N.Dorjdari, a researcher and manager of Open Society Forum, tells MMJ why he considers the draft Tavan Tolgoi investment agreement submitted by the Government to be unsatisfactory. In essence, people are  deliberately not being told any specific details on  how the deposit will be put into economic circulation.

The agreement is based on the product sharing principle. What exactly is this practice?

The product sharing principle has been mainly used in the oil sector in most countries. Its use  in the mining sector has been quite minimal. We have several options in Tavan Tolgoi: product sharing, concession, and licence-based royalty. We could also hire an operator company on contract. There could also be a joint plant. Different choices could be applied in the different parts of the project we have been told about.

In product sharing the most important thing is determining when the product ownership is transferred to the investor. There are different ways of doing this. It can even be that the state retains ownership until the time the product is sold. The investor may claim its share of the sales  proceeds. Until the product sale is complete and the profit shared, the ownership stays with the state. Most developing countries prefer this version. A good example is Indonesia, which applied it in mining, over companies’ initial protests. There should be clear agreement between the investor and the Government on how the product will be shared, who will own how much and how the costs will be recovered.

Unfortunately, there is no indication in the Government proposal submitted to Parliament of the specific shareholding ratio, making it impossible to determine how much the country stands to earn. There is no reference to any computation the Government might have made. What will MPs and the public debate, if there are no data, no options on offer?

Where is the product sharing principle best used in coal development?

Indonesia. However, their system of work contract is not strictly product sharing, but the principle is the same. A minimum tax has to be paid regardless of operation results.         

Do you see benefits in adopting the product sharing principle in Tavan Tolgoi?

It will depend on the specific terms. An agreement must be profitable for both parties, but the Government appears to have passed on all risks to the investor and to claim a certain percentage of the profit. It is left to the company to decide how it will recover the costs. This increases the risks for the company, which will be interested in keeping costs low.
In most investment agreements, including in the product sharing agreements used in our own oil sector, there is a threshold production level to allow for cost recovery. This permits the company to first recover its costs and only then share the profits. In such cases, it is essential to monitor the costs and keep them at a reasonable level. If the company shows costs as high, the Government’s share of the profits will be less. Now, there may not be much a Government can do to control costs, especially in a developing country where local qualified manpower available for strict monitoring is at a premium. Maybe the tax collection method is easier, but even there, the type of tax will determine the need to control costs. If the tax office is not clever enough, it can be hoodwinked. It is thus difficult to say which method will be best for us.

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