Opinion
Major changes in licence allocation process
2017-12-06
N.Ariuntuya
Some basic features of the system of issuing mining licences, in force for the past 20 years, have now been changed. Allocation after application is out, replaced by a selection process. This is a major policy change, and was hurriedly included among amendments to the Minerals Law that were quickly discussed and passed when the State budget 2018 was approved. It has become a regular practice in the past few years to adopt amendments to laws and regulations in the mining sector during the debate on the budget proposals, avoiding any meaningful discussion as MPs are focused on other issues. Details of this year’s changes can be read inside.
Taking part in the discussion on 2 November, Prime Minister U.Khurelsukh said, “It is time to stop the land trade that regularly follows the grant of a mining licence, triggering public frustration, disrupting justice, and creating chaos. The Government will abandon the wrong method of allocating mining licences on application, which has led to a few companies and individuals owning hundreds of licences which they then ‘transfer’ to others, in what is purely and simply an act of sale avoiding tax payments. We favour a law that makes the allocation of licences transparent, through selection and auction.” Earlier on 23 October, Minister of Mining and Heavy Industry D.Sumyabazar had temporarily suspended the regulations governing the grant of licence, justifying his decision by citing the number of complaints received from citizens on the issue.
Approval of these amendments to the Minerals Law has resulted in sudden and huge changes in the mineral sector, which hosts so many interests and is so important for development. We wait to see what the new method of selection for licence allocation will be and how quickly the grant of licences resumes.
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Until now, two principles have governed grant of mining licences. The first was to determine if the area applied for had been subject to geological and exploration work with money from the State budget or from private sources, while the second was to treat applications on a first-come-first-served basis.
Mongolia passed a Minerals Law in 1994 to lay the foundation of a new legal environment in the mining sector, while a revised law in 1997 was aimed at attracting foreign investment. According to M.Enkhsaikhan, who was Prime Minister then, the idea in 1997 was to give a push to exploration, and the first-come-first-served method was seen as a good way to expedite matters.
This open policy to attract and welcome foreign investment was certainly successful in doing that. World class exploration work led to discovery of gold, copper, coal and uranium deposits, the most important of which was Oyu Tolgoi. The flip side was that in 2005, areas under licence covered as much as 44.5% of Mongolia’s land area. Alarm set in, and the figure was gradually brought down -- to 31.3% in 2008, 16.3% in 2010 and 7.1% in 2017.
The public selection principle came into force in 2006 and the first 14 mining licences under this were allocated in 2009. However, the mechanism was soon put on hold and it resumed only in 2014, and has been followed until the latest decisions. However, as the graphs show, substantially fewer mining licences have been granted by selection than in the earlier application-based system. All the 14 licences allocated in 2009 were later cancelled as a fall-out of the corruption case against the then Head of the Mineral Resources Authority. A total of 112 valid licences have been issued since 2014, or 3% of the currently valid 3412 licences.
The ban imposed by Ts.Elbegdorj, when he was President, was mainly responsible for the reduction in licence allocation. The ban took effect on 20 April, 2010. On that day, 4,706 valid licences were on the records, of which 3,610 were exploration licences. The ministry and concerned agencies were asked to review and reorganize these. When this was done, the number was brought down to 1,000. Mongolia did not issue a single exploration licence until the end of 2014, a period of more than four years.
There was actually no legal prohibition on allocation of mining licences starting from 2015, but there were restrictions. Areas sought to be explored were to be identified by the Government and licences would be issued through either the application or the selection system. The experiment with allocation of licences based on online registration ended after a year. Despite high hopes that offer of new exploration permission would attract investment and thus get the economy moving, the results were disappointing. Applications for more than 70% of the total area opened up nationally were refused by the local community.
After a series of these stop-and-go decisions, the Government under J.Erdenebat decided to go in for intensive mineral exploration work. By 2017 spring, a total of 41.4 million hectares or 26.4% of Mongolia’s territory was made ready for new mining licences, with 31.2 million hectares put aside for application-based allocation, and the rest 10.2 million hectares for the selection method. Allocation by application was begun with some fanfare in August, but the exercise had to be suspended because of software malfunction without a single licence having been issued.
By its actions mentioned at the beginning of this editorial, the present Government has taken an almost 180-degree turn. It wants to be more cautious than its immediate predecessor, and we can only wait to see what tighter control delivers.
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In general, the decision has wide popular support. For long, people have had their suspicion about the whole issue of allocation by application, seeing it as only encouraging and facilitating an unholy licence trade. This distrust and discontent was acknowledged and sought to be redressed in the revision of the Minerals Law as initiated by President Elbegdorj in 2013.
One reason why his draft made no progress is that people felt that if selection were to be made the only way to allocate mining licences, it would create a base for similar corruption. Examples from many countries were cited where such a process had ended up being abused by individuals or groups, against the interests of genuine and beneficial investment. Allocation on a first-come-first-served basis seems more common worldwide even today.
Another reason given for rejecting the selection process is that in a country like Mongolia, with not too many completed exploration projects and where exploration work is taken up primarily by private companies, as the Government stays away from such high-risk activity, it will hinder the development of the geological and exploration sector. The international experience is that an open selection process creates fair competition and is beneficial for the nation only when there is good geological database, or a high probability of regular mineral discovery or strong competition for limited reserves, and all this in a state of general political and economic stability. None of these criteria would comfortably apply to Mongolia.
E.Odjargal’s article in the Mongolian section of this issue describes international practices on how to allocate mining licences. There is also a collection of the views of several stakeholders and specialists on the positive and negative features of the selection and open auction methods.
Open competition seems to be the government’s preferred mechanism. Its effects will be known only in the long term. One thing, however, is certain – few Mongolian companies will have a chance in a bidding competition. As we used to say, mining licences are for wealthy foreigners.