Tuesday, March 19, 2013

Guest post: giving power to the people of Mongolia

Rio Tinto and the government of Mongolia are committed to ramping up production at the Oyu Tolgoi gold and copper mine, one of the world’s largest. The recent turmoil between the two partners should push them to clarify their roles and help create more solid support for the project from the Mongolian public.

Rio Tinto has recently faced some corporate difficulties, including write-offs, which make success with Oyu Tolgoi imperative for the new management team under Sam Walsh. For the Mongolian government, which owns a third of Oyu Tolgoi beside Rio’s two thirds stake, the project is so big that it comes close to dominating the economy.

Despite these shared long-term interests, the two sides have been quarrelling over the past six weeks, in the latest in a string of disputes over the financing and implementation of the scheme.

The current turmoil started with rumblings from several Mongolian Members of Parliament who called for changes to terms of the Investment Agreement governing the mine.

Previously, Mongolia’s president, prime minister and cabinet quickly dismissed calls for an opening of new negotiations without much comment. But last month President Tsahkia Elbegdorj aired some common misgivings about the project.

Among them were questions about the role of the three directors representing the state’s interest. Elbegdorj singled out former President N Bagabandi’s role, sparking brief speculation about the possibility of Bagabandi standing against Elbegdorj in the coming presidential elections. The two sides have since engaged in several rounds of he-said-she-said ahead of a March 20 shareholder meeting.

The finger-pointing is difficult to disentangle from the outside. The government is learning on the job about the role of a co-investor in a large project that relies on international financing. Wrangling over Oyu Tolgoi’s construction budget and management fees highlight the contrast between administration-by-fiat in governmental affairs and the operation of its 51 per cent majority stake in the Erdenet mine, and an operation like Oyu Tolgoi, a private company reliant on global capital flows.

The government must decide what role its representatives at Oyu Tolgoi are to play. Do they represent an arms-length financial interest? If yes, will they resist regulation by ministries and other agencies that might reduce profits in the short term? And if no, is their position inherently antagonistic to Oyu Tolgoi and its other owners?

And what lessons are there for Rio Tinto in this turmoil? The most obvious conclusion and one that other investors in Mongolia are drawing, is: expect a bumpy ride along the way to a promising future.

But Rio Tinto may also have to embrace democracy more fully. Clearly, Oyu Tolgoi’s long-term viability depends on securing a social compact for the project with Mongolians. The strategy followed thus far of engaging only with decision-makers (inherited from Ivanhoe Mines and visible in Rio Tinto projects elsewhere) appears to make a foreign investor’s life more difficult in a democracy like Mongolia.

Mongolia is home to just over 700,000 households and literacy is high. This offers Oyu Tolgoi and its owners a rare opportunity to address the population directly. An information campaign to explain (not advertise) the revenue stream arrangements for a large project like Oyu Tolgoi would go a long way to giving citizens the information they need to hold their representatives accountable.

There is room for creative thinking about a country-wide citizens’ council that would advise or even oversee the government directors on the boards of Oyu Tolgoi and other big natural resource projects in the future. This would not be a parallel decision-making body, but a means to involve Mongolians more directly in the oversight and the evaluation of plans. Members would be selected in ways which keep them as far as possible from day-to-day party politics. Such a council could even help guide a future sovereign wealth fund that might be used to smooth out the impact of commodity price fluctuations on export revenues.

While the direct involvement of Mongolian citizens would be likely to produce turmoil of its own, it would also offer opportunities for a real buy-in by the general public and for strengthening social support for the Oyu Tolgoi project and others like it.

Julian Dierkes is associate professor at the Institute of Asian Research, University of British Colombia

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