www.transparency.org www.cmi.no Corruption in natural resource management in Mongolia Query What are the biggest vulnerabilities towards corruption within natural resource management in Mongolia? Purpose companies in 2009 and 2011 for the exploitation of the Oyu Tolgoi copper and gold mining complex and the Our agency has received a request to advise our local Tavan Tolgoi coal mine. Concerns over lack of projects in Mongolia. transparency and corruption surrounding the negotiation process of such deals and of the distribution Content of mining royalties have led to large scale citizen protests over the distribution of mining royalties. 1. Overview of corruption issues in Mongolia’s natural resource management The government is committed to make all citizens benefit from the country’s newly discovered mineral 2. Corruption challenges in Mongolia and their wealth through the creation of a Human Development potential impact on NRM Fund (HDF) and a direct distribution scheme, using 3. References cash transfers to citizens. However, the outcome of these efforts will largely depend on the country’s ability to set up a robust legal and institutional framework that Caveat establishes strong corruption safeguards along the There are very few publicly accessible research articles extractive value chain and ensures fair and equitable and sources of information focusing on corruption distribution of resource rents to all citizens. challenges in the Mongolian NRM system. In spite of important anti-corruption steps taken in Summary recent years, Mongolia is facing important governance and corruption challenges. The quality of governance, The recent discovery of mineral wealth in Mongolia’s as captured by major governance indicators, seems to rapidly transforming economy brings both development be declining over years, especially with regard to opportunities and governance challenges for the government effectiveness and control of corruption. country. Major contracts have been awarded to foreign Author(s): Marie Chene, Transparency International, [email protected] Reviewed by: Robin Hodess, Ph.D., Transparency International, [email protected] Date: 16 November 2012 Number: 354 U4 is a web-based resource centre for development practitioners who wish to effectively address corruption challenges in their work. Expert Answers are produced by the U4 Helpdesk – operated by Transparency International – as quick responses to operational and policy questions from U4 Partner Agency staff. Corruption in natural resource management in Mongolia 1. Corruption challenges in and triggered a boom in the mineral sector, contributing to strong growth in the country 's GDP – which, NRM according to World Bank statistics, grew by 17.2%, making it one of the fastest growing economy in 2011. In 2010 the extractive sector accounted for 30% of Background GDP, 32% of government revenue and 81% of exports (EITI report, 2012). Approximately 85% of all exports of Mongolia’s democratic transition minerals go to China. Recent contracts awarded in Mongolia peacefully emerged from a communist one- 2009 and 2011 to Australian, UK, Canadian and party regime modelled on the Soviet system two German companies confirm heavy foreign involvement decades ago, with the 1990 first multiparty in the management of natural resources, while the parliamentary elections marking a shift towards commitment to distribute mining royalties to all citizens successful democratic transition. In spite of lacking pre- is at the heart of the political debate (Freedom House, communist experience with parliamentary democracy 2012). and a long tradition of political opposition which are commonly referred to as pre-conditions for a successful In 2009, after years of negotiations, Ivanohe Mines democratic transition, Mongolia has succeeded in (now renamed Turquoise Hill Resources Ltd) and Rio preserving its newly established democratic system Tinto signed a USD 5 billion long term agreement with ever since (Bertelsmann Foundation, 2012), and the Government of Mongolia for the construction and reasonably free and fair elections have been held operation of the Oyu Tolgoi copper and gold mining resulting in rotation of power following elections complex, the largest financial undertaking in Mongolian (Verena Fritz, No date). Simultaneously, the country history which is expected to account upon completion to began its transition from a socialist planned economy more than 30 % of the country’s GDP (Bertelsmann towards a market economy. Foundation, 2012). In 2011, the contract to operate the Tavan Tolgoi coal mine was awarded to a joint venture In April 2012, shortly before the Parliamentary elections between a German (Operta GmbH) and an Australian took place in June 2012, former President Nambaryn company (Mcmahon Holdings). Enkhbayar was arrested by the Independent Authority Against Corruption on corruption charges. At the time, The recent discovery of mineral wealth brings both his supporters claimed that his arrest was politically development opportunities and governance challenges motivated and violated his basic human rights, with the for Mongolia. International experience shows that corruption charges engineered to prevent him from natural resource wealth in the context of poverty and running in the elections. While disqualified as a weak institutions can fuel corruption, conflict and candidate for the parliamentary election, a number of insecurity. In addition, with large inflows of money into his political allies won enough votes in the June government coffers, corruption and vote buying could elections to be invited into a government coalition with thrive. The outcome will largely depend on the country’s Tsakhiagiin Elbegdorj’s Democratic Party. In August ability to establish strong legal and institutional 2012, Enkhbayar was sentenced to four years in prison frameworks that ensure fair and equitable distribution of on corruption charges. According to observers, this resource rents to all citizens. verdict introduced some political uncertainty in this resource-rich nation, as Enkhbayar’s party plays an important role in preserving the current coalition unity, Specific risk factors in the extractive at a time when politicians are considering major sector changes to mine and investment policies (The Wall The Mongolian NRM sector is likely to be confronted by Street Journal, 2012). similar risks observed in other countries. A number of factors exacerbate corruption risks in the mining and Natural resource management (NRM) at NRM sector. These risks include (Marshall, I, 2002): the heart of the Mongolian political debate Mongolia’s mineral wealth largely dominates the current • Commercial value: The high commercial value of political debate. Although the agricultural sector natural resources makes them a coveted target for remains the backbone of the economy, the country's misappropriation, plundering and rent seeking recent discovery of copper, gold, coal, and uranium behaviour. deposits opened the floodgates to foreign investment www.U4.no 2 Corruption in natural resource management in Mongolia • Government regulations: In most countries, company and the company often lacks control and minerals are owned by the state and governments information over their local partner background, regulate the acquisition of rights for exploitation. connections, and behaviours. The sector is more heavily regulated than other industries, due to its potential financial, social, and • Opaque concession awarding/contract environmental impact as well as its impact on the negotiation processes: The negotiation process local communities. Mining and extractive activities of mining contracts is complicated, lengthy, and also imply frequent contacts or investment in the highly technical and frequently occurs behind transport and energy sector, as they need to close doors due to confidentiality reasons often develop, upgrade or secure access to public invoked in relation to such contracts (Chêne, M., infrastructure, as heavy users of transport and 2007). The high technical complexity of such energy. This implies frequent interactions between contracts also limits opportunities for public the industry and a wide variety of ministries, scrutiny. government agencies and departments. As such, mining operations are more exposed to corruption • Corporate opacity: According to Transparency risks involving public officials than other industries, International’s 2012 Transparency in Corporate as they require frequent contact and interactions Reporting report, which assessed the transparency with public officials for getting concessions, of the world’s 105 biggest companies, companies licenses and approvals for the exploration, performed particularly poorly on country-by- development and operation of the mine (Chêne, country reporting. 39 companies scored 0 per cent M., Unpublished and Marshall, M., No date). in this category, meaning that they lack transparency in disclosure of any financial data in • Capital intensive industry and high costs of their countries of operation, while on average, mining operations: Mining is a risky and capital companies scored around 4 per cent – a very intensive industry which requires up-front weak result. investment before mining operations can proceed and companies can start making profits. • Governance environment: Mining operations Exploration, contract negotiations, government often take place in environments with weak approvals and construction processes can take governance structures,