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Mining donations and cooperation agreement

2020   |   November - December   |  034

Thanks to the Extractive Industries Transparency Initiative (EITI), the traditionally discreet mining industry became the first sector to voluntarily and transparently report its tax and donations to the public. It has been 10 years that the initiative enabled deep access to the information of mining companies. Year to year, it’s becoming more and more possible to extract important data further.   

As mentioned in the EITI report, mining companies paid over 10 trillion MNT in tax and fees and 377 billion MNT in donations and assistance to Mongolia between 2010 and 2018. That is an amount sufficient to build Tavan Tolgoi’s power plant five times over. If that were the case, Mongolians wouldn’t have had to save free power and live in chilly apartments today. Considering the number of donations alone, it’s enough to build 377 kindergartens. 

In reality, we hear more about decisions being made on organizing festivals and “ovoo” worships instead of opening kindergartens and power stations. That makes one wonder, then, how much exactly of the aforementioned money was spent on organizing festivals and how much on building kindergartens.  

According to the 2018 reports by the EITI, 99 companies operating in Mongolia provided over 24.1 billion MNT in donations and financial assistance which were received by several ministries, 19 provinces, and 63 soums.

If we break down the recipients of such donations: 0.001 percent were individual citizens and NGOs, 34 percent were government organizations, and 66 percent were categorized under cooperation agreement or “unidentified purpose”. Although it’s commendable that mining companies provided donations under the cooperation agreement on hand, it also created an impetus for provincial and local authorities to found independent Wealth Funds on the other hand. It became crystal clear that soum and province authorities who perpetually complained about not receiving their rightful share of the mineral resources “pie” had started to seek out creating their wealth funds based on mining companies. Few of them had already created it and started pulling funds. It’s too early to tell if this has to be commended or criticized. Nevertheless, there’s no other way but to address this new phenomenon in the mining sector.  

Donation necessary for the Government

If we categorize the worth of donations of 8.1 billion MNT provided by mining companies to government organizations according to their purposes, 1.7 billion MNT went to the education sector and 1.6 billion MNT to festivals, which make up the highest amount combined, and 167 million MNT went to infrastructure. Meanwhile, 36 million MNT allocated to the environment is considered the lowest. In addition, the purpose for 1.3 billion MNT donation is unclear. 

This shows that our soum “lords” are still “claiming” money for their festivals and naadams from mining companies. At least, they did honestly specify the donation was for organizing festivals. The question of how the remaining unspecified 1.3 billion MNT was spent is still a mystery. The primary concern is that festivals or school and kindergarten renovations must be funded by the integrated state budget. So, this begs the question of why these were funded by non-budget funds or donations instead.  

Although mining companies paid around 3 trillion MNT to the government in taxes, donations, financial assistance, and dividends in 2018, 93 percent of this went directly to the state budget. The remaining 7 percent was allocated to the local (provincial and soum) administrations. The EITI reports show that total tax revenues, donations, and dividends received by local administrations amount to just over 200 billion MNT. In other words, this indicates that the amount local communities are receiving is minuscule in relation to the overall wealth generated from mining.

In fact, poor management of mining revenues is a long-discussed problem. A solution that was proposed through reflecting local criticisms and interests was the concept of a cooperation agreement with local communities. Implemented since 2015, the practice brought relative benefits to provinces and soums with higher mining development. In 2018, a total of 63 soums received donations in big or small amounts from 99 mining companies. Dalanzadgad soum of Umnugobi province currently ranks highest in donations received with 883 million MNT. Meanwhile, Bayan-Ovoo soum of Bayankhongor province which ranked in the top 5 received 187.7 million MNT. This means the remaining 333 soums received either lesser or no donations at all.   

Within or outside of the law

We mentioned how, veiled under the term “under the cooperation agreement”, the purpose of two-thirds of the total donations remains unclear. We are talking about 15.9 billion MNT here. 12 billion of this was provided for the “Gobi Oyu” Development Fund established under the cooperation agreement between Oyu Tolgoi LLC and Khanbogd soum, Umnugobi province alone. The fund’s agreement is hailed as a model cooperation agreement for its effectiveness among others. Although the fund regularly reports its expenditure and outcomes of the funding, there’s no mechanism for reporting how exactly the remaining 3.9 billion MNT were spent.     

To find out, every agreement has to be reviewed. Luckily, we are now able to find these agreements (most, if not all) on the website www.iltodgeree.mn which contains 167 cooperation agreements signed between mining companies and local administrations. 60 of these agreements were in effect in 2018, of which almost half or 32 agreements contained certain services and transaction amounts, creating a lot of ambiguity.  

Furthermore, a review of the EITI’s 2018 report reveals that 90 percent or 14.2 billion MNT of the total 15.9 billion MNT transferred from companies under the “Cooperation Agreement” were concentrated at locally owned funds. Our existing data shows that four of the 8 funds were operating at the province level, three at the soum level, and one at the bagh level as of 2018. In short, it needs to be strongly emphasized that local “small” directors wield authority over a significant amount of money outside the law and the public’s eye.

The big picture

Despite the considerable benefits of mining companies’ donations on the soum budget, they’re still “peanuts” compared to the total amount paid at the state level. The total amount of donations from the mining sector makes up 0.8 percent of the total revenues brought to Mongolia. Some soums and communities don’t reap this benefit. For most of the ones that do, it’s still not sufficient to improve the living qualities of their communities, as the numbers reveal. 

It’s difficult to blame local communities who were neglected from the development progress for wanting to create on their opportunities the government didn’t provide. Their view is that establishing a provincial or local fund will increase the money that comes from the mining industry to the community. Why not, if Umnugobi is a real-life example?

The only issue is the funds’ spending is largely outside of the public’s eye, creating risks of corruption and white-collar crimes. Moreover, although they say the concentrated fund is used to finance budgetary activities, it’s unclear as to who makes the decision, how they make it, and whether or not the money is being spent effectively. It’s hard to both justify and refute the spending.  

On the other hand, companies are frustrated at the “mandatory” payment of a donation to different levels of state funds. Therefore, risks can be avoided and suspicions eased if the management of mining revenues is re-organized across the state in an accessible and transparent manner.  

As a result of the successful implementation of the EITI in Mongolia for 13 years and the “Transparent Agreement” initiative that focuses on making mining-related contracts and agreements accessible, the Mongolian mining sector made an unprecedented amount of information open to the public. The information provided in this article was collected from reports by the Extractive Industries Transparency Initiative and the website iltodgeree.mn. 



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