World Bank allocates $9.3m to improve governance of Mongolian mining sector
Mineweb writes that,
OYU TOLGOI APPROVAL EXPECTED THIS YEAR
As Rio Tinto predicts the Oyu Tolgoi agreement will be approved by the Mongolian State Great Kural (Parliament) and the Central Government this year, the World Bank is spending millions to prepare Mongolia to better regulate and tax mining.
Author: Dorothy Kosich
Posted: Thursday , 17 Jul 2008
RENO, NV -
The World Bank is providing $9.3 million from International Development Association funds for a Mining Sector Technical Assistance Project (MTSA) in Mongolia, aimed at improving the nation’s ability to regulate and financially benefit from its burgeoning mining industry, while reducing government corruption.
The World Bank estimated that mining accounted for about 20% of real GDP, 56% of gross industrial output, 69% of exports, and 36% of revenue for Mongolia in 2007.
Rio Tinto CEO Tom Albanese told Bloomberg Television Wednesday that he believes Rio will get the approval it needs from Mongolia to mine the world’s largest undeveloped copper and gold resource, Oyu Tolgoi. Rio and Ivanhoe Mining had spent more than four years trying to get approval for the $3 billion project.
Successful future mining sector development in Mongolia “will to a large extent depend on the government’s ability to establish and maintain an effective regulatory and fiscal framework, prudently and transparently manage its mineral wealth to the benefit of all its population and ensure sound environmental and social performance of the sector,” according to the World Bank.
Meanwhile, both the World Bank’s Governance Indicators and the organization Transparency International say corruption has worsened in Mongolia since 2001. In 2006, the World Bank Investment Climate Survey found “unofficial payments required for obtaining exploration and mining licenses were high and estimated at around 40 percent of the official fees. Twenty-six percent of firms reported being required to pay bribes to obtain access to electricity, water and/or communications infrastructure.” Anti-corruption legislation has been enacted, but problems remain in the capacity of the government to effectively implement the law.
The U.S. State Department has also found “a creeping expropriation” on the part of both Mongolia’s central and provincial governments.
The World Bank said the pending development of the Oyu Tolgoi and Tavan Tolgoi world-class deposits “present the state with particular challenges. These development will likely increase Mongolia’s mineral exports to over 90 percent of total exports, and tax receipts from the mining industry will likely exceed 50 percent of total tax receipts. In addition, these large new mining exports will also create large balance of payments surpluses which are likely to impact the value of the Mongolian Tugrug which will need to be carefully managed.”
The World Bank Project Information Document said that recent engagement with the government on the potential mining investment boom in Mongolia has primarily been on issues of policy and investment climate, “and it is clear that the government needs urgent assistance to manage the macroeconomic and physical developments of mining and to ensure that economic growth remains stable and the sector is effectively managed and monitored.”
MSTA PROJECT
The MSTA project is designed to help the government improve the effectiveness of its ability to regulate and manage the mining sector to increase mining’s contribution to Mongolia’s national budget. It also aims to assist in management of the effective distribution of “benefit streams” and sustain economic growth through commodity price cycles.
The project also works to further develop the regulatory framework for mining, improve the capacity of the Mongolian Government to effectively monitor regulatory compliance of the mining sector as well as increase the availability of geological data and support programs to mitigate the health and safety risks for artisanal and small-scale miners. The World Bank estimates there were 67,000 full time and part-time artisanal and small-scale miners in Mongolia last year.
“The very focused project development objective for this first phase is to assist the government to develop further the legal and regulatory framework for the mining sector that meets the needs of government, industry, and civil society,” said Graeme Hancock, World Bank senior mining specialist and task team leader for the MSTA project.
“This included the operation of Erdenes MGL LLC according to international standards we would expect from a stock exchange listed mining company,” he added. Erdenes MGL is the holding company of state equity for Mongolian mining projects. However, the World Bank has noted the company has only been recently established and “its management systems need to be put in place.”
The World Bank also found that “licensing lacks transparency and can be subject to discretionary actions. There is a wealth of geological data, but it is not suitably formatted to be readily available and usable by interested investors or widely disseminated for analysis.”
In the Project Information Document, the World Bank said, “Mongolia’s heavy dependence on the exports of a few key commodities-copper, gold, and cashmere-has made the economy particularly vulnerable to fluctuations in commodity prices and natural disaster. This makes it all the more urgent to ensure that Mongolia makes best use of the ongoing commodity boom period to meet its poverty alleviation and development goals more effectively.”
“The country faces the challenge of creating economic opportunities for its rural population and urban unemployed in an economy whose GDP growth over the next few years will depend largely on the mining sector, which traditionally has been an enclave activity in Mongolia as in most countries, and given its capital-intensive nature, does not create much direct employment,” according to the document.
The World Bank also noted that sub-national governments (aimags and soums) lack adequate funds to deal with the “increasing pressure for basic service delivery and essential infrastructure as mining developments take place. ” Mongolia is divided into 21 aimags (provinces), which are in turn divided into 315 soums (districts).
The MSTA Project consists of five main components:
1. Strengthening the capacity of the Ministry of Finance and the General Department of National Taxation to manage mining sector revenues.
2. Improve the regulatory capacity in the Ministry of Industry and Trade and the Mineral Resources and Petroleum Authority of Mongolia to manage mining sector development.
3. Develop Erdenes MGL’s capacity to manage state equity in mining projects.
4. Project management in the Ministry of Finance
5. Infrastructure development strategy to support the sustainable development of south-eastern Mongolia comprising both the Central Government Ministries and the Aimag (provincial) governments.
The World Bank also plans to work with the Ministry of Nature and the Environment to build environmental monitoring capacity, and the development of a regulatory framework for the mineral sector.
The MSTA project includes a $4.2 million grant and a $5.1 million credit (interest free soft loan). Other external partners, such as the German Federal Government’s GTZ, the Asian Development Bank, the European Bank for Reconstruction and Development and the International Finance Corporation have also committed technical assistant to Mongolia’s mining sector.
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