From draft to State Policy – a long journey

By S.Bold-Erdene

The State Policy in the Mineral Sector was passed last month after being discussed for over two months. President Ts.Elbegdorj had proclaimed a decree last March and a working group was set up to prepare a draft policy for Parliament to discuss. After working for almost half a year, the working group submitted the draft to the State Great Khural at the Fall Session.

As the policy would be in force until 2025, the document continued to draw attention from those in the sector throughout these months. Now that it is approved, some amendments will be made to the Minerals Law to bring it in line with the policy. Once this exercise is completed, there will be no further major amendments to the laws, thus ensuring stability in the legal environment, the lack of which has always been a grouse of investors.

The original draft underwent a sea change on its way to being approved as the binding State Policy in arguably the most important sector in the Mongolian economy. Some MPs blamed the Government and the Ministry of Mining for preparing such a poor document as the first draft, while Ministry officials were appalled at the changes MPs proposed in the original draft, finally eliminating almost 30 per cent of its contents. Sometimes the views of politicians were in conflict with those of the Ministry of Mining and also professional associations, but, of course,Parliament was supreme.

Strategic deposits remain in place

The most controversial article was the one on deposits of strategic importance. Experts in the sector have been strongly urging for the last couple of years that the term ‘strategically important deposits’ should be replaced by ‘strategically important minerals’. The original draft also counted underground water, rare earth elements, and radioactive minerals as strategically important. During the discussion, an article was added: “List deposits of radioactive minerals, rare earth elements, underground water and some gold, copper, coal and iron deposits that have great amount of reserves as strategically important and do their prospecting, exploration and processing with State involvement”. Not long after, this was changed to “Increase the economic efficiency of the strategic deposits listed in Decree No.27 of the State Great Khural made in 2007, by improving State monitoring, management and responsibility. Develop cooperation between the State and the private sector.”

Parliament thus decided to “restore” the strategically important deposits and operate them through the so-called cooperation between the State and the private sector which has been talked about for too long. For now, the number of strategically important deposits remains at the current 15, with 39 more under consideration to be added. A decision on the latter was expected by some but it did not materialise.

An amendment may be made in the Minerals Law to change the criteria for listing as strategic deposits. One condition now is that such a deposit must produce more than 5 percent of the nation’s GDP, but this may give way to the relative importance of a deposit to national and economic security, and competitiveness in the region. That way, the number of deposits will come down and only those similar to OyuTolgoi in size and capacity will be considered. Uranium and rare earth elements deposits will also have a chance to make the grade. There is no consensus, however, on whether the State will own these deposits. The Mineral Law says that the State shall have between 34% and 50% ownership in deposits of strategic importance. There is a fair chance that the State will not have any ownership but just cooperate with the private sector through bilateral and deposit-specific agreements.

The original draft had an article that said, “Improve the State’s involvement in registration, licensing and monitoring levels and restrict mineral prospecting and exploring activities.” After several changes, it was finally approved as keeping the State’s involvement at an‘appropriate level’. This amuity might have been deliberate, as it may be used to justify State ownership also. The Policy favours State ownership of shares in mines to be jointly operated with the private sector. Entities under full State ownership will be turned into joint stock companies in phases.

Retaining deposits, and the Treasure Fund

During the final discussion, there was a long debate over inclusion of one article. The Justice Coalition and the People’s Party group insisted on retaining some mineral deposits for use in future“to safeguard national security, maintainenvironmental balance and protect the interest of the future generations”. The Justice Coalition argued that if another deposit like OyuTolgoi and TavanTolgoi is discovered, it should be preserved for future use. The demand had also been part of the election manifesto of the coalition.

Those against it pointed out that as at the end of last year, licences covered only 10 per cent of the territory of Mongolia and mining licences only 0.6 per cent of this. More than 70 per cent of the country is either reserved for special use or protected by the long-named law. They made the point that preserving deposits to be found from the remaining 30 per cent of the territory for future use would not be appropriate. The majority agreed withthem and inclusion of the article was not supported, more so because there already is a whole chapter on taking a mineral deposit area to the State reserve.

Everyone will agree that it’s not wrong to preserve mineral deposits for future use. But are they to be left untouched, lying under the ground, or are they to be operated and the profit kept in a fund for the future?
Another new concept in the policy document is the Treasure Fund. This is the first time that it will be State policy to put a certain percentage of earning from the mineral sector in a Treasure Fund to be used only later. The Ministry of Finance is drafting a law on such a fund. Details are still to be worked out but the present thinking is to transfer all royalties into that fund.

Ninjas and non-government organisations

“Ninjas” are still in a limbo, at least legally. The original draft called for “restriction and suspension of the illegal operations of individual mineral explorers and creation of a legal environment for them to operate as a legal body”. MPs got this changed into:“The State shall support the individual mineral explorers to work in cooperation with others within the legal structure and improve the related legal regulations”. Basically this means Parliament wants the State policy to “favour” the nearly 60,000 ninjas. MPs must have been worried about the social and economic impact of forcing so many people into unemployment. Gold miners had once said they would hire ninjas if a ban was imposed on illegal mining. The Minerals Authority found that ninjas work in 64 soums of 20 aimags. It is unlikely that many of them would voluntarily agree to accept regulations, as the MPs piously hope. The general feeling is that ninjas are destroying the environment and stealing from public property without paying any tax. The MPs’ decision to make it State policy to legalise ninjas directly contravenes an article in the Mineral Law that prohibits unauthorised mineral extraction.

A provision was pushed for inclusion by the Justice Coalition during the discussion in Parliament. This would have allowed non-government organisations to seek a legal order on a mining company to pay monetary compensation for the harm done to the environment by its activities. The amount of the fine would beput into the State or the local budget, and the NGO would receive a reward for its work. There was no majority support for this, as MPs realised that courts would be inundated by such claims by NGOs against mining companies. NGOs deserve support when they seek to protect the environment, but approval of this article could very well have encouraged them to put extortionist pressure on investors.

Policy Council and other issues

Articles except for those regarding ownership and shares -- in which politicians are mostly interested -- were passed without much change. These included those on the Policy Council, the Minerals Exchange and the Geology Department.  The Professional Council of Minerals is being abolished and, in keeping with international norms, its responsibilities will be transferred to professional associations and experts. Accredited geologists will work on reserves classification, affording them opportunities for international exposure.

The proposed Minerals Exchange will bring transparency to export deals and will help exporter companies in myriad ways, especially in providing information about market trends.

The concept of a Policy Council was there in the original draft but the months of discussion have embellished it. The original idea was for a centre for studies of affected parties’ claims when a law was sought to be changed, but the Policy Council has finally become the place where all proposed laws, rules and regulations will be reviewed from all aspects. It will be a totally independent body, with members from the Government, the private sector and professional associations. This is a most welcome addition to the sector.

The Policy stresses the need for transparency in all agreements with a local governing authority. The related article in the Mineral Law is silent about ensuring that such agreements are negotiated openly and that they actually help in local development and improve residents’ lives. The Policy makes it mandatory to keep agreements with local authorities transparent and to reflect the local residents’ opinions. People’s support for mining companies operating in their area will come only when they see the positive effects of mining on local development.