Controversy dogs Mongolia’s infrastructure plans

The new gold rush to develop Mongolia"s resources could make it the world"s fastest-growing economy over the next five years. To profit from its untapped iron ore, coal, copper, uranium, silver, and gold deposits, the government needs to build a vast network of roads and railways to ship the minerals out of the country"s vast interior. More than 10 "strategically important" deposits are in development including the Dornod uranium deposits, the Asgat silver deposit, and the massive Tavan Tolgoi coal site.

Tavan Tolgoi, like Oyu Tolgoi, inspires awe among resources investors. It is a deposit of approximately 7.5 billion tons -- believed to be the world"s largest untapped coking coal site. Most of its projected 50 million tons of production will go to China.

The trick is getting it there, says Reuters in a recent analytical report. To that end, Mongolia aims to build a massive industrial park in Sainshand, capital of Dornogovi Province, to help transport metals and coal to customers around the world. The facility will include copper smelting and coal processing plants, as well as railroads to and from the park.

Much like the debate around Oyu Tolgoi, controversy has dogged the government"s infrastructure plans from the beginning. In April, Prime Minister S. Batbold threw his support behind an east-west railway plan, connecting the Tavan Tolgoi coal deposit to the eastern city of Choibalsan via Sainshand, at a cost of around USD2 billion, according to one estimate. Some experts say it would be far more sensible, and half the cost, to build the railway south towards China, which bought 70 percent of the country"s exports last year.

Feeding into the debate is Mongolia"s determination to shed its historical vulnerability as a landlocked country sandwiched between Russia and China. Mongolia needs both geopolitical giants as investors and customers, but wants to be beholden to neither, preferring to be "the mortar between two BRICs".

"Mongolia has been quite careful about its sovereignty -- we don"t want to be too dependent on one country," Mrs. S. Oyun, an MP and former foreign affairs minister, said at a conference in Ulaanbaatar in June. "Theoretically, we want to have a one-third, one-third, and one-third balance," Mrs. Oyun added, referring to China, Russia and a third country such as Japan or the United States.

China"s emergence as the region"s dominant superpower has been accompanied by unpredictable swings in Mongolia"s foreign investment policies. The government originally planned to sell as much as 49 percent of the Tavan Tolgoi coal deposit to a foreign bidder, and hired JPMorgan and Deutsche Bank to handle the sale. But in February, they canceled the auction in favor of 100 percent state ownership, with plans to sign a development contract without giving any equity away.

The government"s decision to cancel the Tavan Tolgoi equity stake sale to a foreign company frustrated dealmakers, but was seen by some analysts as an astute political calculation -- a move to avoid some of the popular anger that followed the Oyu Tolgoi investment agreement. Corruption may also prove to be a long-term problem. Transparency International rated Mongolia 120th in its 2009 corruption perception index, a fall from 102nd in 2008.

Already whispers persist in Mongolia"s business community that many workers at Oyu Tolgoi are in fact more experienced Chinese miners, instead of Mongolian nationals as promised in the investment agreement. Ivanhoe, however, says it is adhering to an agreement that calls for 60 percent of the jobs to go to Mongolians during the mine"s development phase." As of 30 August, we have 4,200 people at site," Keith Marshall, the Oyu Tolgoi CEO, said, adding that 2,536 on site were Mongolian.

Environmentalists are concerned that large-scale mining in southern Mongolia would increase desertification. "Both Oyu Tolgoi and Tavan Tolgoi will require huge amounts of water, and from the environmental impact assessment, and from their plans and their feasibility studies, we know they have not demonstrated availability of water for the life of this project," said S.Dugersuren, executive director of an NGO called Oyu Tolgoi Watch. "Mongolia is experiencing higher degree of climate change -- over 70 percent of Mongolia"s territory is suffering desertification. That is a big concern."

The discovery of a new vein at Oyu Tolgoi is bound to offer even more jobs and riches for Mongolia. Ivanhoe said on Sepember 28 the discovery, named the Heruga North deposit, contains an estimated 10.2 billion pounds of copper and 15 million ounces of gold. "It"s possible that Heruga and Heruga North eventually could be developed together as one of the world"s largest underground gold mines," Ivanhoe said in a statement.

The government hopes to channel some of that wealth to its citizens by privatizing a moribund state-run stock exchange, a move that would finally plug the landlocked nation into the grid of global finance, and channel capital to Mongolian entrepreneurs. The London Stock Exchange is the front-runner to run the new exchange, "building it from scratch", Prime Minister Batbold recently said.

The government is making plans to take public a portion of Oyu Tolgoi mine. It"s all part of Mongolia"s plans to privatize assets -- it is committed to handing a tenth of all proceeds to its citizenry -- and to give Mongolians a way to cash in on the dream. That could go some way toward soothing any leaden feelings over Ivanhoe"s golden deal at Oyu Tolgoi.