Mongolia in global mining rankings: trends, challenges, and ways ahead Текст научной статьи по специальности «Экономика и бизнес»

ПРОБЛЕМЫ МИРОВОЙ ЭКОНОМИКИ PROBLEMS OF INTERNATIONAL ECONOMY

УДК 338(517.3) DOI 10.17150/2500-2759.2016.26(4).629-634

MONGOLIA IN GLOBAL MINING RANKINGS: TRENDS, CHALLENGES, AND WAYS AHEAD

Bat-Ochir Оyunchimeg

Technology, School of Geology and Mining Engineering Mongolian, Ulaanbaatar, Mongolia

Article info

Received February 20, 2016

Accepted May 31, 2016

Available online August 2, 2016

Keywords

Economic growth; institutional quality; Corruption Perceptions Index; Index of Economic Freedom; Doing business; Global competitiveness; global mining rankings; overall Investment Attractiveness; Policy Perception Index; Best Practices Mineral Potential Index; Behre Dolbear's Ranking of Countries for Mining Investment

Abstract

This paper considers the institutional challenges for development of the Mongolian economy. Based on data for last 5 years Mongolian institutional qualities measured by world and global rankings such as Corruption Perceptions Index of Transparency International, Index of Economic Freedom of the Heritage foundation, 'Doing business' report of the World Bank and Global competitiveness report of World Economic Forum. It has been revealed that Mongolia's Index of Economic Freedom and 'Doing business' ranking has significantly decreased and there have been no significant positive changes to Mongolia's competitiveness since 2010. This paper examines that Mongolia has fallen in the global mining rankings, as the latest Fraser Institute annual mining survey and Behre Dolbear's Ranking of Countries for Mining Investment show the nation's decreasing resources attractiveness. Investment Attractiveness Index, Policy Perception Index and Best Practices Mineral Potential Index are falling significantly that investment climate in the mining industry in Mongolia is deteriorating very fast. This publication argues that Mongolia need to be able to put in place good institutional arrangements and it would boost Mongolian economy and let Mongolia gain a competitive advantage in global market. Finally, the paper suggests that the economic policies need to focus more on maintaining economic stability than stimulating growth, the macroeconomic policy needs to be tightened, and reviving foreign investment is critical to mitigate the external vulnerabilities.

МОНГОЛИЯ В ГЛОБАЛЬНЫХ РЕЙТИНГАХ ДОБЫВАЮЩИХ ПРЕДПРИЯТИЙ: ТЕНДЕНЦИИ И ПЕРСПЕКТИВЫ РАЗВИТИЯ

Б. Оюунчимэг

Государственный университет по науке и технике Монголии, г. Улан-Батор, Монголия

Информация о статье

Дата поступления 20 февраля 2016 г.

Дата принятия к печати 31 мая 2016 г.

Дата онлайн-размещения 2 августа 2016 г.

Ключевые слова

Экономический рост; институциональное

Аннотация

В статье рассмотрены институциональные возможности развития экономики Монголии в 2010-2015 гг., описываются некоторые особенности их проявления в стране. Приводятся значения известных мировых индексов, которые ежегодно рассчитываются ведущими аналитическими агентствами, такими как неправительственная международная организация «Transparency International» (индекс восприятия коррупции и индекс восприятия политики), американский исследовательский центр «Heritage Foundation» (индекс экономической свободы), консалтинговая компания «Behre Dolbear» (индекс геологической привлекательности региона). На основании полученных результатов выявлено, что статистика мировых рейтингов демонстрирует неутешительные тенденции снижения финансовых,

© Б. Оюунчимэг, 2016

качество; индекс восприятия коррупции; индекс экономической свободы; ведение бизнеса; глобальная конкурентоспособность; мировые рейтинги добывающих передприятий; общая инвестиционная привлекательность; индекс восприятия политики; индекс геологической привлекательности региона; рейтинги стран по привлекательности инвестиций в горнодобывающую деятельность

экономических и других показателей в области горной промышленности, констатируется, что с 2010 г. конкурентоспособность Монголии на мировом рынке не претерпела существенных позитивных изменений. Так, индекс восприятия политики и индекс геологической привлекательности региона стремительно снижаются, а по прогнозам компании «Behre Dolbear», инвестиционный климат горнодобывающего сектора Монголии в дальнейшем будет только ухудшаться. Делается предположение, что проводимую экономическую политику в стране необходимо прежде всего сфокусировать на поддержании экономической стабильности, а не на стимулировании экономического роста. В этом случае масштабы макроэкономической политики расширятся, а иностранные инвестиции возобновятся, что очень важно для преодоления внешней уязвимости страны. Доказывается, что если бы Монголии удалось совершенствовать ин-ституцианальные механизмы, то в перспективе это дало бы мощный импульс для выхода на новый уровень экономического развития и достижения конкурентных преимуществ на мировом рынке.

MONGOLIAN ECONOMY AND INSTITUTIONAL QUALITY

In 2015, economic growth of Mongolia slowed as it began to adjust to unsustainable economic imbalances. Real GDP growth softened to 2,3 %, from highest 11,7 % in the 20111. The main driver of the economic growth has been the mining industry's development.

The primary outputs of the mining industry are copper and gold, along with iron ore, molybdenum and fluorspar. Mongolia is also estimated to have geological coal resources of 162 billion metric tons with proven coal reserves over 20 billion tons. The coal production reached 24 million metric tons in 2015. The mining sector of Mongolia made 16,1 % of the national GDP, 78,8 % of the export revenue and 67,2 % of the production of the industrial sector in 2015. Since the 1970s the «Erdenet» copper mine and concentration, a joint Mongolian-Russian venture, has been the major source of Mongolian export income accounting for more than 10 percent of GDP. The Mongolian government has promoted a range of policies to attract foreign investment in the minerals sector, especially since the late 1990s, which resulted in a significant expansion of mineral exploration and mining. The giant Oyu Tolgoi copper and gold deposit was discovered in the Mongolian Gobi in the early 2000s, offering the country a window of opportunity to attract investors and developers. The Oyu Tolgoi project is three to four times bigger than Erdenet and expected to account for more than one third of GDP by 2020.

However, the Mongolian economy faces serious challenges to reach its full potential and take advantage of the mining boom's opportunities.

Table 1

Mongolian institutional qualities measured by rankings on 2010—2014

Index 2010 2011 2012 2013 2014

Corruption Perceptions Index 116 out of 178 120 out of 183 94 out of 176 83 out of 177 80 out of 175

Index of Economic Freedom — The Heritage foundation 88 out of 183 94 out of 183 81 out of 179 75 out of 177 97 out of 175

Doing business, The World Bank 60 out of 183 73 out of 183 86 out of 183 76 out of 189 70 out of 189

Global competitiveness, The Global Competitiveness Report — World Economic Forum 99 out of 139 96 out of 142 93 out of 144 107 out of 148 98 out of 144

1 National Statistical Committee, Statistical Yearbook, Ulaanbaatar, 2013, 2014, 2015.

Five years ago the most disturbing of all was the corruption index when Mongolia ranked 116 out of 178 on Transparency International's 2010 Corruption Index2. In 2015 Corruption Perceptions Index, Mongolia was ranked at the 72th place out of 168 states3. Though there have been significant improvements in the past

2 Transparency International. Corruption Perceptions Index, 2010. URL : http://www.transparency.org/ cpi2010/results.

3 Transparency International. Corruption Perceptions Index, 2015. URL : https://www.transparency.org/ cpi2015/#results-table.

few years corruption is still the most vexing problem.

Mongolia's economic freedom score is 58,9, making its economy the 97th freest in the 2014 Index4. Its ranking has decreased by 9 places since 20105. At the root of this negative development are increasing fiscal indiscipline and Government spending, weak rule of law, changing policy environment that may increase investment risk.

Mongolia still stands at the low rankings on the ease of getting electricity, trading across borders and resolving insolvency6.

There have been no significant positive changes to Mongolia's competitiveness since 2010 when Mongolia was ranked at the 99th place7.

However, there have been growing governance issues and challenges facing the country. Such issues and challenges are unique to Mongolia among many countries with abundant natural resources.

MONGOLIA IN GLOBAL MINING RANKINGS

Since 1997, the Fraser Institute8 has conducted an annual survey of mining and exploration companies to assess how mineral endowments and public policy factors such as taxation and regulation affect exploration investment. Survey results now represent the opinions of executives and exploration managers in mining and mining

4 The Heritage Foundation, 2014 Index of Economic Freedom. URL : http://www.heritage.org/index/ex-plore?view=by-region-country-year.

5 The Heritage Foundation, 2010 Index of Economic Freedom. URL : http://www.heritage.org/index/ex-plore?view=by-region-country-year.

6 Doing business, The World Bank. URL : http:// www.doingbusiness.org/data/exploreeconomies/ mongolia.

7 World Economic Forum, Global competitiveness, The Global Competitiveness Report, 2010-2011. 242 p. URL : http://www3.weforum.org/docs/WEF_Global-CompetitivenessReport_2010-11.pdf.

8 The Fraser Institute is an independent Canadian pub-

lic policy research and educational organization with active research ties with similar independent organizations in more than 80 countries around the world. URL : http://www. fraserinstitute.org/about-us/who-we-are/overview.aspx.

consulting companies operating around the world. The survey includes data on 109 jurisdictions worldwide9 and was sent to approximately 3,800 exploration, development, and other mining-related companies around the world.

An overall Investment Attractiveness Index is constructed by combining the Best Practices Mineral Potential index, which rates regions based on their geologic attractiveness, and the Policy Perception Index, a composite index that measures the effects of government policy on attitudes toward exploration investment. While it is useful to measure the attractiveness of a jurisdiction based on policy factors such as onerous regulations, taxation levels, the quality of infrastructure, and others, the Policy Perception Index alone does not recognize the fact that investment decisions are often sizably based on the pure mineral potential of a jurisdiction. Indeed, as discussed below, respondents consistently indicate that roughly only 40 % of their investment decision is determined by policy factors.

When considering both policy and mineral potential in the Investment Attractiveness Index, Mongolia ranks at the 85th (of 109) place in 2015. This is a significant drop for Mongolia which was ranked 36th (of 79) in 2010.

The Policy Perception Index (PPI) is a composite index, measuring the overall policy attractiveness of the 109 jurisdictions in the survey. The index is composed of survey responses to policy factors that affect investment decisions. Policy factors examined include uncertainty concerning the administration of current regulations, environmental regulations, regulatory duplication, the legal system, the taxation regime, uncertainty concerning protected areas and disputed land claims, infrastructure, socioeconomic and community development conditions, trade barriers, political stability, labour regulations, quality of the geological database, security, and labor and skills availability. The PPI is normalized to a maximum score of 100.

9 In 2015.

Table 2

The Fraser Institute Annual Survey of Mining Companies: Mongolian scores and ranks on 2010—2015

Index 2010 2011 2012 2013 2014 2015

Investment Attractiveness Index Score 63,8 67,18 67,04 53,25 49,22 50,03

Rank 36/79 41/93 31/96 80/112 93/122 85/109

Policy Perception Index Score 35,7 45,21 41,60 44,02 28,55 36,85

Rank 54/79 78/93 78/96 95/112 116/122 94/109

Best Practices Mineral Potential Index Score 0,83 0,82 0,84 0,59 0,63 0,59

Rank 18/79 16/93 1/ 96 51/112 51/122 59/109

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Based on data from Ml.

Mongolia with the scores of 36,85 in 2015 is one of the lowest-rated jurisdictions on the Policy Perception Index. There is also the significant drop for Mongolia which moved from ranked 54th (of 79) in 2010 to 94 (of 109) in 2015.

The Best Practices Mineral Potential Index rates a region's attractiveness based on the perceptions of mining company executives of a jurisdiction's geology. Survey respondents were asked to rate the pure mineral potential of each jurisdiction with which they were familiar, assuming their policies are based on «best practices» (i.e., a world-class regulatory environment, highly competitive taxation, no political risk or uncertainty, and a fully stable mining regime). The maximum score possible on this index is 1.

Mongolia with a score of 0.83 in 2010 was among top-ranked jurisdictions. But Mongolia ranks at the 59th (of 109) in 2015 against 18th (of 79) in 2010. Comments for Mongolia were:

Uncertainty regarding taxation of foreign operators;

Political processes and lack of regulatory structure have led to companies being in limbo regarding future projects.

The Parliament of Mongolia approved the State Policy of Mongolia in respect of the Minerals Sector for 2014-2025 (Minerals Policy) on 16 January 2014. The Minerals Policy embodies declarative and aspirational statements setting out the future direction and objectives for the development of the Mongolian minerals sector which covers geology, mining and processing sectors. Based on geological and mining economics Mongolia needs to develop mineral economics which also covers above mentioned sectors. Professor D. Galsandorj concluded that «As a result, the need to use mineral economic theories and practices to apply it to Mongolian mineral sector policies, in terms of mineral extraction, processing for strategic mining projects, concluding mining agreements and increasing competitiveness of mining companies have become further pressing» [2].

Since 1999, the Behre Dolbear Group Inc. (Behre Dolbear)10 has compiled a political risk assessment in the global mining industry.

The 25 countries considered in this annual assessment, as in the past, are ranked based on 7 criteria:

- the country's economic system;

- the country's political system;

- the degree of social issues affecting mining in the country;

- delays in receiving permits due to bureaucratic and other issues;

- the degree of corruption prevalent in the country;

- the stability of the country's currency;

- the competitiveness of the country's tax policy.

Each criterion is rated on a qualitative scale from one (worst) to ten (best) that reflects conditions that promote investment growth in the mining sector. Accordingly, the maximum score attainable for a country is 70 points.

Table 3

Behre Dolbear's ranking of Countries for Mining Investment in 2010—2014

Rating 2010 2011 2012 2013 2014

Behre Dolbear's Ranking of Countries for Mining Investment: «Where Not to Invest» Score 36 34 32 26,9 26,9

Rank 13/25 10/25 13/25 19/25 23/25

10 Behre Dolbear Group Inc. is one of the oldest, continuously operating, mineral industry advisory firms in the world. URL : http://www.dolbear.com/.

Behre Dolbear Group Inc, 2010 Ranking of Countries for Mining Investment. URL : http://www.aivagroup. com/media/docs/CountryRankings.pdf. ; Behre Dolbear Group Inc, ; 2014 Ranking of Countries for Mining Investment (343 KB) ; 2013 Ranking of Countries for Political Risk or Where Not to Invest ; 2012 Ranking of Countries for Mining Investment ; 2011 Ranking of Countries for Mining Investment. URL : http://www.dolbear.com/ news-resources/documents; URL : http://www.green-fieldsresearch.com/behre-dolbear-where-not-to-invest-2010-version2/ ; URL : http://www.dolbear.com/ news-resources/documents.

Five years ago Mongolia was ranked 13 out of 25. In 2014 Mongolia is ranked at the 23th place out of 25 states. The ratings for Mongolia declined based on following criteria:

- the country's economic system (Mongolian government impede foreign investment);

- the country's political system (Mongolia's ranking fell because of the continually changing elections and subsequently uncertainty regarding mining policies);

- Permitting delays (Mongolia's rating fell by its government restriction of new exploration and exploitation license issuance);

- Currency stability (Depreciating currency in Mongolia generate higher inflation);

- Tax regime (Past delays at the Oyu Tolgoi copper project in Mongolia present a clear example of how such uncertainty can delay mining development).

Uncertainty regarding mining policies was noted also in research papers [3-5].

Under the 1997 Minerals Law, the mining taxation regime in Mongolia consisted of a mining royalty together with the taxes im-

posed on all economic sectors. The effective tax rate on mining profits in Mongolia now is low relatively by international best practices — 28 % for Sweden and 29 % for Canada. From James M. Otto's comparative effective tax rates in 2007 for a hypothetical copper mine we can see that the majority of countries fall within the range of 40-50 % effective tax rates. Mongolia's effective tax rate was estimated about 60 % [6]. But some Mongolian researchers suggested to increase effective tax rate in mining [7; 8].

Mineral revenue has been often used by political parties to fulfill election promises and being spent through cash-handouts in the past ten years.

The aim and structure of the existing wealth funds are expected to change to embrace effective and long-term revenue management in coming years. But there is still a lack of stronger implementation of the strategic management of the wealth generated from the exploitation of mineral resources.

Aspects of avoiding the «Resource Curse» in Mongolia, mining tax regime and revenue management, and the quality of Mongolia's institutions highlighted in research papers [9-13].

CONCLUSION

Mongolian institutional qualities measured by rankings based on the Corruption Perceptions Index, the Index of Economic Freedom — The Heritage foundation, the Doing business, The World Bank, and the Global competitiveness, The Global Competitiveness Report — World Economic Forum are still lagging behind its stellar economic growth numbers.

Addressing such challenges Mongolia need to be able to put in place good institutional arrangements have overcome these obstacles, and the so-called «resource curse».

Mongolian rankings in global mining have a trend to decreasing last 5 years. Mongolian scores and ranks based on the overall Investment Attractiveness Index, the Best Practices Mineral Potential index, the Policy Perception Index and Behre Dolbear's Mining Investment index are showing that the economic policies need to focus more on maintaining economic stability than stimulating growth, the macroeconomic policy needs to be tightened, and reviving foreign investment is critical to mitigate the external vulnerabilities.

It can be concluded from the changes of the Mongolian position in the global rankings, that investment climate in the mining industry in Mongolia is deteriorating very fast.

To ensure sustainable and inclusive growth, Mongolia will need to strengthen institutional capacity to manage public revenues efficiently and limit the effects of Dutch Disease and allocate its resources effectively among spending, investing, and saving.

Mongolia needs to increase the capacity and efficiency of key regulatory state institutions in the minerals sector to develop competitive strategies based on robust geo-scientific and socio-economic databases, and promote safe and responsible mining practices, and to transfer some important political power and authority to sub-national and local governments to improve the protection of the rights and interests of local communities affected by mining.

REFERENCES

1. Jackson Taylor, Green Kenneth P. Fraser Institute Annual Survey of Mining Companies, 2015. Fraser Institute annual. Available at: http://www.fraserinstitute.org.

2. Galsandorj D. What is mineral economics? Available at: http://en.mongolianminingjournal.com/con-tent/19340.shtml.

3. Mashen'kin V. S. Osobennosti geologicheskogo biznesa vMongolii [Specifics of geological business in Mongolia]. Available at: http://zolotodb.ru/articles/foreign/1 1327. (In Russian).

4. Collen Alexander, Jackson Taylor, Green Kenneth P. Mongolia Considers Selling Stake in Tavan Tolgoi. Available at: http://www.miningfacts.org/Blog/Mining-News/Mongolia-Considers-Selling-Stake-in-Tavan-Tolgoi/.

5. Mendee J. A «let's change it» syndrome — why does policy fail in mongolia? Available at: http://social-sciences.hawaii.edu/conference/demr2015/_papers/mendee-jargalsaikhan.pdf.

6. Otto James M. Competitive Position of Mongolia's Mineral Sector Fiscal Regime: the Case of a Model Copper Mine (updated version, 2008). Available at: http://www.bcmongolia.org/reports.

7. Bold S. Some aspects of mineral tax regime. Available at: http://www.tsahimurtuu.mn/index.php/urtu-uchid/item/570-ai±iMrT-ManTManbiH-TaTBapbiH-3apMM-acyyAanA-. (In Mongolian).

8. Baasanpurev T. Game rules changed. Mongolian mining journal, 2012, May 21. Available at: http://www. mongolianminingjournal.com/content/25028.shtml. (In Mongolian).

9. Moran Theodore H. Avoiding the «Resource Curse» in Mongolia. Available at: https://piie.com/publica-tions/pb/pb13-18.pdf.

10. Amarjargal R. About «Resource Curse». Available at: http://blog.amarjargal.org/2011/01"6aanrMMH-xapaan"-^rHHkiH-Tyxaki-/.

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11. Enkhbayar D. Mongolia Must Improve Its Institutions to Avoid the Resource Curse. Available at: http:// www.cipe.org/blog/2014/09/02 /mongolia-must-improve-its-institutions-to-avoid-the-resource-curse /#. V0sZxvl97IU.

12. Frankel Jeffrey A. The Natural Resource Curse: A Survey. Available at: http://www.iltod.gov.mn/?p=538.

13. Shapiro Robert J. Economic Modernization in Mongolia: The Impact of Tax and Regulatory Policies on the Mining Sector: A Research and Analysis Report, 2009. Available at: http://www.sonecon.com/docs/studies/ Report_Mongolian_Mining-Shapiro-Jan2009.pdf.

Author

Bat-Ochir Oyunchimeg — Professor, M. E., Ph.D. Mongolian University of Science and Technology, School of Geology and Petrolium Engineering, 14191, Ulaanbaatar, Sukhbaatar district, Baga toiruu, 46-114, Mongolia, e-mail: [email protected].

Reference to article

Oyunchimeg B. Mongolia in global mining rankings: trends, challenges, and ways ahead. Izvestiya Ir-kutskoi gosudarstvennoi ekonomicheskoi akademii = Bulletin of Irkutsk State Economics Academy, 2016, vol. 26, no. 4, pp. 629-634. DOI: 10.17150/2500-2759.2016.26(4).629-634. (In Russian).

Информация об авторе

Бат-Очирын Оюунчимэг — профессор, кандидат технических наук, Институт геологии и горной промышленности, Государственный университет по науке и технике Монголии, 14191, г. Улан-Батор, Сухбаатарский район, Бага тойруу, 46-114, е-таП: [email protected].

Библиографическое описание статьи

Оюунчимэг Б. Монголия в глобальных рейтингах добывающих предприятий: тенденции и перспективы развития / Б. Оюунчимэг // Известия Иркутской государственной экономической академии. — 2016. — Т. 26, № 4. — С. 629-634. — DOI : 10.17150/2500-2759.2016.26(4).629-634.

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