The peril and promise of resource nationalism: A case analysis of Mongolia's mining development

Resources Policy 53 (2017) 1–11

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The peril and promise of resource nationalism: A case analysis of Mongolia's mining development

MARK

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Misheelt Ganbolda,1, , Saleem H. Alib,2 a National Development Agency, Integrated Investment Policy Department, Government of Mongolia, Government Building 2, United Nations Street 5/1, Ulaanbaatar 15160, Mongolia b The Blue and Gold Distinguished Professor of Energy and Environmental Policy, College of Earth, Ocean and Environment, University of Delaware, Newark, DE 19716, USA

A R T I C L E I N F O

A BS T RAC T

Keywords: Mongolia Mining Resource nationalism State-ownership Development

Resource nationalism is often cited as the most serious risk to foreign mining investment in developing countries. Mongolia provides an important case study of studying this phenomenon and its impacts, especially during the global mining boom years from the late 1990s to 2010. This phenomenon has been exposed mainly through the ever increasing role of state ownership in major mineral deposits, mostly by direct equity participation. The rationale behind these nationalist policies is to maximize the economic and political benefits from extractive industries. However, in reality, the Mongolian government lacks financial and human resources as well as practical knowledge to engage directly in mega projects which pose substantial risks, if carried out improperly. The aim of this paper is to examine the underlying nature of the state-centric resource development model in Mongolia. Using an institutionalist approach, the study provides a systematic understanding of the root causes for the growing state involvements in mineral resource development, and its implications for and implementation upon the Mongolian mining sector, including major challenges encountered as a result of the dominant ownership structures shaping the industry.

1. Introduction Extractive industries have often been defined as national assets in legal and social terms whereby they command ascendancy in political discourse on nationalism. Such “resource nationalism” can certainly have many favourable impacts in terms of its potential for wealth distribution across society. Often such nationalism can be manifest in the form of some state-ownership preference for extractive industry projects that can lead to relative success stories, such as diamonds in Botswana and copper in Chile. While such “positive” resource nationalism deserves to be recognized for its potential, it is usually successful when coupled with some level of foreign engagement. Due to endogenous factors within rapidly urbanizing and industrializing societies, there are also emerging forms of resource nationalism which are largely premised on suspicion of all foreign investment. We term this exclusionary and conspiratorial form as “negative resource nationalism”. Such negative resource nationalism is also a major cause of internal political conflict within countries and can also

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fuel violent secessionist movement (Bannon and Collier, 2003). Although self-determination of communities based on consensus should be a fundamental right, the argumentation and rationalization of such assertions should be premised on positive forces of national identity and governance efficiency rather than visceral fear of foreigners or suspicion. No doubt there are many communities in resource rich areas which are often not realizing the full benefits of foreign corporate investment and have legitimate grievances around resource rents not fulfilling their objective. Such dashed expectations are further fuelling a form of xenophobic nationalism in developing and developed countries alike that deserves attention (Bremmer and Johnston, 2009; Stevens, 2008). In this paper we explore both positive and negative forms of resource nationalism and consider how best to modulate their impact in the case of Mongolia, a country that has experienced a massive growth in foreign mining interests over the past two decades. We seek to address the research question of how resource nationalism could be more effectively configured between public, private,

Corresponding author. E-mail addresses: [email protected] (M. Ganbold), [email protected], [email protected] (S.H. Ali). Permanent address: 23-13, 6th khoroo, Baga toiruu, Chingeltei district, Ulaanbaatar, Mongolia. Post office 46-493 2 Chair in Sustainable Resource Development, Programme Leader, Development and Governance, Sustainable Minerals Institute (SMI), 4th floor, Sir James Foots Building (47A), The University of Queensland, Brisbane, QLD, 4072 Australia. 1

http://dx.doi.org/10.1016/j.resourpol.2017.05.006 Received 3 September 2016; Received in revised form 10 May 2017; Accepted 11 May 2017 0301-4207/ © 2017 Published by Elsevier Ltd.

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investigated the cyclical nature of resource nationalism and pointed out the relationship between state and international oil companies, in terms of exploiting crude oil during the boom and bust periods. Stevens (2008) stresses two basic characteristics of resource nationalism: limiting the operations of private firms and demanding greater government control over resource development. The author further argues that resource nationalism is not only a growing concern in developing regions, but it has become a major issue in several resourcerich developed countries such as Canada and Australia, where it may be manifest through domestic private ownership, rather than state-ownership or assets. Domjan and Stone (2010, p. 38) define resource nationalism as “a wide range of strategies that domestic elites employ in order to increase their control of natural resource”. They explain resource nationalism from practical perspectives and assert that it encompasses reasserting state control over natural resources before or after most investment has been sunk in mining project and the full exclusion of foreign participation. Building on this notion, in his research on resource nationalism in Latin American countries, Mares (2010) states that natural resources are a ‘national patrimony’ and, consequently, should not be used for private gain. Bridge (2014) refers the term “resource-state nexus” (p. 1) to examine the spatiotemporal characteristics of individual states sovereign right over the governance of common resources such as water, land, and minerals. Conceptualizing that binding nature of the territorial dominances of the state to explore and develop mineral wealth in such a way is particularly important as it shed lights on the fundamental relationship between ‘state-resources’ from critical geographical perspectives. Having said that, he further illustrates the constitutive relationship between volume of minerals and state sovereignty taking into account of vertical as well as horizontal dimensions of the resource exploitations (Bridge, 2013). The state being a legitimate owner of the mineral wealth within its territory, it can tend to transfer such tenure rights to private entities through grants and contracts. As a result, the static form of resources where they are considered underground (subsurface both literally and figuratively) must also be coupled with their horizontal nexus in terms of the state being co-opted by various neoliberal clients (Bridge, 2014). Thus human geographers offer an important critique of the conventional linear, and often binary notion, of resource nationalism between public and private spheres that political scientists and international relations scholars have espoused (Childs, 2016). Bremmer and Johnston, (2009 pp. 150–152) categorize resource nationalism into four distinct types depending on their root causes, impact on mining industries, and on investment in resource industries. They first introduce a so called “revolutionary resource nationalism” and take Russia and Venezuela as an example of this category. The aim of the revolutionary resource nationalism is not only to increase government control over the mineral sector but also to achieve certain political goals. This form is often expressed as public unrest that demands the transfer for natural resources from private owners to public coffers. Secondly, “economic resource nationalism” is a more common variant of resource nationalism and it aims to support economic diversification through receiving larger share of resource revenues from international mining companies. Compared to revolutionary resource nationalism, this type of resource nationalism is separate from a political agenda and is focused more on revenue maximization from its minerals. Kazakhstan has been considered as typical example in this category. “Legacy resource nationalism” is a third form that is featured in persistent historical episodes where nationalist ideology has attached to the political and cultural identity (Bremmer and Johnston, 2009). Mexico and Nigeria's long-established value on the national oil industry and subsequent changes during the 1938s and 1970s are clear cases.

local and foreign investment to ensure most economically and socially efficient outcomes in a developing country, particularly with a small population relative to its very large resource endowments. One would hypothesize that smaller, more ethnically homogenous countries, such as Mongolia, would have less regional resource nationalism. However, the rise of resource nationalism in such a country provides an important test case to study the phenomenon at its core level. The Mongolian case thus suggests the urgency of addressing the challenge of effective resource governance in the wake of nationalist impulses, which could lead to even more complex and intractable conflicts in larger more heterogeneous countries. 2. Shifting approaches to resource nationalism The governance structures of mineral industries have been experiencing a dramatic shift over the past two decades due to cyclical price volatility of the mineral commodities (Wilson, 2015). Along with the surging values of minerals and metals in the mid-1970s, resource-rich nations tend to take both regulatory and non-regulatory approaches to intervene in the activities of the mining sector, in order to maximize the social, political, as well as economic benefits that could be generated from the extractive industries. The incentives for taking such arrangements can be explained by several reasons-from narrowly defined political interests to national development requirements. These incentives could also be implemented through different ways, such as increasing resource rent taxes, controlling prices, restricting outputs, deferring and breaching contractual agreements with investors, and even expropriating all privately-owned mines (Auty and Mikesell, 1998; Webb, 2008). As a result of this new wave of state-driven resource sector reforms, “resource nationalism” has emerged as a potent force in determining investment risk. The fundamental idea of nationalizing mineral resources is established under the assumption that ‘laissez-faire’ market principles cannot create sufficient benefits for the local economy where mining activities occur and thus states should take rather interventionist actions to receive higher levels of pay-offs (Moran, 1971). This ideology together with individual state's sovereign rights on exercising its mineral endowments within the territory has paved the way of state participation in exploring and exploiting mineral resources, financing and developing mining projects, either directly or through SOEs (Southalan, 2012). In practice however, majority of those enterprises are shaped by common features: lower productivity, lack of accountability, high corruption, and poor governance practice compared to their private counterparts (Perotti, 2004). Hence, there have been massive shifts from the state-centered bureaucratic model to private sector-led development policy during the last 20 years (World Bank, 2011a, 2011b). This is largely due to intensifying competition over the global non-renewable resources supply, and more importantly, the mineral industries’ strategic importance to national economic and political stability. As a result, state participation in the mining sector remains relatively high and the ownership model is often dominated by natural resource companies (NRCs) or other government appointed organizations. This is especially the case in developing countries (Ramamurti and Vernon, 1991) where economies are heavily reliant on mining industries. Regarding the ways of operationalizing resource nationalism, Gilpin (1987) identified two different policy options: either state-based or market-based governance mechanisms that resource countries face for the management of resources in ground. Wilson (2011) defined the ways in which these two types of management systems are employed in natural resource sectors: resource nationalism and resource liberalism. According to him, resource nationalism is a state-driven approach to the management of mineral resources. Similarly, Joffé et al. (2009, p. 4) describe resource nationalism as “the expression, by states, of their determination to gain the maximum national advantages from the exploitation of national resource”. They 2

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Finally, “soft resource nationalism” is taking place in OECD countries such as US, Canada, and Australia. These countries exercise a rather ‘soft’ approach- through pre-established norms and agreements to increase economic benefits. Instead of taking more radical policy actions e.g. expropriation of private asset, termination of contract, and nationalisation of natural resource companies which are common in developing countries, they tend to follow a formal rule of laws to govern resource industries. By considering the matter orthogonally, Ward (2009, p. 8) divides resource nationalism into three types: “producer countries resource nationalism, consumer countries resource nationalism, and investment target countries resource nationalism,” and identifies distinct features of each resource nationalism. Ward argues that compared to other two forms of resource nationalism, so called investment countries resource nationalism is a rather new concept in the mineral sector which is often practiced through the promotion of Sovereign Wealth Funds (SWFs). The establishment of such funds can indeed be a mechanism to promote economic resilience and state control of mineral rents without state ownership of enterprises. Considering these various forms, Vivoda (2009), Kretzschmar, Kirchner and Sharifzyanova (2010) analysed the negative impacts of resource nationalism on foreign investments and operating conditions for global mining houses. They found that resurgence of resource nationalism in mineral-producing countries pose significant uncertainties over the resource extraction by Western companies. These adverse impacts are threatening the performance of their operations and destabilizing their future sustainability as commercial entities. Guriev et al. (2011) investigated the concept of resource nationalism from an institutional point of view and concluded that despite the apparent inefficiency of nationalisation, governments tend to choose such policyespecially in countries where there is a weak institutional capacity and an unstable political environment. Andreasson (2015) examined resource nationalism in Sub-Saharan Africa's context and confirmed that different historical backgrounds and political environments are shaping the patterns of different types of resource nationalism. While particular policies deployed as part of resource nationalism vary across countries, Wilson (2011), summarizes the following key characteristics of policies which have been fundamental impacts on resource governance:

• • •

2012; Cuervo-Cazurra et al., 2014; OECD, 2015). This literature often neglects the root causes for the emergence of SOEs and do not question the extent to which the role of state ownership in resource development will bring about desired development outcomes. For this premises, Wilson (2010, 2011) outlined four different objectives with corresponding regulatory measures that have been taken by states engaged in resource development projects:

• • • •

Enlarging the returns from resource extraction by mandating increases in the traded prices of mineral products, through utilization of an export ban and/or “participation in international commodity cartels” (Gilbert cited in Wilson, 2011, p. 285); The capture of these earnings by defining minimum levels of domestic ownership, “either through FDI controls or, in extreme cases, nationalisation” (Mares cited in Wilson, 2011, p. 285); The creation of downstream industries by demanding that firms engage in in-country processing, through negotiating with foreign companies (Moran cited in Wilson, 2011); and The extraction of non-resource related allowances from buyer states, through the use of numerous forms of resource diplomacy (Arndt cited in Wilson, 2010).

Perotti (2004) examined the governance role of state ownership in the resource sector based on several countries cases. He finds that “gradual transfer of operational control and financial claims over state assets remains the most desirable goal, but needs to be paced so as to avoid regulatory capture and the capture of the privatization process itself” (p. 2). He argued that weak institutional background limits regulatory capacity and accountability. In such condition, maintaining state control hinders resource endowment and therefore, the balance should shift towards less state ownership by the state. Such an institutionalist approach was also supported by Kretzschmar et al. (2010) by using historical data to show strong correlation between country risk profiles and state ownership of oil and gas industries. They concluded that unstable political and legal environments increase the excess concentration of ownership in resource sector. We concur with this instrumentalist approach as a starting point to consider our primary case research on Mongolia. 3. Theoretical framework

Policies restraining the operations of resource firms through regulatory burdens and restricting trade regimes that encourage certain behaviours such as minerals processing or the provision of subsided energy to local consumers; Policies seeking the high economic rents for populist purpose, through changes to resource taxation and fiscal regimes that intended to increase the share of the profits from resource production accruing to the state; Policies targeting the ownership of mineral industries, which mandate some form of local or state ownership, or in some extreme cases, the nationalisation of mining and energy firms.

A theoretical premise of our research reinforces two different but highly related bargaining theories: “market cycle” and “obsolescing bargain model.” Introduced by Wilson in 1987 (Wilson, 2015), the market cycle model argues that world mineral price cycles determine the position of state-companies in bargaining for resource sector rents. The theory asserts that during the boom period, governments had advantages in bargaining and tended to impose substantial demands to private firms. However, during the bust cycle of resource prices, the power balance would transfer to private corporations, who could then influence the state in various ways to adopt more liberal policies. Vernon's obsolescing bargain model (cited in Domjan & Stone, 2010; Vivoda, 2009) implies dynamic changes in bargaining power between resource firms and host governments relative to the “scale and technological complexity of the industry concerned” (Kretzschmar et al., 2010, p. 42). This means state participation is limited or no longer exists in the projects which require substantial capital and advanced technologies. The obsolescing bargain theory emphasizes that at the earliest stage of mining projects, firms have the upper hand in bargaining due to uncertainty and substantial amount of financial resources required to carry out a resource project. As a result, states have to offer favourable conditions to attract foreign investment. But, after the allocation of investments, uncertainty would be eliminated and the resource projects would become ‘sunk assets’. Under such circumstances, initially agreed bargaining conditions would change, enabling states to undertake rather onerous regulatory measures

Grimley (2015), based on the Ernst & Young's report on “Business Risk Radar for Mining and Metals” (2014), introduced that “mandated beneficiation and state ownership” has been the most dramatic pattern of recent resource nationalism. According to Grimley, mandated beneficiation has become very common as governments “seek to extract greater value from their resources by accrediting that minerals are processed in-country prior to export” (p. 22), while larger state ownership comes from the desire to take direct equity participation to mining development and production activity. As part of the resource nationalism, the role of state ownership in resource development has become a popular topic amongst mining practitioners. However, very limited studies have been done on this topic and most of the existing works are designed to address operational performances and growing significances of the global SOEs (Das, 3

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products in total exports reached to 89.2 per cent and foreign investments in the mining sector tripled within just one year, reaching as much as 4.0 billion USD in 2011 (Bank of Mongolia, 2011). As a result, from a very small economy, based mostly on traditional herding and agriculture, Mongolia has become a mining-based country (Chuluundorj and Danzanbaljir, 2014). This shift has, in turn, affected every aspects of socioeconomic as well as socio-political environments in Mongolia. Due to growing significance of resource industries in national prosperity, the Government of Mongolia (GoM) sees its mineral endowments as a key driving force to achieve better development outcomes. Thus state participation in resource industries has become ever more apparent. State ownership in mineral resources development of Mongolia can be dated back to the former socialist era since 1945–1990. During that time, because of the centrally planned economic system, state interventions were relatively high. In order to achieve predetermined socialist agendas and fulfil national five years development plans, “Erdenet” copper and molybdenum complex and Mongolrostsvetmet joint stock company, and the “Mardai” uranium mine were established in cooperation with the former Soviet Union. Mongolczechoslovakmetal was established with assistance from the former Czechoslovakia, and “Baganuur” and “Shivee-Ovoo” coal mines were developed and managed by either jointly with the communist bloc countries or individually by the GoM (Pomfret, 2011; Chuluundorj and Danzanbaljir, 2014). The main ownership mode during the given period was thus defined as full state ownership with increasing concern on maximizing social welfares, instead of improving the economic performances and ownership efficiencies. As such, the majority of the state owned mines were operated at considerable losses (Pomfret, 2011). However, during the transition period between 1990 and 2000, dominant ownership structure has changed dramatically. When Mongolia adopted a market-based economy in 1990, more than one hundred SOEs were privatized under the guise of improving productivities and reducing state involvements in economic sectors. Even so, government retained its complete ownership status in few strategic sectors including transport, power, and mining (Krusekopf, 2015). As Mongolia undergone tremendous socioeconomic changes since 1990s, the GoM demonstrated a lack of practical understanding about, and approaches to, privatizing those strategic sectors. Therefore, state ownership in resource industries remain unchanged and government maintained its direct control over the major mines to avoid costly (often failed) contract arrangements with private investors (Sappington & Stiglitz cited in Perotti, 2004). Retention of state ownership could also be attributed to the growing fear that liberalizing such industry would lead to state unable to provide public services at affordable prices (OECD, 2015). In the early 2000s, as metal prices plunged considerably, Mongolian government reviewed its ownership policy and started to pay more attention on privatizing state holding assets. Despite the fact, state ownership in mining sector re-surged again in the mid-2000s due to the rising international prices of copper and gold. This has coincided with policy shifts in China, Latin America and South Africa which exposed through growing control over the natural resource supplies (World Bank, 2011a, 2011b). Responding to this new trend, GoM focused its mineral policy towards more ‘participatory’ approach which encouraged greater state control over the resource industries. This interest was fuelled further by the new discovery of Oyu Tolgoi copper and gold deposit, one of the largest untapped mines in the world, by Canadian mining company Ivanhoe Mines in 2001. The exploration of the mine was paved the way for growing attention of foreign investors and mining communities to Mongolia which, in turn, resulted in massive inflows of foreign capital to Mongolia. Therefore, in order to increase the level of government involvement in mining sector, ‘State Ikh Khural’ or Parliament of Mongolia, the top legislative body, introduced various laws and regulations, a new taxing system, and other policy measures to capture

(Wilson, 2015). Within this theory the degree of maturities in resource industries are the main explanatory factors. Another important theory concerned in this research is the “rentier state theory” (Wilson, 2015, p. 405). This theory highlights domestic political authorities’ willingness to control the allocation of mineral resource rents. Adopting such interventionist policy allows state to redistribute revenues derived from mineral extractions to finance widespread social welfare programs, “enabling a ruling bargain between political regimes and their subjects based on appeasement through rent distribution” (El-Katiri cited in Wilson, 2015, p. 403). From this perspective, resource nationalism – especially in the form of state ownership – serves a key regulatory instrument for rentier states. From this conceptual understanding, resource nationalism could be framed as a conflict between national interests (often designed to achieve specific political goals) and foreign firms’ efforts to maximize profits. Thus the role of state ownership in resource endowments could be regarded as the host state's sovereign right of exercising its control over natural resources found within the territory of the state through using both regulatory and non-regulatory approaches. Using such an institutionalist approach to conceptualize ongoing resource nationalism in Mongolia is important since it offers a full picture of organizational dynamics in the Mongolian resource sector within the context of the state ownership model. 4. The state as an agent of resource developmnet: case of Mongolia Mongolia has over 8000 occurrences and 1000 deposits of more than 80 different minerals within its territory (Chuluundorj and Danzanbaljir, 2014). Over 1494 mines are under operations, the majority of the currently active mining operations are in coal, zinc, copper and molybdenum, gold, iron ore, fluorspar which account for 17.1 per cent of the gross domestic products and 79.1 per cent of the total industrial outputs (MRPAM, 2016). According to the Mineral Resources and Petroleum Authority of Mongolia (MRPAM), approximately 3329 mineral licenses have been granted to both foreign and domestic companies covering 13.9 million hectares or 8.9 per cent of the entire territory, of which 1494 are operational and 1835 are exploration licenses as of 2015. Considering that only 8.1 per cent of the licensed areas are under exploration, there is great potential of increases in mineral reserves as more exploration will be conducted in remaining areas. Along with the rapid development of mineral industries in Mongolia, a number of world-scale large mines such as “Oyu Tolgoi” copper and molybdenum mine, “Tavan Tolgoi” coking coal mine, and “TsagaanSuvarga” copper mine in southern Gobi region of Mongolia are expected to generate substantial development opportunities. In addition, extremely favourable market conditions for world mineral commodities, especially during the 2010–2013 made Mongolian minerals attractive to foreign investors accelerated economic growth during that period. As mining become a core economic sector, this new trend led to substantial changes in the existing structures of the economy (Table 1). Macroeconomic indicators improved significantly and GDP growth reached to 17.3 per cent in 2011, making Mongolia one of the fastest growing economies in the world. In the meantime, shares of mining Table 1 Major changes in economy between 2003 and 2013. Source: Modified from Chuluundorj and Danzanbaljir (2014) Largest sector of economy (share in GDP)

2003 Trade 28.8% Agriculture 20%

2013 Mining 20% Agriculture 13.6%

Exports (USD billions) GDP (USD billions) GDP per capita (USD)

0.615 0.9 385

4.273 12.46 3964

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(a): Structure of state organizations relates to mineral governance Parliament of Mongolia

State Property Policy and Coordination Agency

Government of Mongolia National Development Agency Ministry of Mining and Heavy Industry

Nuclear Energy Commission

Mineral Resources and Petroleum Authority

(b): State-backed mining enterprises in Mongolia.

Fig. 1. (a): Structure of state organizations relates to mineral governance (b): State-backed mining enterprises in Mongolia.

As for commercial perspectives, GoM is involving and controlling greater equities in mining projects through establishing a number of state-owned resource companies. Being as the largest state-backed mining entity in Mongolia, “Erdenes Mongol” (or Erdenes MGL) company was founded in 2007. The company is not only possessing Mongolia's world class-mines, but also entitled to retain an ownership status for a Gashuun-Sukhait coal transporting road, Gashuun-Sukhait port and entry point, nation's arterial mining infrastructures and a major exporting hub connecting South Gobi region's coal mines and other adjacent mines to the Chinese border. Table 3 shows the key mining projects undertaken by Erdenes MGL and some of the hybrid ownership stakes that have been followed. Apart from Erdenes MGL, other state-owned mining entities such as Mon-Atom LLC,3 Mongolrostsvetment LLC4 (see Fig. 1b) and their subsidy companies are operating on behalf of the GoM and exploiting and processing various minerals such as uranium, fluorite, iron ore, and silver. As such, in Mongolian case, the state is certainly acting as a key agent in mineral industries through controlling and holding direct

resource rents. In short, state-led resource development policies in Mongolia mirrored with a dominant trend in the global mining industry, and occurred in the context of rising mineral prices, “optimism over the scale and value of natural resources in Mongolia and a flood of private investment and interest in the sector” (Krusekopf, 2015, p. 4). As state involved substantially in resource development, institutional functions diverged considerably and become a critical factor to manipulate overall industry. Fig. 1(a and b) depicts an overview of major state organizations and established NRCs in the Mongolian mining sector. While in Table 2, roles of respective organizations and their extent of influences over resource development is provided. It is clear from both figures that the state is, indeed, playing a vital role in the resource sector through administrative and commercial channels. At the administrative level, the Parliament of Mongolia has substantial rights over the resource industries therefore, significant influence over mining activities. Although the Ministry of Mining and Heavy Industry is the top regulatory authority for the mining sector and has the overall responsibility to develop and proposer the mining industry, its functions is hindered by legislative burdens and a lack of coordination across inter-ministries. This flaw has fully reflected in the respective laws and regulations governing mining industries and the political environment shaping mineral sector in Mongolia.

3 Fully state-owned uranium company holding at least two major uranium deposits: Mardai and Dornod uranium projects in Eastern part of Mongolia. 4 51.0 per cent owned by GoM and 49.0 per cent owned by Mongolian Copper Corporation. The company holds 32 licenses as of 2016. Of which, 3 are exploration and 29 are mining licenses. Source: Official website of Mongolrostsvetmet (2016).

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Table 2 Roles of selected state organizations in resource development. Source: Compiled from Minerals Law of Mongolia (2006); National Development Agency (2016); Nuclear Energy Commission (2016); Law on Investment of Mongolia (2013). State organizations

Major roles

Degree of influence over the mining sector

Parliament of Mongolia

-Determine state policy with respect to mining sector; -Oversee the implementation of legislation on mining; -Approve a mineral deposit as a mineral deposit of strategic importance; -Restrict or prohibit exploration and exploitation of minerals, terminate grants of exploration and mining licenses for certain territories; -Have competence over reconnaissance, exploration and mining of minerals in areas with state special protections; -Determine the state's share percentage of mineral deposits of strategic importance;

Extremely high

Government of Mongolia

-Enforce implementation of legislations on mining; -Implement state policy with respect to development of geology and mining sector; -Submit proposal to the Parliament of Mongolia for approval of a mineral deposit of strategic importance, and for determining the state share; -Determine source of investment of Mongolia in a joint venture to develop mines;

Relatively High

Ministry of Mining and Heavy Industry (including MRPAM)a

-Regulate exploration and mining activates; -oversee operations with respect to development of strategic deposit; -conduct various types of surveys (e.g. geological, geophysical); - Create a favourable investment environment for the mining sector; -Organize a tender to issue a license for an identified area of mineral concentration; -Issue exploration and mining licenses;

High

National Development Agency

-Issue stabilization certificate to the foreign investors who meet certain requirements specified in the Law of Investment; -Decide to allow (or not) permission on mining investment by foreign state owned legal entities and to provide assistances on investment agreement; -Protect investors legal rights through consulting service;

Moderate

State Property Policy and Coordination Agency

-Control and regulate the operations of state owned legal entities; -Implement state ownership representations on behalf of the government;

Moderate

Nuclear Energy Commission

-Develop radioactive minerals exploration and exploitation activities; -Mining and control of uranium deposits;

Low

a

Mineral Resources and Petroleum Authority of Mongolia (MRPAM) is a government agency under the Ministry of Mining and Heavy Industry.

GoM to take a series of nationalist policies on resource sector to ensure state-driven resource development initiatives, which have failed to serve as an effective resource governance practice.

Table 3 Ownership structures and the key mining projects undertaken by Erdenes MGL. Source: Data compiled from the official website of Erdenes MGL. Portfolio companies

Government shareholding rate

Major project

Ownership stakes in individual mines

Erdenes Oyu Tolgoi

100%

Oyu Tolgoi copper and gold mine

Turquoise Hill Resources- 66% GoM- 34%

Erdenes Tavantolgoi

100%

Tavan Tolgoi coking coal mine

GoM−80% Private companies20%

Erdenet Mining Corporation

51%

Erdenet copper and molybdenum mine

GoM−51% Mongolian Copper Corporation −49%

Baganuur

75%

Baganuur coal mine

GoM−90% Private companies−10%

Shivee- Ovoo

90%

Shivee-Ovoo coal mine

GoM−90% Private companies−10%

5. Implications for and implementations of state ownership in the context of resource development in Mongolia The state exercising full or partial ownership over natural resources found within its territory usually implies the state's sovereign right to control and exploit those minerals (Akpan, 2005). In Mongolia, a growing desire for the state to own and control greater stakes in natural resource development could be explained by several factors and implemented through taking different policy measures which either directly or indirectly promote state participation in resource industries. The long-held nomadic belief and lifestyle of herders in Mongolia is important factor for shaping such trend. Herders not only profit from traditional livestock husbandry, but also rely on livestock for food, housing, and clothing (World Bank, 2009). Therefore, livestock herding was and remains the single most important source of livelihood for people in Mongolia. As herders move seasonally from one place to another, the grazing land is a vital resource. Hence, nomadic herders are the main users of land and their livestock's viability is substantially dependent on the availability of land. For this reason, herds and land have been long considered as a foundation of socioeconomic stability in Mongolia (Spadavecchia, 2014). This belief is fully reflected in the major policy framework governing the mining sector. For instance, Article 6.1 of the Constitutional Law of Mongolia (1992) states that “the land, its subsoil, forest, water, fauna and flora and other natural resources in Mongolia shall belong exclusively to the people and be under state protection”. Further, in the

equities in all major resource projects with the general aim of “efficiently using natural resources, and to enhance the country's economic performance and encourage diversification” (Erdenes Mongol, 2016). In reality, however, uncontrolled expansion of mining and substantial revenues generated from extractive industries has led

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Article 3 of the Law on Subsoil of Mongolia (1988) states that “the subsoil of Mongolia is the property of the State or in other words, it is the property of all people of Mongolia” and gives the highest authority to the Parliament of Mongolia in formulating state policy on the use and protection of subsoil. These two articles are thus shaping the fundamental relations with respect to state ownership and control of mineral resources and could be interpreted as bestowing the ownership of natural resources in Mongolia to the state. However in the recent years, as mining become widespread across the country, many herders were displaced from their land and lost their livelihood, especially in the southern part of the Gobi region where the majority of the very large mining projects are taking place. The loss of biodiversity has been intensified and a number of wild animals have become extinct, and forests and rivers have disappeared due to resource extraction and associated infrastructure development (UNDP, 2011; World Bank, 2009). Since Mongolians are extremely “protective of their land and natural resources” (Krusekopf, 2016, p. 13), there were rising public demands for protecting the environment and falling reputation of foreign investors among rural communities. As a result, many protective decisions and ‘mining-unfriendly’ legislations were introduced by the different state administration in order to control resource development. At the Presidential level, and due to national security concerns, ordinances were enacted in 2010 regarding the suspension of the issuance of both exploration and mining licenses. The decision was extended until 2014, when the Parliament of Mongolia enacted the “Law of Mongolia on the Repeal of the Law of Granting Exploration Licenses” on 18 August 2014. In addition to that, the Mongolian Parliament itself adopted the “Law on Prohibiting Mineral Exploration and Extraction Activities in the Headwaters of Rivers, Protected Water Reservoir and Forested Areas” (or often called the law with the long name) on 16 July 2009. As a result of this law, over 346 mining companies’ licenses were suspended. The second critical factor intensifying the role of state participation in resource development is the growing public awareness toward state majority ownership of certain mineral deposits. A general sentiment exists among the public that the government should hold larger stakes in resource projects. This was also reflected in the revised Law on Minerals (2006), the principle legislative act governing the mineral sector. The revised version of the Law significantly amplified the state's role in granting and developing mineral deposits by prohibiting foreign investors from directly owning mining licenses, placing minimum quotas for local Mongolians employed in mining projects, and establishing investment agreements with the GoM. Simultaneously, State Ikh Khural also passed the Resolution No27 in 2007 to declare 15 mineral deposits as strategic importance (Fig. 2).5 This concept was embedded in the Article 5 in the Minerals Law. The Law allowed the state to obtain stakes of 34.0 per cent to 50.0 per cent from those deposits depending on whether exploration was funded by state budget or private entities. Consistent with that, the political barometer conducted by the Sant Maral Foundation in March 2014 (see Table 4) reveals that 55.8 per cent of the people responded that more than 50.0 per cent of the resource should be owned by Mongolians for those deposits of strategic importance. A quarter of the general public responded that ownership should be 100 per cent Mongolian. However, only 0.8 per cent of the total respondents deemed that foreign investors should be the full ownership of those deposits. This number is even smaller in rural areas (0.4 per cent), where almost all of the mineral deposits occur. Therefore, public opinion framed by legal provision is supporting the role of state

ownership stakes in resource projects. Changing dynamics of geopolitical power between Russia and China is another reason behind state ownership of resource development. Mongolia has long felt geopolitical anxiety towards its two neighbouring countries, China and Russia. Being sandwiched between two of the world's largest economies, geographical domination is deeply rooted in the public consciousness and Mongolians are concerned over potential threats that could be (and used to be), made by one or both of the countries both economically and politically. In addition, Russia and China have been, so far, the biggest trading partners and dominant players in the Mongolian resource sector (Spadavecchia, 2014). These historical fears have shaped Mongolian politics for many years and influencing resource sector investment policies. The situation is more severe when it comes to China. This is due mainly to the fact that since 2013, almost 86.0 per cent of mineral exports, mostly non-valued added natural resources are shipped to China (National Statistics Office, 2013). Further, as shown in Fig. 3, more than 50.0 per cent of the mining licenses were held by Chinese companies at the end of 2015. This effectively makes China the only market for Mongolian mineral commodities and the single biggest investor in mining projects. Moreover, growing trade and investment from China, especially in the resource sector, has resulted in a serious imbalance in the Mongolian economy and the total investment made by Chinese firms has already exceeded the limit specified in investment law. Geopolitical concern with relation to growing investment from China further deteriorated as Chinese state-owned resource company, Chalco's proposed takeover of “Ovoot-Tolgoi” coal mine, one of the largest coal deposits in Mongolia, from Canadian South-Gobi Resource Company. This deal confronted with strong opposition from general public polling and reflected in similar stances from major political parties. Such overseas investment related disputes around the mining sector has inflated public anxiety over the national security, in particular the foreign state-owned companies intentions to acquiring and controlling mineral deposits in Mongolia could negatively impact on social and economic stability. As a consequence, the Parliament of Mongolia introduced a very ambitious law, “the Law on Strategic Entities Investment” in 2012. The Article 21.1 of this law outlines sectors of strategic importance to include: (i) mineral resources; (ii) banking and finance; and (iii) media and communications and imposes restrictions and obligations on foreign state-owned and private companies if such business entities intend to acquire one-third or more than 49.0 per cent of the shares from above-mentioned sectors, they need to obtain approval from either government or parliament depending on the size of investment. Thus, for ordinary Mongolians as well as Mongolian government, maintaining state ownership is seen as vital to retain control over the resource project and to ensure national security in strategically important sector such as mining. As Mongolia develops its abundant mineral resources, local politicians tend to demand more from both domestic and foreign entities operating in the resource sector. This could be attributed to promises made by candidates running in parliamentary election in Mongolia. During the four years election cycle, political parties often declare rather populist manifestos and offer a wide range of welfare programs to the general public in order to take majority seats in the parliament. For instance, during the parliamentary election in 2004, Mongolian Democratic Party (MDP) proposed “Child Money Program”, offering 10.0 thousand MNT6 (8.30 USD) per month for every child below 18 years. This universal welfare program brought substantial success to the MDP, “forcing the formation of a coalition government” with the Mongolian People's Revolutionary Party (MPRP)7 (Yeung and Howes, 2015, p. 10). As government revenues continued to rise in line with the

5 According to the Article 4.1.11 of Law on Minerals of Mongolia, mineral deposit of strategic importance means a deposit that may have a potential impact on national security and producing or has a potential of producing more than 5.0 per cent of a nation's GDP in a given year.

6 7

7

Mongolian national currency-tugrik Current Mongolian People's Party.

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M. Ganbold, S.H. Ali

Fig. 2. Mineral deposits of strategic importance. Source: Modified from Sedbazar (2009)

promises and pledged to distribute 1.0 million MNT per person (855 USD). Similar campaign was introduced by the rival party, the MPRP, which increased the benefits to 1.5 million MNT or approximately 1282 USD per person. Both parties have no specific financial plan to fund such an enormous cash spurred by populism, apart from excessive optimism towards mineral commodity prices and affiliated revenues. In June 2016, month before the general election, GoM again announced a new plan to purchase 322 of 1072 Erdenes-Tavantolgoi Company's free holding shares by all Mongolian citizens at 300.0 thousand MNT. Although it is not mandatory to sell their shares to the government, many citizens preferred to receive a cash instead of reserving the stakes. It was declared by the government that the aim of this ‘share-to-cash’ transfer program was to support economy during the hardship, however, it was unclear how to finance this program as state budget deficit had already reached to 1.02 trillion MNT in the first half of 2016 (Ministry of Finance, 2016). Therefore, in order to fulfil election promises the most politically expedient way for the parties is to initiate different laws and regulations to maintain state ownership status in the resource sector so as to finance their expensive campaigns through ‘ownership credit’. No doubt, it is relatively common practice in many mineral rich countries that state participation in resource projects can be implemented by a government backed companies established to hold majority or minority equity in joint companies (Halland et al., 2015). However, in the Mongolian case, overwhelming political interventions and growing conflict of interests in state-owned mining companies exacerbate good governance practices and lead to poor corporate performances (Open Society Forum, 2014). According to the assessment results of the Resource Governance Index, developed by Natural Resource Governance Institute (NRGI), state-owned Erdenes MGL has shown a rather disappointing corporate governance performance, ranked at 25th among the 33 state-owned companies in different countries Relatively promising results on the institutional and legal setting in the resource sector was contrasted with poor transparency, reporting obligation, and shareholders accountability of state owned mining companies (NRGI, 2015). A more detailed study conducted by Open Society Forum and Ministry of Mining8 also reveals the same picture (Fig. 4). The ratings for the corporate governance performances by fully and partially state-owned mining companies demonstrate that a significant shortcoming was recorded on the enforcement of rule of laws at all mining companies with a government stake. Yet, better ranking was

Table 4 Survey results of foreign ownership in strategic mineral deposits of Mongolia. Source: Modified from Sant Maral Foundation (2014)

100% Mongolian More than 51% Mongolian Equal More than 51% foreign

Countryside

Ulaanbaatar (capital city)

Nationwide

24.7 56

24.4 55.4

24.6 55.8

7.7 0.4

10.1 1.4

8.7 0.8

hers Oth 13 3% Russia 3% ng Kong Hon CENTAGE] [PERC da Canad 4% Singapore 5% 5

[CATEGORY NAME] [PERCENTAGE]

Soutth Korea 5%

Virgin Islands 16%

Fig. 3. Mining licenses ownership structures (by countries, as of 31 December 2015). Source: Data compiled from Monthly Statistical Bulletin by MRPAM.

increasing prices of gold and copper in 2006, GoM increased the fund by an additional 25.0 thousand MNT (21.36 USD) per quarter to 136.0 thousand MNT (116 USD) per child per year in 2007, just before next election term. Again, in 2012, due to the growing popularity of cash distribution campaign within society, the MDP made more aggressive election

8

8

Current Ministry of Mining and Heavy Industry.

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M. Ganbold, S.H. Ali

Erdenes Mongol LLC

16

Baganuur JSC

20

Shivee-Ovoo JSC

36

Erdenet Mining Corporation

38

Erdenes Tavan Tolgoi JSC

28

Erdenes Oyu Tolgoi LLC

22

Oyu Tolgoi LLC

48

Mongolrostsvetmet LLC MonAtom LLC

36 10

Highest score

100

Fig. 4. Corporate governance performances of state-owned NRCs operating in Mongolia (percentile rating). Source: Modified from Open Society Forum (2014)

which generates sharp decline of economic growth. For instance, the recent mining downturn led to the Mongolian economy shrink to 2.4 per cent in 2015 from 17.3 per cent in 2011 (National Statistics Office, 2015). Instead of investing in more productive assets or building up adequate financial reserves during the high resource prices in 2011, GoM's expenditures on social welfare increased by 56.0 per cent (Wacaster, 2012) and the profits generated from equity participation in mining projects were exhausted on a wide range of social programs. In return, fiscal deficit soared sharply and foreign investments plunged by 80.0 per cent in 2014 (Bank of Mongolia, 2014) when Mongolia experienced the downturn of the mineral cycle. During this time, many enterprises faced insolvency risk and unemployment rose dramatically. In order to mitigate such adverse impacts, Parliament of Mongolia adopted the “Law of Mongolia on Fiscal Stability” on 24 June 2010 and established a sovereign state fund, the Fiscal Stability Fund. As stated in the Article 16.1 of this law, the fund shall be established for the purpose of ensuring medium term fiscal stability. According to Ministry of Finance (2014), the balance of the fund had reached to 107.8 billion MNT (57.08 million USD) as of 2014, far lower than the initial projection of 500.0 billion MNT by the end of the 2013 fiscal year. Direct state ownership “puts the government in a conflict of interest position” (Krusekopf, 2015, p. 22) as it is both initiating and imposing rules and regulations for the sector, while also acting as an owner impacted by those rules. This raises important questions about whether the state can introduce and implement sound mining policies which are separate from its desire to control and own resource projects. The growing role of state ownership in resource development tends to weaken institutional strengths. According to World Bank Governance Indicators, Mongolia entered the resource boom with moderate institutional performance compared to similar resource-rich developing countries such as Kazakhstan, Turkmenistan, and Azerbaijan. However, this performance has declined sharply in the past few years (Isakova, Plekhanov & Zettelmeyer 2012). As the state involved significantly in mining projects, the quality of institutions further deteriorate- corruption, bureaucracy, and abuse of power have become common phenomena- especially at the judiciary, parliamentary and top government officials level (Chene, 2012). All these challenges expose fundamental shortcomings of state ownership in the absence of institutional capacity within the government.

given to Oyu Tolgoi Company, where state holds minority shares. In contrast to Oyu Tolgoi, both Erdenes MGL and Mon-Atom, fully state owned enterprises, received the lowest scores. This poor ownership performances might be explained by political interferences and regulatory burdens on the actions taken by those companies. Because Erdenes MGL and its portfolio companies are the single largest revenue contributors to the “Human Development Fund” (HDF), a government special fund designed to finance almost all the social welfare programs proposed by the government. Hence, it is arguable that either fully or majority owned national resource companies are more likely to seek non-business objectives than minority-owned business entities (Cuervo-Cazurra et al., 2014). GoM's intention to direct ownership of major mineral deposits made several valuable mining projects unfeasible. Mismanagement of the strategically important Tavan Tolgoi coking coal deposit, the world's largest untapped coking coal mine is a case in point. The government's attempt to develop 6.0 billion tonnes of coal deposits on its own stalled despite receiving 250.0 million USD from Chinese stateowned aluminium company Chalco as pre-payment for future coal supply. Although the loan was planned to cover funds required to expand the mine infrastructures, GoM redistributed 200.0 million USD to the public as “aims of the motherland” through the HDF in 2012 which led to a derailing of the larger project. In the late 2014, the GoM introduced a new plan in the West Tsankhi part, one of the five blocks of the entire deposit and reannounced an open tender for selecting the potential investors. This time, consortium led by Japanese Sumitomo, Chinese Shenhua, and the Mongolian Mining Corporation were selected as potential operator. The tender was for the construction of 267 km of railway from the mine site to a Chinese port, the expansion of a coal processing plant, and the construction of related utilities. Unfortunately, negotiation was hampered by political impediments and rising concern about loss of state control over the deposit. Apart from the Tavan Tolgoi project, many other resource projects such as underground mine expansion of the Oyu Tolgoi project, the Dornod uranium project (owned by Canadian firm Khan-Resources), and the recent negotiation on development of Gatsuurt gold mine by Canadian Centerra Gold and GoM, and most recently, Mongolian Copper Corporation's acquisition over the state-owned Erdenet mining company's 49.0 per cent from Russian industrial giant Rostec corporation have been repeatedly facing sanctions from politicians and their supporters. As more mines develop, both the economy and the state budget have become excessively dependent on the cash generated from mining operations. This makes the overall economy vulnerable to the prices of a few minerals. As a result, minor fluctuation on commodity prices reduces the export revenues from the resource sector substantially,

6. Conclusions As a resource-rich developing country, Mongolia needs to strengthen the quality of its institutions to better respond to uncertainty in commodity markets and manage its mineral wealth as efficiently as possible. However, the increasing role of state ownership in mining 9

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development has led to a perception that efficiencies may be stifled by political interference. As the state becomes more involved in resource development, local political institutions tend to use direct state ownership to control major mining projects with the aim of capturing greater economic rents from mining for public expenditures. This has been increased by the growing public concern regarding foreign control over the lands and resources belonging to the Mongolian people. Indeed, resource nationalism provided favourable conditions for the emergence of a wide range of populist policies by the state such as cash distributions, windfall profit taxes for major resource commodities such as copper and gold, and restrictions on new exploration licenses. The dual role played by the state in the mining sector creates a substantial conflict of interest. As the state becomes both the owner and operator of resource projects, the GoM faces inconsistences between policy formation and implementation. Instead of being a responsive regulator and manager of the resource industries, the state tends to accumulate overwhelming financial liabilities through equity participation in mining projects, which pose significant financial and economic risks. As a result, the role of state ownership in mineral projects hinders long term development prospects as Mongolia experiences the pre-maturity stage of resource development. Therefore, resource nationalism in Mongolia is “revolutionary” in cadence and following a rentier state model; instead of developmentoriented, economic resource nationalism to promote industrialization and economic diversification (Wilson, 2015). From this, one may conclude in this context that the fundamental driving force of state ownership in resource projects is not to exercise its sovereign rights over the mining sector, but to gain political advantages. The state's misplaced and mistimed equity participations through its subsidy companies made a number of profitable mining projects stagnant and subject to political interests. As the state involves excessively in resource development process, it tends to hinder profitability of the mineral projects and can often postpone the project commissioning period due to internal conflict among local politicians. These delays and ambiguity over the political decisions create a serious lack of confidence among investors and can lead to a diminution in foreign direct investment. Based on our analysis, we can offer the following policy recommendations on this case:

•

•

•

•

•

“Economic and Social Stabilization Fund” while Norway created a “Government Pension Fund” from their partial mining revenues and successfully managed the economy and ensured political stability during the fall in mineral prices (Gylfason, 2011; Gladstone, 2008). In Mongolia, a proposed draft Law on the Sovereign Wealth Fund Management and the establishment of a “Future Heritage Fund” are expected to provide an incentive for future savings. Separate and prohibit state interference in the operation of SOEs and allow SOEs more authority to engage in resource projects and provide them with an environment in which they can act independently. Norway's state-owned resource company Statoil can serve as a sound model in terms of good governance practices and strong commitments made by the corporation itself to managing public assets under the most transparent, responsible, and profitable principles.

While these recommendations may seem unpalatable to the general public in the short-term, if appropriate levels of expectations and timelines are provided they can indeed be sellable. Mongolia's experience with resource nationalism suggests the need for a more informed engagement with the public on the current capacity of state institutions. International development donors must also consider institutional capacity in resource-rich countries as a priority for aid programs. Such institutional development can facilitate a more positive form of economically expedient resource nationalism in which the state works with foreign companies in a collaborative and professional manner. SOEs have the potential to succeed in delivering development outcomes but they must be a means towards facilitating positive economic activity rather than becoming an end in themselves. References Akpan, G.S., 2005. Host community hostility to mining projects: a new generation of risk? In: Bastida, E., Waelde, T.W., Warden-Fernández, J. (Eds.), International and Comparative Mineral Law and Policy: Trends and Prospects 21. Kluwer Law International, The Hague, 311–328. Andreasson, S., 2015. Varieties of Resource Nationalism in Sub-Saharan Africa's Energy and Minerals Markets. The Extractive Industries and Society. Auty, R., Warhurst, A., 1993. Sustainable development in mineral exporting economies. Resour. Policy 19 (1), 14–29. Auty, R.M., Mikesell, R.F., 1998. Sustainable Development in Mineral Economies. Clarendon, Oxford, England; New York. Bannon, I., Collier, P., 2003. Natural Resources and Violent Conflict: Options and Actions. The World Bank, Washington DC. World Bank, 2009. The Potential Social Impact of Mining Development in Southern Mongolia, Ulaanbaatar. World Bank, 2011a. Overview of state ownership in the global minerals industry: long term trends and future. Washington, DC. World Bank, 2011b. Mongolia’s external sector statistics. Research and Statistic Department, Ulaanbaatar, viewed 01 May 2016. 〈https://www.mongolbank.mn/ documents/statistic/externalsector/bopreview/bopreview_2011.pdf〉. Bank of Mongolia, 2014. Mongolia’s external sector statistics, Research and Statistic Department, Ulaanbaatar, viewed 01 May 2016. 〈https://www.mongolbank.mn/ documents/statistic/externalsector/bopreview/bopreview_2011.pdf〉. Bremmer, I., Johnston, R., 2009. The rise and fall of resource nationalism. Survival 51 (2), 149–158. Bridge, G., 2013. Territory, now in 3D. Political Geogr. 34, 55–57. Bridge, G., 2014. Resource geographies II: the resource-state nexus. Prog. Hum. Geogr. 38 (1), 118–130. Constitutional Law of Mongolia, 1992. viewed 05 May 2016. 〈www.parliament.mn/en/ files/download/26558〉. Chene, M., 2012. Corruption in natural resource management in Mongolia. Transparency International, Berlin. viewed 14 May 2016, 〈http://www.transparency.org/files/ content/corruptionqas/354_Corruption_in_natural_resources_management__ Mongolia.pdf〉. Childs, J., 2016. Geography and resource nationalism: a critical review and reframing. Extr. Ind. Soc. 3 (2), 539–546. Chuluundorj, K., Danzanbaljir, E., 2014. Financing Mongolia's mineral growth. Inn. Asia 16 (2), 275–300. Cuervo-Cazurra, A., Inkpen, A., Musacchio, A., Ramaswamy, K., 2014. Governments as owners: state-owned multinational companies. J. Int. Bus. Stud. 45 (8), 919. Das, A., 2012. Who extracts minerals more efficiently – public or private firms? A study of Indian mining industry. J. Policy Model. 34 (5), 755. Domjan, P., Stone, M., 2010. A comparative study of resource nationalism in Russia and Kazakhstan 2004–2008. Eur.-Asia Stud. 62 (1), 35–62. Erdenes Mongol, 2016. Portfolio companies, viewed 05 May 2016, 〈http://www.

Strengthen the institutional capacities and ensure the strong enforcement of rule of laws. It seems that Mongolia has already established a core legal setting in the resource industries, however, this effort was stalled by the poor enforcement of respective laws and regulations. Therefore, the role of state in the mining sector should be to safeguard and improve the legal environment. Reduce state intervention in mining sector and adhere to strict budget discipline during the mining boom. This will enable windfall mining revenues to be used to finance social welfare programs and populist policies (Auty and Warhurst, 1993). The formation of a “Spending Rule” (Larsen, 2005, p. 82) which limits public spending (similar to that which applies to Norwegian government profits generated from oil and gas industries), is a possible solution. Restructure the HDF and devote its assets into more productive investment alternatives, including public education and health. Although public expenditures in Botswana reached about 30.0 per cent of GDP (per capita of 43.0 per cent) in the early 1990s, far higher than any other developing countries, the investment was directed towards eliminating for the country's infrastructure bottlenecks and improving education and health services. As a result, average life expectancy extended from 51.9 in 1970 to 65.3 in 1993 while literacy rates increased from 41.0 per cent in 1970 to 74.0 per cent in 1993 (Auty and Mikesell, 1998). Accumulation of the resource revenues in “Fiscal Stability Fund” to respond future commodity price fluctuations. Chile established an 10

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erdenesmongol.mn/section/business.shtml?Sel=6088 & subsel=6089〉. Gilpin, R., 1987. The Political Economy of International Relations. Princeton University Press, Princeton, N.J. Gladstone, R., 2008, Pension Reserve and Social and Economic Stabilization Fund, Bank of Chile, Santiago. viewed 09 May 2016. 〈http://www.swfinstitute.org/fund/chile. php〉. Grimley, S., 2015. Resource nationalism: why the industry needs to remain vigilant despite retreating resource nationalism. AusIMM Bull., 22–24. Guriev, S., Kolotilin, A., Sonin, K., 2011. 'Determinants of nationalization in the oil sector: a theory and evidence from panel data'. J. Law, Econ., Organ. 27 (2), 301–323. Gylfason, T., 2011. Natural resource endowment: a mixed blessing? In: Gylfason, T., Arezki, R., Sy, A.N.R. (Eds.), Beyond the Curse: Policies to Harness the Power of Natural Resources. International Monetary Fund, 7–34. Halland, H., Lokanc, M., Nair, A., Kannan, S.P., 2015. The Extractive Industries Sector. World Bank, Washington, DC. Joffé, G., Stevens, P., George, T., Lux, J., Searle, C., 2009. Expropriation of oil and gas investments: historical, legal and economic perspectives in a new age of resource nationalism. J. World Energy Law Bus. 2 (1), 3–23. Kretzschmar, G.L., Kirchner, A., Sharifzyanova, L., 2010. Resource nationalism — limits to foreign direct investment. Energy J. 31 (2), 27–52. Krusekopf, C., 2015. State Ownership and the Development of Natural Resources in Mongolia. American Center for Mongolian Studies. viewed Feb 04 2016. 〈http:// socialsciences.hawaii.edu/conference/demr2015/_papers/krusekopf-charles.pdf〉. Larsen, E.R., 2005. Are rich countries immune to the resource curse? Evidence from Norway's management of its oil riches. Resour. Policy 30 (2), 75–86. Law on Investment of Mongolia, 2013. viewed 05 May 2016. 〈http://www.mzv.cz/file/ 1090541/Investment_Law___unofficial_translation_MED.pdf〉. Law on Subsoil of Mongolia, 1988. viewed 05 May 2016. 〈http://faolex.fao.org/docs/ pdf/mon42189.pdf〉. Mares, D.R., 2010. Resource Nationalism and Energy Security in Latin America: Implications for Global Oil Supplies. The James A. Baker III Institute for Public Policy, Rice University, viewed 25 April 2016http://bakerinstitute.org/publications/ EF-pub-MaresResourceNationalismWorkPaper-012010.pdf. Minerals Law of Mongolia, 2006. viewed 05 May 2016. 〈http://www.charltonsmining. com/images/stories/Overseas_Law/Mongolia/minerallawsofmongolia.pdf〉. Moran, T.H., 1971. New deal or raw deal in raw materials. Foreign Policy 5, 119–134. Ministry of Finance, 2014. Utilization of Budget for Budget Stabilization Fund. Ministry of Finance, Ulaanbaatar. viewed 10 May 2016, 〈https://www.mof.gov.mn/ wpcontent/uploads/2015/01/%D0%A2%D0%A2%D0%A1.xlsx〉. Ministry of Finance, 2016. Integrated Budget Performance for Mongolia as of June 2016. Ministry of Finance, Ulaanbaatar. viewed 26 August 2016. 〈https://www.mof.gov. mn/wp-content/uploads/2016/07/Taniltsuulga-6.pdf〉. Mongolrostsvetmet, 2016. Project overview. viewed 05 May 2016. 〈http://www. mongolros.mn/index.php?option=com_content & view=category & layout=blog & id=42 & Itemid=69 & lang=en〉. MMRPAM, 2016. Statistics Information, Monitoring-Research, Evaluation, and Statistic Information Division, Ulaanbaatar. viewed 08 February 2017. 〈https://mrpam.gov. mn/public/pages/11/monthly_report_2016.12.pdf〉. National Development Agency, 2016. Organizational Structures. viewed 26 August 2016. 〈http://nda.gov.mn/1095.html〉. NRGI, 2015. State participation in oil, gas, and mining. Natural Resource Governance Institute. viewed 20 February. 2016, 〈http://www.resourcegovernance.org/sites/

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