Mongolia rebuilds from the ground up

ZORIGT Dashdorj's office sits in the middle of a building site close to the centre of Mongolia's dusty capital, Ulaanbaatar.

Visitors have to pick their way carefully through rubble and piles of cement as they climb the two floors to meet the country's youthful and engaging Minister for Mining and Energy.

The building where Zorigt (all Mongolians go by their first names) is being ripped apart inside and put back together. An apt metaphor for the country, in the midst of a remarkable economic overhaul due to the emerging exploitation of its vast mineral wealth, and the work it will take to lift its whole population into a better life. In the 76-person parliament dominated by a coalition of the country's two main parties the Mongolian People's Revolutionary Party and the Mongolian Democratic Party, almost everyone seems to have some sort of title. But the former senior public servant, who is with the MPRP, with his responsibility for driving the industry that will soon make up 95 per cent of the country's exports is one of the handful of key decision makers that could help the foundation of prosperity for generations. With proper industrialisation the Mongolian government has estimated its GDP could grow elevenfold to $US41 billion by 2020.

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Last week, Rio Tinto signalled its clear intentions to be a major player in Asia's resource boom-country when it upped its stake in Canada's Ivanhoe Resources, the acknowledged Western mining pioneer in China, a huge fillip for Zorigt. "CVRD (Brazil's Vale) are engaged in ever significant exploration work here, Rio Tinto has a $US5bn project (the massive Oyu Tolgoi copper mine). So the rest of the guys if they want to come, I think they should," Zorigt tells The Australian.

"The more we have large mining players in this town the better to help us grow into a significant mining country."

But the model to attract the world's largest miners, who will have the capital resources to invest in the 15 deposits designated as nationally significant, is still being developed and tested by the government.

Zorigt says deposits whose exploration was done by the government will remain 50 per cent in government hands, with a 34 per cent stake in the others. It was Zorigt who set up the government's holding company Erdenes MGL (it means treasure in Mongolian), which will hold the government stakes in its major mining deposits.

He was then tapped for a cabinet position (Mongolia allows a mixture of politicians and external experts in its executive) and last year entered parliament in a by-election.

The looming test will be the Tavan Tolgoi deposit, which holds 6 billion tons of coal. It has been split on to five different concessions, or blocks, and the government is working on plan for the first two.

"The first one will be 50 per cent owned by the government, 10 per cent floated on the local market for retail investors, 10 per cent available for domestic companies and 30 per cent floated on international markets," Zorigt says.

He now says he does not expect one large miner to snap up the 30 per cent, as was originally mooted.

The second block with be 100 per cent-owned by the government but be licensed to a single mining group that will then pay a fee to the government for mining rights. But details for this remain sketchy and, if past form is any guide, could well be changed before being finalised.

"We have plenty of interest and we are talking to lots of people," he says. But Zorigt says he is keen to finish the process on the first block first. Contract tenders are due in the first week of October with Leighton a possible bidder.

While Rio is putting its money where its mouth is, uncertainty and the heavy hand of an inexperienced government has seen others stay away.

BHP, for instance, has shut up shop and critics point to a lack of services infrastructure starting with access.

The only offshore destinations that are directly connected by air are Seoul, Beijing and Moscow. During Mongolia's dramatically inhospitable winters, Ulaanbaatar -- blanketed in snow for six months, with temperatures regularly reaching minus 40C -- is hardly the place for miners to grab a week or two of rest and recreation. Mongolian Airlines has had Hong Kong, where many of the country's nascent mining groups are stockmarket-listed, on its schedule for some months, but so far has not started flying the route.

On the ground, there are no top-tier international law firms or investment banks and only PricewaterhouseCoopers of the big four accounting firms has an office, and that is less than a month old. This forces mining executives to shuttle between Mongolia and either Beijing/Hong Kong or Korea.

As well, there are the more fundamental infrastructure problems with water, power and transport.

"It's a growth problem," Zorigt says. "In 2000, our GDP per capital was maybe $US400-$US500. Now it is over $US2000.

"If you look at the government budget, I remember when it used to be a bit over $US200 million. Now are talking well over $US2bn ($2.1bn)."

That is half the size, by the way, of Australia's total foreign aid budget. Zorigt, an economist and lawyer who was educated in Moscow, Japan and at the Australian National University, says 27 per cent of people are living under the poverty line, but that the figure is decreasing.

But there are plenty of local people, including those living in humble yurts on the edge of town who spoke to The Australian, who are concerned that the government is frittering away the economic benefits of the mining boom by handing out money instead of spending it on much-needed roads, hospitals and schools.

The last election in Mongolia turned into a populist, vote-buying auction where the main political parties offered a major handout totalling 1.5 million tugriks ($1260) to each Mongolian. A series of well-attended street marches were held to protest against the delay in the payments.

The first part was delivered in a single handout of 70,000 ($US55) to each Mongolian, but the government has now opted for monthly payments.

"During the downturn, the government was struggling to get people to spend," Zorigt says. "During times like this, I think it is economically justifiable. Secondly, in Mongolia given the impact that winter has on herding people (Zorigt's grandfather was herder all his life) they want some better security during this time. These people need cash in their hands.

"These people are actually planning their budgets on this 10,000 tugriks they will get in September."

But the real reason appears to be rooted in politics. "If you believe in democracy, and both parties were elected on that platform (of handouts), in order to keep the faith of people you have to keep your election promises," Zorigt says.

"We are only a young democracy (communism fell in 1990) and can't afford to have politicians and parties breaking promises."

But Zorigt says the government has ambitious plans to solve the infrastructure problems.

In February, Mongolia's parliament adopted a landmark Concession Law that will allow private companies to investment in infrastructure by way of public private partnerships.

"This is going to be an extremely important law," Zorigt says. "Before this we didn't have that legal framework."

And in recent weeks the government has just approved a list of more that 100 projects so private investors can pour money into railways, roads, power and housing projects.

"Private companies can come in and operate them and get their money back. This law and this list are probably going to be the solution to our problem; so far we have struggled to make the public investment in infrastructure," Zorigt says. "This is very serious bet on the future."

Michael Sainsbury, China correspondent for the Australian

Source:The Australian