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B. Nyamtaishir Expresses Conditional Support for Wealth Fund Draft Law, Cites Areas Needing Attention

Nyamtaishir Byambaa

I spoke with B. Nyamtaishir, the Chairman of the Policy Council for "Mongolyn Alt" (MAK) LLC, about the draft law concerning the Sovereign Wealth Fund.

-The State Great Khural (Parliament) of Mongolia is currently deliberating the draft law on the Sovereign Wealth Fund. Given that you hold special permits for strategic deposits and have over three decades of experience in the mining sector, I have a question: Do you support this draft law?

-According to Article 6.2 of Mongolia's Constitution, the land, its subsoil, and the wealth therein are the public property of the state. I support this law because it aligns with our constitutional principles. It is only fitting that the strategic deposits are owned by the people in a 34:66 ratio, without undermining the terms established at Oyu Tolgoi. The Mongolian people rightfully deserve to equally and fairly benefit from our national resources.

-How thoroughly have you examined the draft law? What unique features do you identify in the draft on the Sovereign Wealth Fund?

-The draft law proposes creating several funds: the Future Heritage Fund, the Accumulation Fund, and the Development Fund, designed to manage and allocate state wealth effectively. I have carefully compared this with the Future Heritage Fund legislation that has been effective since 2017. For instance, where dividends from state-owned enterprises previously fed into the Future Heritage Fund, the proposed legislation redirects them to the Development Fund.

Additionally, the law proposes reallocating the surplus from last year's mineral revenue performance formerly 20% to the Future Heritage Fund and 50% of additional revenue from tax reforms also to the Future Heritage Fund—towards the Development Fund. Royalties from newly discovered deposits would continue to be allocated to the Future Heritage Fund. These shifts in fund sources are significant and appropriate. At its core, it's essential to clarify what the Sovereign Wealth Fund actually is. Personally, I hold distinct philosophical views and intentions about the sources of the Sovereign Wealth Fund.

-Could you clarify and elaborate on your different philosophical views and ideas?

I have been in the mining industry for over 30 years, continuously contemplating how to equitably and justly distribute our natural resources among all citizens. I even wrote an article in 2005 to express my views on this issue. A few years ago, I developed a small pamphlet on the Sovereign Wealth Fund and Strategic Deposits, which I distributed to certain members of the Parliament and the Government. This pamphlet included a thorough study of international trends and practices. The concept of the Sovereign Wealth Fund dates back to the 1800s and has a history of establishment in various countries around the world. You might be aware that in 2008, 34 countries convened in Santiago, Chile, to adopt an agreement on the management of Sovereign Wealth Funds.

The core idea is quite simple: the income from exploiting natural resources, namely royalties and their accumulation, should be dedicated to the people because natural resources belong to all citizens. Everyone should benefit from them. This equitable distribution should come through royalties, which are payments that accrue directly from sales revenue, regardless of the profitability of the production.

Royalties should be passed on to the entire population as they use the resources. However, under the current law and the newly proposed draft, funds are divided, with 65% being allocated to a Budget Stability Fund and a Regional Development Fund, leaving a minimal portion for public benefit. Most of it is likely to be used to cover budget deficits. This is incorrect. In my view, royalties should be fully allocated to the Future Heritage Fund to ensure that the wealth of the fund truly belongs to the people and benefits future generations. If this were the case, the mining sector wouldn't be viewed negatively as it often is now; instead, it would receive public support. Therefore, a law that is right and suited to real life needs to be enacted. In short, there are important aspects to focus on in the draft law.

-What specifically should be considered?

The Future Heritage Fund should be diversified, sustained over the long term, and grow through prudent investments. However, looking at the draft law, I doubt these conditions will be met. Specific sources for the Future Heritage Fund appear vague, with government-controlled allocations to other funds, risking uncontrolled spending on politically motivated and unprofitable projects.

From this arises the recommendation that special attention be paid to the management and expenditure structure of the Future Heritage Fund. My view is that the management and supervision of the Future Heritage Fund should be under the strict oversight of the Mongolbank (Central Bank of Mongolia), independent of political influence, and transparent.

Furthermore, the appointment and removal of the governing board and management team of the Future Heritage Fund, as well as amendments to the Fund’s law, should be decided by a two-thirds majority of Parliament, following a public consultation process. This would ensure democratic involvement and oversight in the governance of the fund.

-In response to the proposed draft law on the Sovereign Wealth Fund, there are accompanying amendments to the Minerals Law aiming to limit ownership of deposits deemed strategically significant, specifically capping any single entity or affiliated parties from holding more than 20% of such deposits. Could you elaborate on your views regarding this regulation?

As it stands, Article 5.6 of the Minerals Law mandates that any holder of a strategically important deposit must list a minimum of 10% of its shares on the Mongolian Stock Exchange. This provision seeks to democratize ownership by broadening public access to the shares of these deposits.

The development process of any mining deposit is lengthy and capital-intensive, from initial exploration and reserve determination to feasibility studies and infrastructure development, culminating in establishing a market presence. Globally, for instance, it can take 15 to 20 years to bring a copper deposit into production. Furthermore, the mining industry is marked by significant risks including potential unprofitability due to fluctuating market conditions and mineral prices, the possibility of mine closures, or entire investments becoming non-viable.

In the global context, owning a controlling interest or being a strategic investor inherently involves absorbing these risks, making prompt and judicious decisions, and managing financing and investment effectively. This role is critical not only for governance but also for the economic returns of the project. If the proposed amendments to the Minerals Law are enacted, careful consideration of the potential adverse effects is essential.

-What adverse effects do you anticipate?

If implemented, the restriction preventing any single investor or consortium from holding a controlling interest could lead to delayed decision-making and a fragmented strategic approach. This situation might deter investment and financial backing, potentially slowing down major mining projects, sparking disputes among shareholders, and prolonging the operational timeline for projects. Such delays could prevent strategic deposits from entering the economic cycle, adversely affecting the development of the sector.

Additionally, there is an important context to consider. Past episodes, like those during the "Development Bank" and "Coal" eras, have shown state officials and businesses accruing significant wealth, which was visible to the public. There is a concern that the proposed legal amendments could potentially facilitate money laundering or lead to strategic shares falling into foreign hands, either directly or indirectly. It is imperative to carefully regulate and monitor these changes to avert scenarios akin to a "Strategic Deposits scandal."

-How could amendments to the draft law on the Sovereign Wealth Fund be modified to have significant relevance for the state, society, and citizens?

The mining sector often becomes a focal point of political party promises during elections and a subject that divides public opinion, impacting sector development, investment, and the legal environment adversely. Additionally, consider the extensive negative impact on Mongolia's reputation and image due to external investments.

Hence, revising Article 5.6 of the Minerals Law, which currently requires "at least 10% of shares of strategically important deposits to be listed...," could be beneficial. Proposing an increase to 34% exclusively for Mongolian citizens through the Mongolian Stock Exchange could streamline existing laws and address issues comprehensively.

Furthermore, it's time to reassess the definition of strategically important deposits. The list of such deposits was finalized nearly 17 years ago, and some listed as strategic have already been depleted. Initially, this list was politically influenced rather than scientifically based or aligned with international standards. It included all coal deposits, yet today, the global trend is moving away from coal due to environmental concerns. With our southern neighbor announcing a complete coal phase-out by 2060, should we continue to label these resources as strategic?

Globally, there isn't exactly a term like "strategic deposit." Instead, the concept of "critical minerals" exists, which pertains to resources crucial for national security. Most countries consider water, oil, natural gas, radioactive minerals, and rare earth elements as part of their strategic essential resources. This issue needs to be aligned with international standards and regulations.

In conclusion, deciding on which laws to enact is the prerogative of the State Great Khural. Our role is to comply with and implement the laws once they are established.

Journalist: Baasansuren T.

Source: Daily Newspaper of Mongolia (Өдрийн Сонин)


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