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Two case studies from CIRDI workshop in Bishkek

9th of 1, 2017



E.Odjargal

Following the initial one in Ulaanbaatar in May 2016 and a second in Myanmar in July, the next in the series of workshops on various facets of the State’s role in large resource projects organised by the Canadian International Resources and Development Institute (CIRDI) was recently held in Bishkek, Kyrgyzstan. CIRDI has been assisting countries in sharing their experience in the minerals sector and plans to hold these workshops in turn in all the other developing countries where it has a presence. The workshops focus on policy issues in the mineral sector and are attended by experts in various areas of the industry in several countries.

The Bishkek workshop brought together Government officials and representatives of State-owned companies and NGOs from Mongolia, Kyrgyzstan, Myanmar, Timor-Leste, Canada and Norway. An MOU was signed between the Mongolian National Mining Association (MNMA) and Kyrgyzstan’s Mining Association on sharing Mongolia’s experience in organizing international investors’ conferences and expos. The Mongolian representatives at the workshop included officials from the Ministry of Foreign Affairs, the Ministry of Mining and Heavy Industry, the MNMA, and Erdenes Mongol. They gave general information on geology, exploration, State-owned companies, and MNMA and on the nature of the State’s participation in the Oyu Tolgoi and Tavan Tolgoi projects.
As representing one section of stakeholders, the Mongolian Mining Journal was accorded the status of a media partner at the workshop.



NORWAY: FREE OF THE DUTCH DISEASE

Einar Steensnes, Senior Advisor at Norway’s Oslo Centre, a co-organizer of the workshop, began his presentation on Opportunities and Challenges in State Control of the Mineral Resources by saying that 70% of the poor people in the world live in  resource-rich countries. Their economic condition can be improved by properly using these minerals. However, there is always the fear of the Dutch disease in any resource-rich country.  Norway is the best example of a country that has kept such fears at bay, using its mineral revenues to create a better life for its citizens. It has done this by learning from others’ mistakes, and by following the right business management policy in State participation in its mineral sector.

The country is the world’s third biggest crude oil exporter, and has consistently followed the best practices in managing its resource, right from the time that it started drilling and exploring in 1969. Determined to optimally manage the mineral revenues, Norway set up an  Oil Fund in 1990, and has ever since been using the money that goes into it from oil and natural gas exports to pay for pensions to citizens, and for subsidies for the disabled and other health services,  and still keep enough for the future generation.

The first transfer of money to the Fund by the Ministry of Finance was in May 1996. In 2006 its  name was changed to Pension Fund and its current capital is $885bln, which has helped double the country’s GDP. Norway pays the highest pensions in the world, with an average annual payment of $27,000 to even those who do not work until the retirement age.

In the initial years up to around 1970, Norway was largely dependent on foreign investment for oil exploration and export. Companies from Italy, Great Britain, and the US dominated the scene, but the Government made it mandatory for all companies operating in Norway to train and then employ local citizens. Foreign companies’ share in the mining sector of Norway gradually fell to 50% between 1972 and 1993. Norway made its policies more flexible in the 1990s to attract fresh investment in certain areas of the extractive sector, while discouraging it in others. The Fund’s capital grew but the norms of distribution remained prudent and equitable.

Steensnes did not claim this was easy. Politicians and parties were constantly arguing on whether the money should be invested in health care, education, infrastructure, road construction etc., but they never let matters get out of hand, understanding well that mistakes could be costly. Even today, Norwegian politicians continue to argue on management of their mineral revenue, but they all agree on the need to limit expenses, and to encourage productive investments.

The revenue goes directly into the State budget and then $35bln is transferred to the Pension Fund. This amount was kept constant for long, regardless of the revenue earned. However, lower oil prices have meant the Fund has received $20bln in each of the past two years. If the Government feels it needs money, it can then take in a year up to 4% of the total capital of the Pension Fund to ease the budget deficit. However, this year is the first when this option has been utilised.

Companies in Norway pay 53% income tax but in special circumstances they might have to pay 25% more, bringing to 78% the total tax on income. Steensnes emphasized that the Government closely cooperates with the private sector, providing various kinds of support to oil companies from the time they begin work until when they start making a profit. In the first stage of a project, a company may pay just 25% or less in tax. The important thing for the companies is that even when their tax rates reach 75%, a very high figure indeed, they know that the Government is stable. As Alfredo Pires, Minister for Petroleum and Mineral Resources in Timor-Leste, said later, a stable Government provides the most favourable environment for serious business. Incidentally, Norway is not a member of the OPEC, and thus is not constrained by any decision made by OPEC. This freedom to manage its exports of oil and gas can often be advantageous.

It also helps that Norway the fifth least corrupt country in the world. Steensnes has been involved in this ranking exercise since 2010 and feels it is essential to enforce anti-corruption policies and measures. He feels both Mongolia and Kyrgyzstan have been doing this successfully for the past six years.

KYRGYZSTAN: INSTABILITY AND CORRUPTION

The workshop in Bishkek took place when Kyrgyzstan  was passing through a special time: a new parliament building was coming up, leaders from Russia and China were paying official visits, and the country was hosting the 15th Prime Ministers’ summit of the Shanghai Cooperation Organization (SCO). However, President Almazbek Atambaev had dismissed the Kyrgyz government just 10 days before the workshop, and senior officials and acting members of the Government attending it often had to leave on urgent summons to political business.

They included Duishenbek Zilaliev, Director of the State Committee on Industry, Energy and Mining, and representatives from the Ministry of the Economy, mining associations, and State-owned companies.

Kyrgyzstan was part of the Soviet Union and has about 20 years’ experience of the market economy, beginning with Canadian investment in the Kumtor gold mine. The mining sector is the strongest pillar of the economy, accounting for 41% of exports, and. Kyrgyzstan wants to attract more investors to it. Canada has the biggest share of investment in the country – 48% of the total. Investments have also come from China, Great Britain, Russia, Kazakhstan, Germany, Turkey, and Switzerland.  Low commodity prices have hit the country, and speakers at the workshop were more concerned about existing investors leaving the country than with new ones coming in. NGO representatives, however, attributed the outflow more to the politics of the country, leading to an unstable legal environment. The policies of Kyrgyzstan’s big neighbours were also having an impact.

Kyrgyzstan adopted its regulatory Law on Subsoil in 1997, and it has already undergone 10 amendments. Another amendment is expected to be discussed in the parliament soon. This seeks to change the rules related to special permission payments, linking the duration of a special permission directly to the rate of payment. At present, inactive companies are liable to have their licence cancelled, but there are many holding long-term special licences which are not active and are interested in selling these to foreign investors. Some Mongolians are among those who bought such special licences and then found that the deal is void according to law. The proposed changes will also clarify the situation.

As of today, there are more than 2,100 mining licences in Kyrgyzstan. Special licences for big deposits with large reserves are announced through a tender but the Government decides to whom to issue the licence. For deposits with small reserves, the State Committee on Industry, Energy and Mining floats a tender and issues special licences after an auction. Any territory for which there are more than one applicant is put on auction. Tax rates are the same for local and foreign companies, and these rates are the same in all industries. However, mining companies pay  two additional fees. An extra payment called “a bonus” has to be made in instalments when a special licence is received, and the amount of this varies with the size of the territory. For example, a gold exploration licence holder will pay $100 per square kilometre or, depending on the reserves, $60,000 per ton.

The Kyrgyzstan Mining Association wants the quantum of this “bonus” to be linked to fluctuations in the price of commodities. As for gold, one has to pay $60,000 per ton in a placer deposit and $40,000 per ton in a primary deposit. The Association would prefer to have the same tax for both kinds of deposits.

Extraction companies pay royalty, the amount of which depends on the mineral. All tax payments except royalties are allocated to the State budget. Half of the royalty payments goes to the concerned local budget and is spent on development of the region through the local development fund. This mechanism was set up in 2012 when mining companies began facing strong oppositions from locals. Furthermore, 85% of the income generated from the tenders and auctions for a deposit is allocated to the local budget, 3% of which goes to the regional development funds. The proposed changes will allocate $3mln from the State budget to the local budgets, a 10-fold increase from the present.  Ulan Ryskulav, Vice Director of the State Committee on Industry, Energy and Mining emphasized in his presentation that Kyrgyzstan would resolve one major problem of the mining sector – strong oppositions from the locals - by incorporating this principle.

The Kyrgyz Government announced an international tender for the first time when offering the rights to develop the Jerui gold mine. It was won by Russia’s Vostok-Geoldobycha for $100mln. The country’s second-largest open deposit after Kumtor has estimated reserves of 84 tons of gold and 10.3 tons of silver. The State Committee for Mineral Reserves is responsible for fixing all deposits’ reserves, but industry professionals would like the estimates to be made by using international standards.

A  Kazakhstan company won the tender when a Kyrgyz rare earth deposit was to be put into economic circulation but the Government has cancelled the deal as the company has not met the  financial obligations. The Government will announce another tender soon, and bidders are likely to include investors from Japan and China. Kyrgyzstan does not have any production sharing agreement (PSA). The Kumtor gold project is run under a concessional agreement. 

Kyrgyzstan joined the Eurasian Economic Union (EAEU) in August 2015, following which there is now an open border between it and Kazakhstan. This has created an anomalous situation when domestic extraction companies send concentrates to Kazakhstan for refining. Previously, Kyrgyz customs authorities recorded details of what was going out but since the two countries now have a common customs zone Kyrgyzstan can no longer check consignments crossing the border; it cannot even track how much concentrate leaves the country.

Kyrgyzstan joined the Extractive Industries Transparency Initiative in 2014, but not much progress seems to have been made. The Law on Subsoil merely says, “A company may submit a transparency report on a voluntary basis.” It is almost time to submit the EITI report for 2016 but Kyrgyzstan is not yet ready with its 2015 report. An official from the Mining Association felt  that a two-year old report will be of no interest to anybody. Industry officials share the common view that corruption is rampant in the mining sector but the topic was not raised during the workshop.

The average salary in Kyrgyzstan is $200 and pension $70. There are not many jobs besides those in a few mining projects. Many young Kyrgyzstan is are working in Russia, Kazakhstan and other countries. According to the last year’s statistics, 1.5 million Kyrgyzstans were employed abroad.

 

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