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10 bne IntelliNews Daily Central Asia May 14, 2015
Mongolia and Rio need tax deal for
Oyu Tolgoi as election clock ticks Terrence Edwards in Ulaanbaatar
Mongolia’s government has made big strides in resolving a tax dispute with mining giant Rio Tinto that’s holding back a $5.4bn expansion of the huge Oyu Tolgoi copper-gold mine. But time is running out to finalise a deal as politicians gear up for elections in 2016 that will inevitably involve some multinational bashing.
The mine was supposed to double the size of the economy within a few years and transform the country, but quickly got bogged down in a nasty tax row that has been dragging on for two years and wrecked Mongolia's reputation as the world's hottest frontier market. The signing of the investment agreement in 2009 saw the country’s GDP swing from a contraction of 1.3% that year to the world-beating peak growth of 17.5% just two years later. But the dispute has taken the wind out of Mon- golia's sails, which expects 7.8% growth this year, falling to 4% in 2015 and 2016 unless the mining work is ramped up again, according to the Asian Development Bank.
“If Oyu Tolgoi's not running, the whole economy is suffering,” says Marcel Ven- hofen, executive director for the German Mongolian Business Association.
So investors were cheered on April 4 by remarks from Mongolian Prime Minister Chimed Saikhanbileg, who claimed that a final deal was near for the underground expansion of Oyu Tolgoi, which is 66% owned by Rio Tinto indirectly through its majority- owned unit Turquoise Hill Resources. The Mongolian state owns the remaining 34%.
Rio Tinto wants to extend the mine un- derground in a second phase that will cost another $6bn, where it says 80% of the ore deposit is found some 80km from the Chinese border.
“The two sides have reached agreement, in principle, on the main points of dispute,” Saikhanbileg said during a televised speech. “Now the parties are finalising their respective internal processes and will soon officially announce the results to the world.”
tax officials determined the figure. “It's more about seeking clarity than anything particularly special,” said Walsh.
Cabinet Secretariat Minister Sangajav Bayartsogt has objected on the grounds that Mongolia is not able to grant special tax arrangements for just one company, no
matter how important – although, arguably, the 2009 investment agreement drawn up for Oyu Tolgoi did just that. Badral Munkh- dul, the head of market intelligence group Cover Mongolia, warns that: “It looks like the tax law has to be changed to solve the tax dispute.”
And with elections looming the rhetoric will hot up. Several politicians have made themselves household names by saying the mine was benefiting only the oligarchs and the elite. Publically supporting the expansion of the mine could mean political suicide. Prime Minister Saikhanbileg gave himself some political cover in February by holding a text message referendum. However, the result was close and voter response unremarkable.
“Mongolia cannot grant special tax arrangements for just
one company – no matter how important it is”
Rio Tinto’s chief executive, Sam Walsh,
also hinted to bne IntelliNews that progress
was being made during a visit to Mongolia
on March 29 to commemorate the millionth
tonne of copper ore shipped from the mine.
“There are issues we're working through
with the government, and I’m hopeful we'll 8K bring [them] to resolution,” he said. “My
visit here is to show that commitment, to
show our interest, and show our good will
in regard to the progress in negotiations.”
Despite the positive words, a deal over 4K the second phase of Oyu Tolgoi won't be
possible until both sides can agree on a 2K $127mn tax dispute that has since been
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MONGOLIA GDP AND GDP GROWTH, 2008-PRESENT
Mongolia's GDP (USDmn) and GDP growth (Y/Y, %) since signing the 2009 investment agreement with Rio Tinto
12K 10K
6K
GDP (USDmn) GDP growth rate
reduced to $30mn. The amount may now be
relatively small, but Rio Tinto's Walsh said
the miner in November delivered its “best
and final offer,” which includes a request 2008 for the government to spell out how exactly Source: CEIC Data
0K
2009
2010
2011
2012
2013
2014
GDP (USDmn)
GDP growth rate