Minerals Law needs amendments,
carefully considered
carefully considered
Given the primacy of the country’s mineral resources in its development, it is no surprise that both the people and the lawmakers in Mongolia want to get their minerals law absolutely right. The original law was adopted in 1994, introducing new concepts of investment and mining standards in a country that had only recently embraced the market economy. An amendment was made in 1997, incorporating incentives to foreign investment and hailed as opening up the economy further. Private companies started to make mineral research and exploring.
Another amendment came in 1998. After some years of global stagnation in the mineral sector, commodity prices began to rise and more foreign investment began to flow into the mining sector of Mongolia. The amendment made in 2006 to reflect this was a contentious one, and was followed by another in 2008, three more in 2009 and one again in 2010. This has laid Mongolia open to charges from foreign analysts and investors that its legal environment is fickle, hindering long-term investment in the mining sector. The joke among them used to be that in Mongolia, you go to sleep under one mineral law and could wake up under quite another. It was not an unfounded complaint maybe, and even D.Batkhuyag, troubled by the various problems these frequent change posed to the work of the Mineral Resources Authority of Mongolia, which he heads, said, “The rules have to be unambiguous and must not be changed in the middle of a game”. But there is urgent need to address some anomalies and deficiencies in the present law.
Parliament is seized of the matter, but cannot be oblivious of the fact that mining, more than many other businesses, is a long-term process, where investments are usually big and it takes time for returns to start coming in. A change in the legal environment makes investment more risky, so the amendments it makes should be equitable as well as long-term.
It is a big error to think the Minerals Law provides the legal environment for activities in the mineral resources area only. In any case, “legal environment” is a very wide term, and several other issues, not directly related to mineral resources but inextricably related to them, have to be incorporated in the Minerals Law. Take, for example, the Special License Law which governs cancellation of licences issued under special considerations. However, the Minerals Law also has similar provisions, leading to widespread confusion on which law takes precedence if there is a contradiction.
The 2006 amendment dealt with “mineral accumulation”, without, however, being clear about exactly what the term meant. Geologists complained that even a heap of soil could be considered “mineral accumulation” and in, a way, the entire 1.5 million hectares of Mongolian territory can be seen as mineral accumulation.
Defining strategic importance
Another major confusion in the Minerals Law is how it defines a mineral deposit of strategic importance. Industry professionals want Parliament to make the definition more accurate and less ambiguous. At present, Article 4.1.12 of the Mineral Law says, “A mineral deposit of strategic importance means a deposit of a size that may have a potential impact on national security, or on economic and social development of the country at the national and regional levels or one that is producing or has a potential to produce more than five (5) percent of the total Gross Domestic Product in a given year.” Thus even a small deposit can be termed strategic if it is felt to have a potential impact on economic and social development at a regional level. Even a reserve of 100 kg of gold can be claimed important for local development.
Junior mining companies, working in the distant countryside with poor infrastructure, have been complaining about this for years, but the decision makers have not paid heed. The reference to a possibility of producing more than five percent of total GDP in a given year is also confusing. Which year’s GDP should be taken and will the figures relate only to mining products? GDP estimates change constantly, and with commodity prices always fluctuating in the world market, the financial value of a mine’s output cannot be calculated to everybody’s satisfaction.
There have been suggestions that to qualify as strategically important, a deposit must have more than 500 million tons of coking coal. There is no internationally followed standard in this, but whatever an individual nation decides is usually determined by clearly understood logic and is not enforced arbitrarily. The mining sector waits for Parliament to adopt clearer criteria to identify mineral deposits of strategic importance when it next amends the Minerals Law.
Mining with a license for exploration
The present Minerals Law is often criticised as being no more than a document of simple licence registration. Licensing in the mining industry is done under the 1997 amendment and allows exploration activities only with the investor’s money. This leads rich foreign companies to begin mining proper even when they hold a licence for exploration and no more. The President’s decree to stop any fresh issue of exploration licence went some way towards limiting illegal mining but Parliament allowed the order to lapse with effect from December 01 and the licence selling business will boom again, unless a Parliamentary resolution firmly puts an end to the practice.
The licence issue cannot be seen in isolation and has to be coordinated with the Land Law. Today there are 1,149 mining licences covering 520,900 hectares of area and 3,048 exploration licences over 25.7 millions hectares. The total area under licence is 16.7% of the territory of Mongolia. Many see the grant of so many exploration licences to foreign companies as a threat to national security, but we have been wooing foreign investors since the 1997 amendment and instead of rebuffing them, the Government should ensure a more efficient utilisation of this investment flow. The money should come and stay in Mongolia, instead coming in only to go out again, with some profit.
Another thing the Minerals Law does not and should do is to clearly define the period of validity of an investment agreement as well as of a mining licence. For example, the mining licence of the Oyu Tolgoi deposit will expire after 25 years but the investment agreement is for 30 years. It is anomalous to allow a licence extension simply because of the terms of an investment agreement.
Royalty rates
Revenue from copper export has been the mainstay of the budget for years. Coal will now earn as much as or more than copper. This calls for a change in Article 47 of the Minerals Law which deals with royalty rates. With no 68% windfall tax from next year, only more royalty charges can make up for the loss, even if they bring in less than 50% of what the windfall tax earned. A sliding royalty rate has been agreed on, but MPs are considering a special higher rate for the Erdenet copper. Not all of them are in favor of a different tax system. D.Damba-Ochir has expressed concern that a 20% tax on Erdenet Mining will be self-destructive. Same rates for all minerals will earn MNT58 billion while higher rates on copper will raise receipts by MNT150 billion. This is tempting in the short term but could very well be self-defeating in the long. However, the proposed sliding royalty rates should be coordinated with other taxes, including the import tax, so that investors are encouraged to bring in modern technology.
Mines-related regional development
The Minerals Law gives to local budgets 10% of the royalty collection, but this contradicts the General Budget Law. Besides, local Civil Representatives Assemblies have no legal authority over the area’s budget. Parliament has to empower local Governments to take 10% of the royalty. There should be local participation when mining companies prepare the technical and economic feasibility study for their projects so that money is earmarked for regional development. “We should at least have a say in the reclamation schedule,” says Tsog-Ornokh, Governor of Tsogttsetsii soum in Omnogovi province.
Mining professionals are unanimous in their support for making it a mandatory responsibility for licence holders to contribute to regional development. For example, Energy Resources is constructing a town for 15,000 people in Omnogobi while Erdenes Mongol will build one for 10,000 residents. Another new town is planned by Xinhua MAK, but the Minerals Law should make mining-based regional development a statutory obligation .
P.Tsagaan, Advisor to the President, is heading a team charged with recommending amendments to the Minerals Law. Its suggestions should be submitted for public debate so that the law becomes an instrument of sustainable development and also does not need further revision for a reasonable period.
Another amendment came in 1998. After some years of global stagnation in the mineral sector, commodity prices began to rise and more foreign investment began to flow into the mining sector of Mongolia. The amendment made in 2006 to reflect this was a contentious one, and was followed by another in 2008, three more in 2009 and one again in 2010. This has laid Mongolia open to charges from foreign analysts and investors that its legal environment is fickle, hindering long-term investment in the mining sector. The joke among them used to be that in Mongolia, you go to sleep under one mineral law and could wake up under quite another. It was not an unfounded complaint maybe, and even D.Batkhuyag, troubled by the various problems these frequent change posed to the work of the Mineral Resources Authority of Mongolia, which he heads, said, “The rules have to be unambiguous and must not be changed in the middle of a game”. But there is urgent need to address some anomalies and deficiencies in the present law.
Parliament is seized of the matter, but cannot be oblivious of the fact that mining, more than many other businesses, is a long-term process, where investments are usually big and it takes time for returns to start coming in. A change in the legal environment makes investment more risky, so the amendments it makes should be equitable as well as long-term.
It is a big error to think the Minerals Law provides the legal environment for activities in the mineral resources area only. In any case, “legal environment” is a very wide term, and several other issues, not directly related to mineral resources but inextricably related to them, have to be incorporated in the Minerals Law. Take, for example, the Special License Law which governs cancellation of licences issued under special considerations. However, the Minerals Law also has similar provisions, leading to widespread confusion on which law takes precedence if there is a contradiction.
The 2006 amendment dealt with “mineral accumulation”, without, however, being clear about exactly what the term meant. Geologists complained that even a heap of soil could be considered “mineral accumulation” and in, a way, the entire 1.5 million hectares of Mongolian territory can be seen as mineral accumulation.
Defining strategic importance
Another major confusion in the Minerals Law is how it defines a mineral deposit of strategic importance. Industry professionals want Parliament to make the definition more accurate and less ambiguous. At present, Article 4.1.12 of the Mineral Law says, “A mineral deposit of strategic importance means a deposit of a size that may have a potential impact on national security, or on economic and social development of the country at the national and regional levels or one that is producing or has a potential to produce more than five (5) percent of the total Gross Domestic Product in a given year.” Thus even a small deposit can be termed strategic if it is felt to have a potential impact on economic and social development at a regional level. Even a reserve of 100 kg of gold can be claimed important for local development.
Junior mining companies, working in the distant countryside with poor infrastructure, have been complaining about this for years, but the decision makers have not paid heed. The reference to a possibility of producing more than five percent of total GDP in a given year is also confusing. Which year’s GDP should be taken and will the figures relate only to mining products? GDP estimates change constantly, and with commodity prices always fluctuating in the world market, the financial value of a mine’s output cannot be calculated to everybody’s satisfaction.
There have been suggestions that to qualify as strategically important, a deposit must have more than 500 million tons of coking coal. There is no internationally followed standard in this, but whatever an individual nation decides is usually determined by clearly understood logic and is not enforced arbitrarily. The mining sector waits for Parliament to adopt clearer criteria to identify mineral deposits of strategic importance when it next amends the Minerals Law.
Mining with a license for exploration
The present Minerals Law is often criticised as being no more than a document of simple licence registration. Licensing in the mining industry is done under the 1997 amendment and allows exploration activities only with the investor’s money. This leads rich foreign companies to begin mining proper even when they hold a licence for exploration and no more. The President’s decree to stop any fresh issue of exploration licence went some way towards limiting illegal mining but Parliament allowed the order to lapse with effect from December 01 and the licence selling business will boom again, unless a Parliamentary resolution firmly puts an end to the practice.
The licence issue cannot be seen in isolation and has to be coordinated with the Land Law. Today there are 1,149 mining licences covering 520,900 hectares of area and 3,048 exploration licences over 25.7 millions hectares. The total area under licence is 16.7% of the territory of Mongolia. Many see the grant of so many exploration licences to foreign companies as a threat to national security, but we have been wooing foreign investors since the 1997 amendment and instead of rebuffing them, the Government should ensure a more efficient utilisation of this investment flow. The money should come and stay in Mongolia, instead coming in only to go out again, with some profit.
Another thing the Minerals Law does not and should do is to clearly define the period of validity of an investment agreement as well as of a mining licence. For example, the mining licence of the Oyu Tolgoi deposit will expire after 25 years but the investment agreement is for 30 years. It is anomalous to allow a licence extension simply because of the terms of an investment agreement.
Royalty rates
Revenue from copper export has been the mainstay of the budget for years. Coal will now earn as much as or more than copper. This calls for a change in Article 47 of the Minerals Law which deals with royalty rates. With no 68% windfall tax from next year, only more royalty charges can make up for the loss, even if they bring in less than 50% of what the windfall tax earned. A sliding royalty rate has been agreed on, but MPs are considering a special higher rate for the Erdenet copper. Not all of them are in favor of a different tax system. D.Damba-Ochir has expressed concern that a 20% tax on Erdenet Mining will be self-destructive. Same rates for all minerals will earn MNT58 billion while higher rates on copper will raise receipts by MNT150 billion. This is tempting in the short term but could very well be self-defeating in the long. However, the proposed sliding royalty rates should be coordinated with other taxes, including the import tax, so that investors are encouraged to bring in modern technology.
Mines-related regional development
The Minerals Law gives to local budgets 10% of the royalty collection, but this contradicts the General Budget Law. Besides, local Civil Representatives Assemblies have no legal authority over the area’s budget. Parliament has to empower local Governments to take 10% of the royalty. There should be local participation when mining companies prepare the technical and economic feasibility study for their projects so that money is earmarked for regional development. “We should at least have a say in the reclamation schedule,” says Tsog-Ornokh, Governor of Tsogttsetsii soum in Omnogovi province.
Mining professionals are unanimous in their support for making it a mandatory responsibility for licence holders to contribute to regional development. For example, Energy Resources is constructing a town for 15,000 people in Omnogobi while Erdenes Mongol will build one for 10,000 residents. Another new town is planned by Xinhua MAK, but the Minerals Law should make mining-based regional development a statutory obligation .
P.Tsagaan, Advisor to the President, is heading a team charged with recommending amendments to the Minerals Law. Its suggestions should be submitted for public debate so that the law becomes an instrument of sustainable development and also does not need further revision for a reasonable period.
The Mongolian Mining Journal 2010.12
