Mongolia 2016 Validation

Mongolia's Validation commenced on 1 July 2016.

In January 2017 Mongolia was ​validated against the 2016 Standard. 

Validation is the EITI's quality assurance mechanism and measures the progress countries have made in meeting the requirements of the EITI Standard. For more information about the country, visit the country page on eiti.org.

The Board's decision

On 11 January 2017, the EITI Board came to the following decision on Mongolia's status: 

The Board agreed that Mongolia has made meaningful progress overall in implementing the 2016 EITI Standard. In taking this decision the EITI Board noted the effective oversight provided by the Mongolian Multi-Stakeholder Working Group (MSWG), efforts to improve the accessibility of data through an online Data Portal, progress in establishing sub-national multi-stakeholder councils as well as the impact on public debate, particularly at the local level. The EITI Board highlighted that the EITI has provided a positive platform for discussion and debates about mining sector management, involving all stakeholders and the wider public. The EITI Board was encouraged by the government’s efforts to make government systems transparent and urged the MSWG to work towards further mainstreaming EITI disclosures.

The Board’s determination of Mongolia’s progress with the EITI’s requirements is outlined in the assessment card, below. The EITI Board agreed that Mongolia had not made satisfactory progress on requirements 1.4, 2.2, 2.3, 2.6, 4.5, 4.9, 5.2, 6.1, 6.2 and 7.4. The major areas of concern relate to MSG governance (#1.4), license allocations (#2.2), license registers (#2.3), state participation (#2.6), including SOE transactions (#4.5) and quasi-fiscal expenditures (#6.2), data quality (#4.9), subnational transfers (#5.2), social expenditures (#6.1) and documentation of impact (#7.4). The EITI Board disagreed with the validator on the following requirements: government engagement (#1.1), export data (#3.3) and in-kind revenues (#4.2).

Accordingly, the EITI Board agreed that Mongolia will need to take corrective actions outlined below. Progress with the corrective actions will be assessed in a second validation commencing on 11 January 2018. Failure to achieve meaningful progress with considerable improvements across several individual requirements in the second Validation will result in suspension in accordance with the EITI Standard. In accordance with the EITI Standard, the Mongolian Multi-Stakeholder Group may request an extension of this timeframe, or request that Validation commences earlier than scheduled.

The Board’s decision followed a Validation that commenced on 1 July 2016. In accordance with the 2016 EITI Standard, an initial assessment was undertaken by the International Secretariat. The findings were reviewed an Independent Validator, who submitted a Validation Report to the EITI Board. Mongolia’s Multi-Stakeholder Working Group were invited to comment throughout the process. The Multi-Stakeholder Working Group’s comments on the report were taken into consideration. The final decision was taken by the EITI Board.

Mongolia's progress by requirement

Corrective actions

The EITI Board agreed the following corrective actions to be undertaken by Mongolia. Progress in addressing these corrective actions will be assessed in a second Validation commencing on 11 January 2018:

  1. In accordance with requirement 1.4.b.vi, the MSWG should ensure that there is an inclusive decision-making process throughout implementation, with each constituency being treated as a partner. The MSWG should agree and publish its procedures for nominating and changing multi-stakeholder group representatives. In accordance with requirement 1.4.b.iii, members of the MSWG should ensure that they liaise with their constituency groups. 
     
  2. In accordance with requirement 2.2.a, the government should ensure annual disclosure of which mining, oil, and gas licenses were awarded and transferred during the year, highlighting any non-trivial deviations from the applicable legal and regulatory framework governing license awards and transfers. In accordance with requirement 2.3, the government should also ensure that the dates of application for all oil, gas and mining licenses are publicly available and that the coordinates for oil and gas PSAs are published.
     
  3. In accordance with requirement 2.6, the MSWG should provide an explanation of the prevailing rules and practices related to SOEs’ retained earnings and reinvestment. The government should also ensure annual disclosure of any changes in government ownership in SOEs or their subsidiaries, and provide a comprehensive account of any loans or loan guarantees extended by the state or SOEs to mining, oil, and gas companies. In accordance with requirement 6.2, the MSWG should consider the existence and materiality of any quasi-fiscal expenditures undertaken by SOEs and subsidiaries in the extractive industries, including subsidies, and ensure that any material quasi-fiscal expenditures are disclosed.
     
  4. In accordance with requirement 4.5, the MSWG must ensure that the reporting process assesses the materiality and comprehensively discloses material payments to subnational government entities.
     
  5. In accordance with requirement 4.9.b.iii and the standard Terms of Reference for the Independent Administrator agreed by the EITI Board, the MSWG and Independent Administrator should:
  1. examine the audit and assurance procedures in companies and government entities participating in the EITI reporting process, and based on this examination, agree what information participating companies and government entities are required to provide to the Independent Administrator in order to assure the credibility of the data in accordance with Requirement 4.9. The Independent Administrator should exercise judgement and apply appropriate international professional standards[1] in developing a procedure that provide a sufficient basis for a comprehensive and reliable EITI Report. The Independent Administrator should employ his /her professional judgement to determine the extent to which reliance can be placed on the existing controls and audit frameworks of the companies and governments. The Independent Administrator’s inception report should document the options considered and the rationale for the assurances to be provided.
  2. ensure that the Independent Administrator provides an assessment of comprehensiveness and reliability of the (financial) data presented, including an informative summary of the work performed by the Independent Administrator and the limitations of the assessment provided.
  3. Ensure that the Independent Administrator provides an assessment of whether all companies and government entities within the agreed scope of the EITI reporting process provided the requested information. Any gaps or weaknesses in reporting to the Independent Administrator must be disclosed in the EITI Report, including naming any entities that failed to comply with the agreed procedures, and an assessment of whether this is likely to have had material impact on the comprehensiveness of the report.
  1. In accordance with requirement 5.2.a, the MSWG should clarify the distinction between SOEs’ direct subnational payments and subnational transfers prior to data collection. The MSWG should ensure that the EITI Report includes the revenue sharing formula used to calculate transfers to individual aimags and soums, and that is discloses any discrepancies between budgeted and executed subnational transfers.
     
  2. In accordance with requirement 6.1.a, the MSWG should agree a clear distinction between mandatory and voluntary social expenditures prior to data collection. Where mandatory social expenditures are provided in-kind, the MSWG should ensure that the nature and deemed value of such in-kind transactions are disclosed. Where beneficiaries of mandatory social expenditures is a third party, i.e. not a government agency, the MSWG should ensure that the name and function of the beneficiary be disclosed.
     
  3. In accordance with requirements 7.4.a.iii and 7.4.a.iv and 7.4.b, the MSWG should, in preparing the next annual progress report, conduct an assessment of follow-up on EITI recommendations and impact of implementation based on consultations with a broad range of stakeholders.

The MSWG is encouraged to consider the other recommendations in the Validator’s Report and the International Secretariat’s initial assessment, and to document the MSWG’s responses to these recommendations in the next annual progress report.

 

[1] For example, ISA 505 relative to external confirmations; ISA 530 relative to audit sampling; ISA 500 relative to audit evidence; ISRS 4400 relative to the engagement to perform agreed-upon procedures regarding financial information and ISRS 4410 relative to compilation engagements.

Next Validation date

A second Validation will commence on 11 January 2018.

Impact of the EITI in Mongolia

Section 7.5 of Mongolia's initial assessment (see Validation documentation)

The EITI process in Mongolia has had some impact, even if stakeholders agree it has been limited to awareness raising and focused on the reporting process. As part of the International Secretariat’s assessment of the impact of the EITI in Mongolia in its ten years of implementation, all stakeholders were asked why Mongolia was implementing the EITI. One government stakeholder noted that Mongolia had decided to implement the EITI in 2005 when the extractive industries were opaque and at a time when the government was seeking to attract foreign investment in the mining sector. The EITI was thus seen as a tool to attract investment. One of CSO representative noted that the end-goal of implementing EITI was to reduce poverty in Mongolia.

Several CSOs noted that before the EITI (pre-2006), no communities knew how much money the government was getting from the sector. People now have access to this information and the level of national and subnational debate over the governance of the extractive industries has grown, even if this was seen as due to the mining boom since 2009. Now that local communities had access to information on how much money their local governments were receiving from extractives companies, they were now eager to know more on issues of licenses (including their allocation), employment, environmental issues, etc. The number of NGOs focused on transparency has also grown, and transparency is now a regular topic of discussions among parliamentarians, students and government officials. CSOs also noted the government used Mongolia’s compliance status as a sign of prestige, even if they were concerned over the lack of meaningful support for the process and disclosures required under the EITI Standard. Civil society also considered their campaigning for a mining legislation and on specific deals, like the Erdenes Tavan Tolgoi deal halted in early 2015, as a concrete outcome of the EITI in the sense that CSOs could now refer to the government’s commitment to its EITI compliance status in their lobbying and as a means to ensure public oversight of mining deals. While government representatives noted that EITI compliance status reflected their commitment to transparency and securing a social license to operate for companies, industry did not highlight a significant impact of implementation.

Several government, industry and CSO representatives noted that the most significant evidence of the impact of the EITI was the formation of subnational councils, which had brought much closer ties between government agencies like MRAM, companies and local communities and local governments and was starting to build trust amongst stakeholders. However it was noted that the main interaction was at specific events and follow-up contact was entirely conducted through the EITIM Secretariat. A few CSOs noted that the EITI could yield more benefits to citizens by, in particular, disclosing more information on beneficial ownership, which could reduce the risk of conflict of interest and corruption, and publishing contracts, to enable citizens to judge the “fairness” of deals.

The May 2016 study on corruption risk assessment in Mongolia’s mining sector, produced by the UN Development Programme together with the Ministry of Mining and IRIM Mongolia, highlights the limited impact of EITI implementation on corruption in the mining sector.[1] However the report’s description of the impact of EITI implementation focused only on the reduction in discrepancies during the EITI reconciliation rather than a broader focus on disclosures of information related to the extractive industries value chain required under the EITI Standard. The report only notes that “no action was taken and no one was held accountable when required disclosures (…) were missing.”

Sustainability: The EITI process also faces significant risks to its sustainability, both financially and in terms of consistency of engagement. A draft Law on Mineral Resource Sector Transparency (the “EITI Law”) has been in preparation for almost three years now.

The financial sustainability of the EITI process also poses a risk. The EITIM has had to operate without funds for several months at a time on an annual basis in recent years, due to delays in accessing World Bank grant funding. While disbursement of MDTF grants covered expenses retroactively, the transition to the Extractive Industries Global Programmatic Support (EGPS) fund from January 2016 led to a six-month gap in funding for the EITIM Secretariat.

At the political level, the sustainability of the EITI process faces some risks given the potential impact of June 2016 parliamentary elections on government representation and chairing of MSWG meetings, given experience of the lack of National Council meetings in 2014 as a result of political changes.

 

[1] UNDP, Ministry of Mining (May 2016), ‘Corruption risk assessment in the mining sector in Mongolia