The following is an interview with CEO of state owned Erdenes Mongol LLC B.Byambasaikhan
It is well known that Erdenes TavanTolgoi LLC is the main subsidiary of Erdenes Mongol LLC. So it is puzzling that Erdenes Mongol LLC does not have a representative on Erdenes Tavan Tolgoi LLC’s board of directors. Why is that?
There is a precedent where state owned companies had government officials from ministries and agencies on its board of directors. This precedent is not a positive aspect of a company in a competitive business environment. By law, a member of the board is an authorized executive. An authorized executive makes decisions and is held accountable on many aspects, such their company’s strategy, plan, and budget.
For this reason, the job of a member of the board requires a lot of time. It is not possible for busy officials from ministries and agencies to do their job as a member of the board properly. In practice, there is a positive effect on companies when the board is comprised of members that have extensive knowledge of the field and business expertise.
The board of private companies have gone through extensive reform. Investors first look at the administration of a company. Is one person making all the decisions, or is the board fully cooperating to make decisions? Investors tend to put their trust in companies that are well managed and have a board that is comprised of professionals. We are working to improve the governance of Erdenes Mongol and its subsidiaries.
There was an amendment to the Human Development Fund Law in February and we intend to operate by that law. Now, there is a legal environment in which we can nominate and choose members of the board, who then can choose a CEO. There is a need to create a mechanism where companies make right decisions for the company in accordance with the law. There is no need to wait to implement this mechanism, it is possible to do it within a short period of time.
There has been much speculation that the market is in bad condition. Whether the market worsens or improves is not up to us. What is up to us is the management of our company, improving our financial discipline, and cutting costs. We are now moving to a system where professionals are appointed to the board of directors. There is an idea to recruit professionals from companies that have similar operations as Erdenes Mongol, for example Singapore’s Temasek or a company from Kazakhstan. The main component of our strategic reform program is to improve the administration of the company.
Will ErdenesTavan Tolgoi’s board of directors change in the future?
Erdenes Mongol announced a job opening for an independent board director. What kind of qualifications do you require from someone on the board of directors?
When shareholders approved the by-law of our company, they highlighted that they will hire an independent board director. We are working according to the by-law. Our main asset is natural resources. Our main goal is to use these assets correctly and in a fashion that is profitable. In order to do this, as I mentioned before, we need to improve our financial discipline, and cut costs. We need a professional who has experience in these matters.
Outside of the mining industry, our company has a strategy to be involved in the industries of infrastructure and energy. As a result, we need someone who has experience implementing large projects of infrastructure and energy. Of course, this must be done with close cooperation and consultation of our shareholders and finance department.
It is better if the [independent director] has extensive experience in attracting investors. In practice, executives who have worked on the board of large corporations to improve reputation and profits have very high value in a successful company. The selection process will be concluded soon.
Last week, you presented the strategic reform program of your company. We’ve never heard this terminology used before.
In order to improve Erdenes Mongol’s performance to an international standard, we have started a joint program with the Asian Development Bank. In order to implement this program, we started planning a year ago, and have already done some of the work. To sum it all up, we are implementing a strategic reform in our company. The program will require three years to complete. So far, the first year has passed. We have already decided the source of finance for the program. In the future, our work will be even more extensive.
There were criticisms that the CEO of Erdenes Mongol took out a loan of 35 million USD and was spending it frivolously. What do you think the end result of the program will be?
The company will have financial disciple, high efficiency, and will be profitable. We have set a goal to increase the profits our subsidiaries by 10 to 15 percent. We will also have the capability to implement large projects. Through the program, we will raise capital from international markets. By doing this, the balance of the company will have a strong balance and we will be able to invest in other projects. Some people are questioning why a reform program requires 35 million USD. That is a very narrow way of looking at the issue.
We are implementing reforms to reach a certain result. This is not a process that can be done in a year. Everything we do will be systematic. In the end, Mongolia will have an institute that implements big projects. When Erdenes Mongol was established in 2007, the goal of the company was to implement projects in the mining industry and use the revenue to invest in infrastructure projects. This goal is close to being realized.
In short, you are building the foundation for the next step of the company.
There is a need in Mongolia to implement large projects and develop our infrastructure. The conditions of the market and the possibility to work profitably are all there. The problem of “who can implement them?” comes up. Research by the Asian Development Bank and other international financial organizationsreconfirm this problem. There aren’t a lot of private companies that have the capability to implement these big projects. Does the government have the capability? The ministries draw up plans and supervise the implementation. The government organizations below the ministries also implement projects but without much success. The reason for this is the problem of financing and lack of human resources. We need an institute that implements large projects of infrastructure, energy, and mining. We are working to make Erdenes Mongol the foundation of that institute. This company has the potential to raise capital and to execute projects. We criticize ourselves for not being able to execute projects that were discussed 20 years ago. Prime Minister J.Erdenebat said, “When trying to implement projects, there is a lack of projects with economic benefits and collateral that meets the standards of the banks.”
With any project, five percent of the investment money is used for research and paperwork. High ranking officials’ attempts to execute projects without research is not working. In order for a project to survive, there needs to be a market research and risk management.
The strategic reform program has been carried out for a year. What have you accomplished within this time?
First of all, I would point to the start of underground mining at the Oyu Tolgoi mine. OyuTolgoi needed to reach a decision in order for the next project to be implemented.
After that, we found a reason to start the strategic reform. There needs to be a reason for reform. There have been times when we tried to do reform but failed due to lack of capital.
We did our research and reached a decision to implement this project with the Asian Development Bank. Financial discipline is a requirement for any company. In order to have financial discipline, the administrative system is important.
The financial policy and system of our companies were not up to international standards. Because we are a company that manages investments, it is logical to file the balance sheets and annual reports of our companies together. Our companies now filesa single report. The reports now meet international standards. For the last three years, Ernst & Young have done audits on our reports. As a result of this, the possibility of raising capital through investments is increasing. We have made smallbut significant steps towards better financial administration, and as a result, Baganuur and Shivee-Ovoo are projected to gain profit starting next year. We are working to obtain our credit rating. A credit rating is a good way to measure where we are in terms of international companies. It is a goal of ours to have a credit rating which we can use to raise capital. We have determined our total assets to be one billion USD. We have started to file reports on our assets that meet international standards. Investors are eager to join our projects. One example is, our subsidiary Baganuur is undergoing a feasibility study that is in line with the standards of international banks. The process has been ongoing for a whole year. Feasibility studies that meet the standards of banks take more than six months. There are professionals who come to research and determine many things, it is a very intricate process.
You said Erdenes Mongol will have assets worth 10 billion USD in the future. What is the basis ofthisclaim?
We believe regional economic corridor projects to be of extreme importance. For example, China has proposed the One Belt, One Road initiative and are working to implement that proposal. Mongolia, China, and Russia have come to an agreement to establish an economic corridor. The premiers of the three countries have to make an agreement. Through this agreement, many infrastructure projects will be executed. 60 to 70 billion USD is required to provide the conditions for the Mongolian economy to develop. Most of the money will go into large infrastructure and mining projects.
If Erdenes Mongol has good governance and we raise capital to execute large projects, we will have the possibility to reach a 10 billion USD net worth. Our large energy project is already underway. Our projects on providing water and roads will soon start.
Is it true that you are building a large power station to export energy to China?
There is a plan to build a power station that can provide energy to Shivee-Ovoo mine. The feasibility study is underway. The final decision will be made after extensive studies.
What are the challenges you are facing in your reform program. People always suspect government meddling with public companies.
Narrow minded thinking can cause problems. It is important to use the assets we have today correctly. However, when the market, especially the regional market, is ever expanding, we cannot sit still. Let’s start new businesses andnew projects. Money is not a problem. Money is everywhere in the market. If you create a good project, the money will come. For example, Oyu Tolgoi has taken out loans from 14 banks. We have to think about the next OyuTolgoi. All opportunities are open.
Erdenes Mongol is being reformed based onthe governance of Singapore’s Temasek. The secret of Temasek’s success is said to be competent workforce. Will your company invite competent professionals to work for you?
That is what we’re striving for. Whether you succeed or not depends on the competence of the team. We need the most competent professionals at our subsidiaries Baganuur, Shivee-Ovoo, an Erdenes Tavan Tolgoi.
Also when implementing new projects, hiring capable workers will help the company operate more efficiently and profitably. We didn’t only look at the system of Temasek but of many other companies as well. We are researching the system of the American General Electric.
Reputable corporations work with General Electric to learn from them. Our partner Rio Tinto is a prime example of a great company. Rio Tinto spends the lowest possible amount and is making a profit in this recession. We are learning from them also.
I would also like to note that it is wrong to assume that we are becoming like Temasek. It is important for us to have a good strategy, to work efficiently and profitably, and also to create an organizations with capable professionals.