“An investor prefers things to be more predictable, less uncertain”

2019-07-18 10:19

David Sproule, Ambassador of Canada to Mongolia, tells E.Odjargal that his country is eager to share its experience in mining but investors will not come here until they feel the environment is stable, with rules for them not changing with every change in government. He also sees risks as being an inevitable corollary of ownership, and would prefer a government not to own mines, but to be satisfied with receiving taxes and royalties.

Let’s start with the 8th round table meeting between our two governments in Ulaanbaatar on 4 June. What important decisions were taken to increase cooperation in areas such as the economy, trade, investment, mining, and infrastructure, and what was noted as the major accomplishments of the past cooperation?
We have these meetings every two years. We reviewed the full range of issues, programmes and projects to make sure both countries are working hand in hand to get towards a common goal. The recent meetings were very successful. An Assistant Deputy Minister was in town to represent Canada and the Mining Minister led the Mongolian delegation, which was very appropriate, given the very important role Canada plays in the mining sector here. It is pretty exciting to see how the relationship between Canada and Mongolia has been growing not only on the investment side but also on the development side, not to mention the person to person areas, including education, culture, and sports, where we have been promoting ice hockey among Mongolian children. We also have a very large programme to help professionalize the Mongolian civil service. Our support to both the government and the private sector is meant to help Mongolia be more competitive and create the kind of environment that will attract investment. 

Canada is one of our third neighbours and strategic partners. How much is the trade turnover between our two countries and has this been increasing in recent years?
In the 46 years since diplomatic relations were established, our trade and investment ties have improved dramatically, from being almost zero. Canada is now the biggest investor in the mining sector which is, of course, Mongolia’s most important sector. So it is very significant on the commercial side.  On the development side, Canada is a very active partner, with programmes worth between $6 million and $8 million a year. Much of that is devoted to assisting Mongolia in developing its regulatory and oversight regime for the mining industry. So we are making a contribution to both investment and development. And outside mining, we have a very active Canada Fund Program which involves small grassroots projects to assist Mongolian NGOs providing services in areas such as human rights, the environment, protection of women etc.  

What are the new areas where cooperation could be extended?
Canada is not very active in investment in and development of infrastructure in Mongolia. 

How much investment has come from Canada in the last two years and in which sectors? 
I can’t give you the exact figure. There are ten major investors and maybe double that number of suppliers and contractors who bring their expertise here and employ Mongolians. I think the investment in the last couple of years has stayed the same or decreased, though such statistics could be a little deceptive. Oyu Tolgoi is spending a lot of money now on the underground development and this masks the fact that new investors are not coming. If you ask them why they stay away, I think the investors would say that the investment environment is uncertain. 

They are worried about how governments change frequently, and how new governments bring new regulations and also new officials who interpret the rules in a changed manner. For sure, the political controversy over the most important investment in Mongolia has had an impact. Smaller investors wonder what kind of difficulties they might get into if a really large investor has so much trouble. This is why investment has gone down at least in the two years that I have been in Mongolia.

What sectors do you see that can attract investment?
Well, obviously the most important sector for investors from Canada, and from many other countries, is mining, and as we are the number one investor there, we will continue to be very active in mining. We also hope to be able to provide a lot more services and supply contractors. Canada is also looking into more possibilities of being able to work in the agricultural sector, and we are organizing visits to Canada to help Mongolians learn about the techniques used there, leading to more collaboration on the ground. We already have a memorandum of understanding for collaboration in that area. 

Construction is another area which has possibilities.  Mongolia is undergoing something of a building boom as it focuses on providing housing for its people. Canada has special know-how and experience in cold weather construction, and we believe that there will be a lot of opportunities for sharing of information because Canada is familiar with the climatic conditions here and also with how to build in them.
 

What should Mongolia do to attract more investment?
I can tell you how it is perceived from the investors’ point of view: Too many regulations, too many different officials, too many interpretations, too many changes and a lot of criticism of investors even when they contribute significantly to the Mongolian economy and the welfare of the average Mongolian people. 

I think I am just voicing some of the concerns of foreign investors who come and take tremendous risks, sometimes in a country never invested in before. They make a financial commitment, usually quite large. Then the rules change and they get criticized.  And you know what happens? It is happening right now. The investors decide to put their money in another country, maybe Canada, where they will not have those uncertainties, where the rules would not be changed after they enter the field. An investor prefers an environment that is more predictable, where things will remain as the government said they would at the time of the first investment, and not change because the rules are implemented differently, or because new officials would interpret them differently. The message I am getting from investors who are here in Mongolia is that rules and conditions are always changing for them.

How many Canadian companies are operating here and in which sectors? Are there new companies interested in coming here?
We have ten significant investors in Mongolia, almost all of them in mining. I think that is understandable given Canada’s long history and experience of mining and the opportunities here. Then we have 20-odd companies, mostly in mining, which are active but not major players, some providing contractual services and some supply companies. But we are trying to encourage more activity in other sectors, as I said, such as agriculture and construction. 

Over the years Canadian companies have been going away from the Mongolian mining sector. Cameco and Khan Resources come to mind, and then there was Centerra Gold. How do you see the situation? What has been the main problem for these companies?
I shall not go into these specific cases because Khan Resources left before I came here and though Centerra had been here for a long time, my knowledge of and involvement in their work here was minimal. Let me talk generally. Mongolia is a very attractive investment destination because it has such an abundance of natural resources. I think the biggest difficulty, obstacle, and frustration for investors is the uncertain political environment here. Governments change a lot, the regulations change a lot, and the officials change a lot. What investors want more than anything else is certainty. They want to know what the rules are and want these rules to be in place over a long term so that they can plan, can risk their capital. If the rules change, maybe the initial calculations about the returns on the investment change too. So I think that the most important thing that foreign investors and traders would like to see is more stability and more certainty, particularly in the rules related to taxes. 

Turquoise Hill Resources is listed in the Toronto Stock Exchange and 20 percent of the costs of the present development of Oyu Tolgoi are being met with funds from Canadian Export and Development Organization, and a Canadian bank. What do you say about the current situation in the project, especially about risks?
There is no doubt that reports on the work of the working group have created general uncertainty in the industry. All reports suggest that investment in mining is down. 

So the committee’s efforts have had an impact, though mostly negative. I think it is rare to review an investment agreement, for if one of the parties to the agreement wants and manages to change it unilaterally, that makes it difficult to have faith in any contract, which makes things very difficult for an investor. If you see a government, after signing an agreement inviting a major investment in its country, then constantly criticizing the project and changing its terms and conditions, you have to ask yourself whether any investor should proceed to invest in that country. Unfortunately, Oyu Tolgoi has been politicized by parliamentarians and government leaders. I think Mongolia will be better served if it turns its attention to attracting future investments and to setting up other large projects, generating employment and tax revenue, as well as supplementary benefits to the economy. Mongolia must exploit its great advantages. Right now, I think the problems flowing from the work of the working committee have created uncertainties in the mind of not only one very major and important investor, but to all investors. 

I understand that other parliamentary working groups are now studying the report, and I think it will all turn out OK. I am not a pessimist. As for how it will affect Canadian investors and vendors, I think you have to ask them. I can only tell you that they have ventured a lot of capital and taken risks and are very keen to be sure that their investments are safe and protected. 

They and other foreign investors here are watching developments very closely.                   

Will the FIPA, signed between our two countries in 2016 and ratified in 2017 to protect investments and help companies operate unobstructed, play a role in the current situation?
First of all, it is important to understand that FIPA (Foreign Investment Protection Agreement) can be brought into play only when there is a formal request from an aggrieved party. There has so far been no complaint. If there is one, we shall see how it works in practice. Signing it was an important signal from the Government of Mongolia that it was committed to treating investors fairly to ensure that foreign investors obtained the same and equal treatment that local investors did under the law. This commitment has not yet been tested but it is formally still very much there. 

How interested are your country’s investors in the TT IPO?
Well, I can’t speak for them. Your Mining Minister talked energetically about TT at PDAC and also spoke to investors, but I am not really in a position to say whether or not the IPO will be an attractive proposition for Canadian investors. I do give the Minister great credit for the effort he made, and I think the government is keen to have another large project, especially when investments in Oyu Tolgoi are likely to naturally taper off when its construction ends. It is important that another large project takes up the space and provides a large inflow of investment for construction and related infrastructure.              

Canada has more than one hundred years’ experience of mining. You have often talked about the lessons your country learned from its mistakes and used that knowledge to achieve its present success. Our government is planning to put all strategic mines under the ownership of one state-owned company, hoping to reap bigger profits. Do you think this is an instance of not learning from past mistakes?
It is quite true that Canada has been mining for decades, even centuries. Like many other countries, we also learned from our mistakes. That is how we have improved our investment regime, worked to protect our environment, and understood the need to consult with local stakeholders, communities and indigenous groups which might be affected by an investment. I should point out that mining primarily is the responsibility of our individual provinces, whereas here it is very much under the control of the central government. So we have many different ways of dealing with our mining industry, but all provinces know and act on the knowledge that the investor wants certainty, wants to know beforehand what risks he will undertake. If the rules change all the time, he will be very nervous about investing his money. 

I think it is also an issue for Mongolia whether or not it wishes to have an ownership stake in the mining industry. Going by history, it is not surprising that the state-owned enterprise model would be very attractive, but it involves risks. If the government is going to be the investor, the stakeholder and the shareholder, it has to accept risks just like private industry. It can make profits, but it can also experience losses. The public is not happy about the latter, and always hopes for the former, as all owners do. But that is not how businesses go, especially if you have to borrow the money you invest. The costs of repayment delay the returns you get on the investment. 

If I look back at the Canadian experience, decades ago Canadian governments used to  become shareholders in companies by making part of the investment but for many years now the trend has been that the government does not invest and go for ownership stakes, instead satisfying itself with the taxes and royalties. This puts the government in a position where it benefits from another’s investment, without sharing risks with the private investor. Risks are an inevitable corollary of ownership, and that could sometimes be difficult if you are answerable to the general public as shareholders. We have been moving away from the concept of state-owned enterprises, leaving ownership to private companies. I think our successive governments have found it better to abandon the risks associated with ownership because they have competent officials to collect taxes and royalties.   

In Canada, the indigenous people’s voice is heard with respect. How do Canadian miners reach an understanding with the local community? Do they contribute to the development of infrastructure by building towns and roads?
In Canada the location of the project is important. If a project takes up indigenous land, their representatives will participate in discussions about the investment and review all plans seriously. This is standard practice because ultimately the success of a project depends on having community support, including of those living in the towns, municipalities and other areas that would be affected by the project. You might know that the goal of one of the two large projects to assist the government here is to help Mongolia reach out to and consult local communities at the aimag level. They are the ones to be directly affected and they want to have a voice in the development of the project not only to ensure that it brings adequate benefits to them, but also that it does not damage the environment that they understand best. This is how everybody benefits, and this is the concept that Canada has gradually developed. 

And I go back to a question you asked earlier about Canada’s experience. We have learnt that in the case of a mining project, it is always best to take the time to consult with the people who would be affected by it and seek their views on how the project is to be developed. Usually the local people are convinced and offer not just cooperation but sometimes active support also. This way of getting local involvement in the project is an example of what we can share with Mongolia from our own experience.   

In Canada, before companies are granted any of various licences, which basically are permissions to invest, they have to submit their plans to the government. Usually these include the results of their talks with the local community, be it at the municipal, provincial or district level or even with individual groups. The company has to decide what it plans to do in terms of providing infrastructure and services in the areas where the project will come up. Of course, this must have the concurrence of the people, and also coincide with the government’s own ideas and plans. In Canada, when a company invests, it brings money to the community, and pays taxes and royalties to the government. And then the government has to decide if it will spend that money on education, or health care, or roads or put it in the treasury. We don’t have companies providing services and developing infrastructure as these are normally the responsibility of elected officials. 

How are things going with SESMIM, meant to improve the management of extractive industries, and MERIT, which is for supporting responsible resource management?  
Yes, these are our two major projects here at present. Let me talk about SESMIM first. This is meant to provide a sort of direct assistance to certain ministries to assist them in their oversight of the mining sector. These are principally the Mining and Heavy Industry and the Environment ministries but would at times include the finance ministry and other ministries. I think it’s been quite successful as a lot of work has been done in terms of improving oversight of measures to protect the environment. One major target area of SESMIM is mine closure with little or no environmental damage. It’s a complicated issue and we in Canada have learnt by trial and error some of the ways to do that, and maybe Mongolia would benefit from our experience. That project is coming to an end and I think it’s been very successful. Intensive training has been provided to officials and I know the mining minister is very pleased with the overall results. 

The other big project is MERIT and much of the work in it in the last few months has been focused on community involvement. We have interacted at the province level with local officials,  community groups and NGOs to find out how to benefit from any investment that comes into the community and there is much to learn about how to go about it in such a way that everybody feels positive about the investment and we manage to avoid some of the consequences when people disagree and when everybody who should have an opinion to offer doesn’t get an opportunity to do so. That is a lot of work and the project staff have worked not only with officials and decision makers here in Ulaanbaatar but they have also gone out into the provinces to speak with the decision makers there. I think all this has been very beneficial and I would say that Canada is proud of both projects because we believe that as the largest investor in the mining industry here we should take, and now have taken, the responsibility to assist Mongolia.

I have to end by saying that utilising opportunities for investment is fine but we also must tell and show Mongolia what we have learnt over decades. Only shared experience can help Mongolia maximise the benefits from its mineral resources. We have no doubt that much of Mongolia’s economic future depends on successfully managing its mining sector. Mongolia has one huge advantage and we would like it to make the most of it, for the sake of the Mongolian people. 
 

Сэтгэгдэл (1)

  • Ivan Somlai (50.98.7.41)
    Very good and pertinent points were made by the Ambassador. What I may add, though, is that certain Canadian support should be better vetted ab initio for its relevance; its ability to honestly and clearly communicate; its efficiency in local collaboration; its selection of particular staff; and its effectiveness in its overall management and accountability.
    2019 оны 07 сарын 23 | Хариулах
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