MONGOLIA EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE MONGOLIA ELEVENTH EITI RECONCILIATION REPORT 2016 NOVEMBER 2017 © 2017 KPMG Audit LLC, a Mongolian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1 Table of contents Glossary 6 1 Introduction 9 1.1 Introduction 9 1.2 Data assurance of the 2016 M.EITI Report 10 1.3 Participants in the 2016 M.EITI Report 10 1.4 Acknowledgement 10 2 Executive Summary 11 2.1 Overview of approach and reconciliation results 11 2.2 Summary of government receipts reconciled 12 2.3 Key findings 16 3 Reconciliation Scope and Methodology 18 3.1 Introduction 18 3.2 Reconciliation methodology 20 3.3 Reconciliation approach 25 3.4 Reporting entities and receipts to be covered 34 4 Reconciliation Results 36 4.1 Reconciliation results 36 4.2 Unresolved differences and unreported companies (REQ 4.9) 42 4.3 Accounting framework and external audit 46 5 Extractive Industries in Mongolia 47 5.1 Overview of the Extractive Industry 47 5.2 EI licences 81 5.3 Distribution of revenue 98 5.4 State participation in EI 109 5.5 Other matters 127 6 Recommendations 147 6.1 Implementation of last year’s recommended actions (REQ 7.3) 147 6.2 IA’s Recommendations for future M.EITI Reports 148 6.3 MSG’s Recommendations 150 7 Appendices 152 © 2017 KPMG Audit LLC, a Mongolian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2 Reliance and inherent limitations This report is solely for the purpose set out in our engagement contract dated 24 April 2017 and for the use of M.EITI. It is not intended for the purpose other than stated in the engagement contract. While our report may be distributed more widely, any reliance placed on it by another party is that party’s sole responsibility. This report has been prepared as outlined in the terms of our engagement contract. The services provided in connection with this engagement comprise an agreed upon procedures engagement, which is not subject to assurance or other standards issued by International Auditing and Assurance Standards Board and, consequently no opinions or conclusions intended to convey assurance have been expressed. Our fieldwork was performed during the period 24 April 2017 to 13 November 2017. We have not undertaken to update our report for events or circumstances arising after 13 November 2017. Our findings should not be extrapolated to future periods, as laws and the contextual environment are subject to change which may alter our findings subsequent to the date of reporting. The information used in preparing our report has been compiled from a mixture of public sources, data provided by EI companies and government entities through information templates, the M.EITI including MSG and the M.EITI Secretariat, and meetings with various ministries, government bodies and agencies, companies, civil society organisations and other stakeholders. A bibliography and list of sources is set out in Appendix 33. We do not accept responsibility for such information provided to us, which remains the responsibility of management of the particular EI companies, government entities, ministries, etc. as relevant. We have not, sought to establish the reliability of the sources of information by reference to other evidence, and we have not verified the validity of the data received. As such, the scope of our work was different from that for an audit and, consequently, no assurance is expressed. This report has been prepared in English and Mongolian. If there is any discrepancy between the English and Mongolian versions of this report, the English version shall prevail. © 2017 KPMG Audit LLC, a Mongolian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3 Comprehensive table of contents Glossary 6 1 Introduction 9 1.1 Introduction 9 1.1.1 Background 9 1.1.2 The Independent Administrator’s role 9 1.2 Data assurance of the 2016 M.EITI Report 10 1.3 Participants in the 2016 M.EITI Report 10 1.4 Acknowledgement 10 2 Executive Summary 11 2.1 Overview of approach and reconciliation results 11 2.2 Summary of government receipts reconciled 12 2.2.1 Total receipts by government entities 12 2.2.2 Government receipts by category after reconciliation 15 2.3 Key findings 16 2.3.1 Scope of reconciliation 16 2.3.2 Assurance 16 3 Reconciliation Scope and Methodology 18 3.1 Introduction 18 3.2 Reconciliation methodology 20 3.2.1 Data collection 20 3.2.2 Data comparison 22 3.2.3 Data reconciliation 22 3.2.4 Level of information disaggregation (REQ 4.7) 24 3.2.5 Safeguarding confidential data 24 3.3 Reconciliation approach 25 3.3.1 Materiality threshold for companies 25 3.3.2 Materiality threshold for selection of key revenue streams 26 3.3.3 Threshold for minor differences 27 3.3.4 Assurance procedures (REQ 4.9) 27 3.4 Reporting entities and receipts to be covered 34 3.4.1 Government entities 34 3.4.2 Companies 35 4 Reconciliation Results 36 4.1 Reconciliation results 36 4.1.1 Summary of reconciliation and differences 36 4.1.2 Coverage of the reconciliation exercise (REQ 4.9) 37 4.1.3 Comprehensiveness and reliability of data presented (REQ 4.9b) 41 4.2 Unresolved differences and unreported companies (REQ 4.9) 42 4.2.1 Unresolved differences by selected key revenue streams 42 4.2.2 Unreported entities 43 4.2.3 Issues, barriers and remedies 44 4.2.4 Limitations to the work done 45 4.3 Accounting framework and external audit 46 4.3.1 Public sources of companies audited financial statements, if applicable (REQ 4.9a) 46 © 2017 KPMG Audit LLC, a Mongolian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4 5 Extractive Industries in Mongolia 47 5.1 Overview of the Extractive Industry 47 5.1.1 Contribution of Extractive Industry to the Mongolian economy (REQ 6.3) 47 5.1.2 Legal framework and fiscal regime (REQ 2.1) 53 5.1.3 Minerals overview 65 5.1.4 Petroleum overview 76 5.1.5 Uranium overview (REQ 3.1) 79 5.2 EI licences 81 5.2.1 Mining licensing 83 5.2.2 Petroleum licensing 92 5.3 Distribution of revenue 98 5.3.1 State financial system (REQ 5.1) 98 5.3.2 Legislation related to national budget (REQ 5.1) 98 5.3.3 EI revenue distribution in the national budget (REQ 5.1) 99 5.3.4 Sub-national transfers (REQ 5.2) and revenues for specific programmes (REQ 5.3a) 100 5.3.5 Country’s budget and audit processes and government forecast for the country’s budget (REQ 5.3b,c) 107 5.4 State participation in EI 109 5.4.1 Government institutions related to EI 109 5.4.2 Brief introduction to SOEs in Extractive Industry (REQ 2.6b) 113 5.4.3 Financial relationship between government and SOEs (REQ 2.6a) 117 5.4.4 Disclosure on Government’s level of ownership and loans and loan guarantees (REQ 2.6b) 120 5.4.5 Transactions related to SOEs (REQ 4.5) 122 5.4.6 Quasi-fiscal expenditures (REQ 6.2) 123 5.4.7 Sub-national payments (REQ 4.6) 126 5.5 Other matters 127 5.5.1 Beneficial ownership of companies (REQ 2.5) 127 5.5.2 Contract transparency (REQ 2.4) 130 5.5.3 Infrastructure provisions and barter arrangements (REQ 4.3) 134 5.5.4 Social expenditures (REQ 6.1) 136 5.5.5 Transportation revenues (REQ 4.4) 140 5.5.6 Implementation of mining activities and rehabilitation information 141 6 Recommendations 147 6.1 Implementation of last year’s recommended actions (REQ 7.3) 147 6.2 IA’s Recommendations for future M.EITI Reports 148 6.2.1 Assurance over data reported by government departments 148 6.2.2 Emphasise the importance of the M.EITI Report for government entities 148 6.2.3 Capacity building of the SOEs on the SOE specific requirements of the EITI Standard 148 6.2.4 Revenue stream collected in the E-Reporting system 149 6.2.5 Distinguishing EI business activity from other types of business activities 149 6.2.6 Cadastral information 149 6.2.7 Disclosure of Product Sharing Agreements 150 6.3 MSG’s Recommendations 150 6.3.1 Unreported companies and SOEs 150 6.3.2 Implementation of Regulation on Extraction of Minearals from Small-Scale Mines 150 6.3.3 Contract transparency 150 7 Appendices 152 © 2017 KPMG Audit LLC, a Mongolian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 5 Glossary ASM (s) Artisanal and Small-scale Mining/ Miners A category Confirmed mineral resources (used by MRPAM) B category Expected mineral resources (used by MRPAM) C category Possible mineral resources; needs further survey to confirm (used by MRPAM) P category Inferred mineral resources (used by MRPAM) BOD Board of Directors BoM Bank of Mongolia EI (s) Extractive Industry/Industries EPP Environmental Protection Programme CAGR Compound Annual Growth Rate CIT Corporate Income Tax CO Customs Office CSO Civil Society Organisation DBM Development Bank of Mongolia EI Extractive Industries FDI Foreign direct investment GAAP Generally Accepted Accounting Principles GALWS General Agency for Labour and Welfare Service GAPCSP Government Agency for Policy Coordination on State Property GDP Gross Domestic Product GDT General Department of Taxation GoM Government of Mongolia Ha Hectare IA Independent Administrator IFAD International Fund for Agricultural Development IFRS International Financial Reporting Standard ISAE International Standards on Assurance Engagements JV (s) Joint-venture/ ventures JSC Joint Stock Company LLC Limited Liability Company M/m/mill.