Matching practices

From licensing to state-owned companies, Mongolia’s latest EITI Report is a timely diagnostic of mining governance in practice

International commentators have long quoted the Mongolian folk saying that “Mongolian rules only last three days”. Mongolia has sought to rebuild its standing with investors through public-private partnerships and providing reassurance that regulations are applied consistently in practice. Amidst moves to restructure the governance of mining state-owned enterprises (SOEs) and amend the 2014 Minerals Law, Mongolia’s 2016 EITI Report provides a timely annual diagnostic of deviations from the rules in practice.

Stress-testing licensing

Award of licenses has risen sharply in Mongolia since the end of the moratorium on exploration licensing in 2015 (see below), prompting concerns from UNDP (in 2016) and Transparency International (in 2017) over corruption risks in the mining licensing system. Incoming Minister of Mining D. Sumiyabazar temporarily froze new licensing for one month upon taking office in October 2017 over such concerns (see local press).

Figure: Mining license allocations, 2014-2016. Source: 2016 EITI Report

In its 2016 EITI Report, EITI Mongolia (EITIM) selected 52 license allocations and transfers in 2016 (roughly 6% of the 864 total) for investigation. It revealed that the government deviated from the rules governing license awards in a total of 11 license allocations (both through direct application and public bidding) and six transfers, in both mining and oil and gas. For the 37 mining licenses awarded through competitive bidding, the report provides the bid criteria and list of unsuccessful bidders. While the deviations range from narrow to wide, this diagnostic is timely as the government prepares amendments to the 2014 Minerals Law to present to Parliament in 2018.

Opening up the behemoths

The 2016 EITI Report is also a timely diagnostic of the level of transparency in state-owned enterprises (SOEs). It shows that practices vary considerably across the 19 mining companies in which the government holds a majority interest. In 2016, Mongolia started reforms in the governance of Erdenes Mongol, which manages nine of the mining SOEs, with technical assistance from the Asian Development Bank and the International Finance Corp. Improvements in SOE transparency also feature in Mongolia’s May 2017 extended credit facility agreement with the IMF. A fiscal model developed for Mongolia by NRGI in August 2017 (see here) calls for greater transparency over SOEs’ off-budget expenditures. In February 2017, Erdenes Mongol established a joint-venture with local conglomerate Mongolyn Alt for joint geological exploration, as the first in a set of public-private partnerships. Yet the other key entity with jurisdiction over oil, gas and mining SOEs, the Government Agency for Policy Coordination on State Property and Regulation (PCSP), provides only some information on the financials of the remaining ten SOEs.

The 2016 EITI Report discloses key data on the nine mining SOEs making the largest payments to government in 2016 (over USD 117.5k). While receiving audited financial statements from only seven of the nine SOEs, EITIM published details of the nine companies’ retained earnings, reinvestments and quasi-fiscal expenditures, alongside details of their boards of directors. The diagnostic also provided a comprehensive snapshot of loans and guarantees granted by the state and the SOEs to companies in the extractive industries, completing the picture of SOEs’ liabilities in 2016.

Embedding transparency

As Mongolia starts its second Validation under the EITI Standard in January 2018, the 2016 EITI Report marks an important step forward in using the annual reporting as a meaningful diagnostic to support reforms. Embedding the different public disclosures required by the EITI Standard in regular government and company systems will be the natural next step to ensure this transparency is firmly embedded.