mongolian people and brings prosperity to all.
Andrew Bauer is a consultant to the Natural Resource Governance Institute (NRGI). Dorjdari Namkhaijantsan is NRGI’s Mongolia manager.
This blog post appeared in a modified form on 5 July in the print edition of The Mongolian Mining Journal and is not available online.
Everyone can agree that mining in Mongolia should benefit all Mongolians. On top of the jobs and business growth that come from mining, the government should use the enormous revenues from the sector to pay for schools, hospitals, clean energy, faster internet and other services that make for prosperous societies. In this way, Mongolia can become a place where everyone can live comfortably and without worry.
Erdenes Mongol, the country’s largest state-owned mining company, is central to this vision. For more than a decade, Erdenes Mongol has been responsible for handling the government’s interests in major mines, managing mineral licenses, and marketing the sector to private investors. Today, the company controls approximately 10 percent of Mongolia’s mineral production—mostly from the Tavan Tolgoi coal mine and the Oyu Tolgoi copper mine— and is exploring for other minerals such as uranium and gold.
However, its influence has spread well beyond the mineral sector. Many people may be unaware that, today, Erdenes Mongol is one of the main companies driving industrial change in Mongolia.
Initially, the company focused on its core mining mandate. But Erdenes Mongol has been expanding rapidly into new sectors of the economy. So far, it has established subsidiaries or partnerships with the private sector in roads, border crossing facilities, hotels, restaurants, power generation, engine repair, steel, unconventional oil and gas, trade promotion and asset management. Most of this expansion has taken place since 2016.
It is unclear whether these investments represent “value-for-money” for Mongolians. After all, there are no criteria for what Erdenes Mongol can invest in and no framework to help company managers decide which investments make sense. What is clear is that these new business ventures represent a choice on the part of the government to allow the state-owned enterprise to invest in industrial projects, rather than channel its profits to the state treasury.
This situation prompts many questions. Should Erdenes Mongol be investing in these projects, or should the money be spent through the budget on other priorities, such as education or healthcare? Does the company have the experience or technical skills to operate in all these different sectors? Are there other public or private entities in Mongolia that may be better suited to do the work?
Related to such wild growth are Erdenes Mongol’s weak profits. Since its founding, the company has only declared profits over the last three years—a miniscule MNT 41 billion (USD 16.3 million) from 2016-18—and accumulated more than MNT 877 billion in debts as of the end of 2017.
Erdenes Mongol could be more profitable. Costs are likely bloated due to insufficient controls and audits. Revenues are dependent on shipments of coal to China from Tavan Tolgoi; a crash in coal prices could put the company back into the red. Erdenes Mongol could refocus on its core business, though the practice of swapping the board and senior managers after each change in government makes such coherent decision-making more difficult.
But even if profits were higher, Erdenes Mongol and its subsidiaries might still fail to pay regular dividends to the Mongolian treasury. Currently, there are no rules for what percentage of profits from the company’s subsidiaries should go to the parent company, and what percentage of the profits from the parent company should go to the treasury. In comparison, most other state-owned mining companies in the region, such as China’s Shenhua Energy, Coal India and Indonesia’s Antam, regularly pay 30 to 100 percent of their profits to the state treasury as a dividend, which can amount to hundreds of millions or even billions of dollars each year.
Mongolians bear the costs of these inefficiencies. Each tugrik wasted in high costs and each tugrik reinvested by the company means one less turgik being spent through the budget, for instance on social services and infrastructure.
Reforms are needed to transform Erdenes Mongol into a successful company that generates value for the Mongolian government under modest commodity price scenarios. In our just-released report, Wild Growth: An Assessment of Erdenes Mongol, we outline a few, including: (1) Pass a new Erdenes Mongol or state-owned enterprise law that would clearly identify company goals, guide purchase and sale of assets, and clarify company governance and oversight; (2) Restructure the company based on project-by-project assessments of commercial viability and strategic importance, among other factors; (3) Develop a policy for establishing new subsidiaries; (4) Develop clear criteria and an open process for appointing board members and managers; and (5) Disclose greater information on finances and activities, especially for subsidiaries.
We believe that these reforms would help Erdenes Mongol become a successful national mining company, one that better serves the interests of the Mongolian people and brings prosperity to all.
Andrew Bauer is a consultant to the Natural Resource Governance Institute (NRGI). Dorjdari Namkhaijantsan is NRGI’s Mongolia manager.
Authors
Dorjdari Namkhaijantsan
Mongolia Manager