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Oyu Tolgoi already helping to boost the Mongolian economy

Oyu Tolgoi is already helping to boost the Mongolian economy. How much bigger is it going to get? Rio Tinto has commissioned an independent economic assessment that has revealed some answers.

Bridget Storrie reports:

It’s just six kilometres from the President’s residence on the southern edge of Ulaanbaatar to the city centre. The road takes you over the newly finished Marshall Bridge, past the high-end Marshall village development, still under construction, and the new premises of the International School, already full to capacity and with plans to expand. As you go over the railway line, Mongolia’s answer to Disneyworld, the Children’s Park, is on your left. It was renovated last year and has rejuvenated a formerly forlorn piece of parkland. A kilometre or so later the road joins Peace Avenue, opposite the top-end Louis Vuitton store on Sukhbaatar Square.

On the way you could easily count fifty or so cranes towering over the city, most of them working on mushrooming office blocks and apartment buildings. This is the rapidly changing face of Ulaanbaatar. The signing of the Oyu Tolgoi Investment Agreement at the end of 2009 has prompted an influx of foreign investment that is causing an unprecedented surge in the city’s fortunes.

Some of the figures are extraordinary: According to the National Statistics Office, since January last year the production of wooden doors and windows is up 258 per cent; production of sawn wood is up 300 per cent and the production of cement has doubled. And it’s not just construction; the net income of restaurants in Ulaanbaatar is up a staggering 800 per cent since the beginning of last year.

Experts have little doubt what’s behind this boom. Dr Brian Fisher is an Australian economist. “Everything you see happening is almost certainly because of the mining industry,” he says. ”There’s nothing else on this scale going on here.”

And it looks set to last. Dr Fisher and his Mongolian colleagues have just finished a comprehensive assessment of the impact of Oyu Tolgoi on the Mongolian economy. It was commissioned by Rio Tinto and uses a computable general equilibrium model that can analyse the intricate relationships between different sectors of the economy and predict economic outcomes. The model itself is classic in economic terms. What is unique about the way it has been applied here is the amount and the specificity of the data it has analysed. It’s the first time modelling on this scale has been done in Mongolia.

What it shows is that the Mongolian economy is set to grow by over ten per cent a year for the next ten years, as Oyu Tolgoi ramps up to full production. This means that by the year 2020 the size of the economy will more than double. There will be strong growth in real wages and an appreciation in the exchange rate. As Dr Fisher puts it, ”this will be a tide of growth that will float everybody’s boat.”

And it’s a tide that might be unexpectedly high. The model predicts economic outcomes for certain scenarios. In one, the government of Mongolia invests all the revenue from Oyu Tolgoi that it receives in an offshore fund. Dr Tuvshintugs Batdelger is the Director of the Economic Research Institute at the University of Mongolia’s School of Economic Studies, and worked with Dr Fisher to build the model. Even he acknowledges that he hadn’t predicted how big this fund might become.

“In general the story was what we were expecting but I was surprised by how much the wealth fund will grow. If everything is invested offshore the wealth fund is predicted to be around 31 to 32 billion dollars by 2040. I knew the potential of Oyu Tolgoi was big but this still really surprised me.”

For Dr Tuvshintugs, this is where much of the value of the study lies. “We have this big project coming into the economy and we all know that the economy is going to grow. The only question is by how much? Now we know how big Oyu Tolgoi is going to be relative to the rest of the economy. It’s made it very tangible.”

So what does this mean for Mongolia? Brian Fisher believes the biggest change will be in infrastructure development and that’s part of what is already being seen in Ulaanbaatar. “Mining is going to transform this economy,” he says. “You’re going to have much more access to regional areas as a consequence of aircraft flying in and out of these mines. You’re going to have big developments in road and rail and that means construction and construction means jobs.”

Significantly Mongolia’s airlines are already reporting the biggest increases ever in the number of passengers they are transporting. International flights are up by 38 per cent, and on domestic routes there has been a 98 per cent rise compared to figures for a year ago. Dr Fisher thinks the economy could grow like Australia’s; another country with extensive land, a sparse population and rich resources. ‘Last week Qantas announced that it was putting 747s on between Sydney and Perth. That’s pretty incredible given the population they’ve got.’

But it isn’t always the case that rich mineral resources benefit a developing country. You only have to look as far as Nigeria or Congo to see that. An appreciation of the domestic exchange rate can put pressure on some of the traditional exporting industries and make imports cheaper. The economy becomes inward-looking; dependent on imports and with little diversification.

This is a phenomenon known as ‘Dutch disease’ and it’s one of the principal reasons that Rio Tinto commissioned this assessment. The quantitative data it provides should help the Mongolian government manage the economy to mitigate the risks. “There will be a tendency towards Dutch disease because Oyu Tolgoi is so big,” says Dr Tuvshin. “But if you have a smart mineral revenue management policy you can avoid it.”

For Dr Fisher this ‘resources curse’ is badly named. “How can an asset in the ground be a curse?” asks Fisher. “It’s only a curse if there is bad policy.”

As independent economists, neither Tuvshin nor Fisher are shy about offering counsel to the Mongolian government. But this is somewhere Rio Tinto doesn’t go. ‘We’re absolutely not in the business of trying to tell the government what to do,’ says David Paterson, Vice President of Regional Development and Communication at Oyu Tolgoi. ‘We have handed the model over to the School of Economic Studies so that government, economic agencies and all other interested parties can have access to it when they are developing economic policy. We hope it will open up a vigorous, transparent and informed public debate of every aspect of Oyu Tolgoi and its impact on the economy.’

Fisher, Tuvshin and the team are now conducting training on the model for Mongolian economists. The model can be used to predict the impact of any change on the Mongolian economy and one potential use will be to help the Mongolian government as it invests in infrastructure, health and education in the future.

“Oyu Tolgoi is going to have a very big impact on the economy,” says Tuvshin, “and everything now will have to be focussed on better monetary policy, better fiscal policy and better revenue management policy.”

For now though, he is buoyed about the direction Mongolia is heading. ”I speak to friends and colleagues who are working or studying abroad and they are all talking about coming back now. They think this is going to be a very exciting place to live.”

About Oyu Tolgoi LLC (www.ot.mn)

Oyu Tolgoi LLC, Mongolia's largest copper and gold mining company, is a strategic partnership between the Government of Mongolia, Turquoise Hill Resources and Rio Tinto. Located in the South Gobi, Oyu Tolgoi commenced shipment of product to customers in July 2013. Oyu Tolgoi is managed by Rio Tinto, which is investing global expertise and cutting-edge technology to help develop Mongolia’s mining industry and ensure Oyu Tolgoi is one of the world’s most advanced mines. For Oyu Tolgoi, nothing matters more than safety. The business operates under the principle that if a job cannot be done safely, it will not be done at all.

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