Mineral-rich Mongolia has had something of a fall from grace with international investors since a 2012 law introduced tight investment limitations, including government and parliament approval for deals in key sectors such as mining, telecommunications, banking and finance. Foreign investment plummeted in 2013 and a widespread skepticism fell over the Ulan Bator business community as troubles at major projects like Rio Tinto’s multi-billion Oyu Tolgoi (OT) copper/gold mine hit the headlines.
In a push to improve business climate, the new government sent to parliament a new, friendlier foreign investment bill, which was eventually approved in October. The new law establishes Invest Mongolia Agency, the country’s first investment development agency, as a vehicle for investment promotion and development.
The Diplomat’s Jacopo Dettoni spoke to Sereeter Javkhlanbaatar on his third day at the head of Invest Mongolia Agency about the current investment climate in Mongolia and the opportunities created by the new foreign investment law.
Why has the government decided to establish Invest Mongolia Agency (IMA)?
The key reason to establish the IMA is to attract more investment into the economy. Foreign investment is one of the key pillars of Mongolia’s economy. Today, it creates more than half of total GDP, and it’s also one of the main sources of state revenues. As Mongolia doesn’t have much manufacturing, our key resources for foreign currency are trade and foreign investments. We have to improve these two channels in order to attract more direct revenues and more foreign currency to stabilize and secure economic development. That’s why foreign direct investment (FDI) should be one of the government priorities.
How is the agency going to attract more investment into Mongolia?
The IMA should be an independent agency able to work closely with investors. Political institutions generally deal with policies and there is some distance between policymakers and the man in the street. We need to close that gap. To do that, we have to establish mechanisms to listen to investors, solve their problems, assess projects and eventually attract more investments.
International investors have been continuously spooked by political interference in investment issues. When you say that the IMA is going to be an independent agency, should we expect it to be free from political appointments?
If you look at its structure, the IMA is not that independent, because it’s under the umbrella of the Economic Development ministry. However, in terms of daily functions and operations it actually is an independent agency. The decision-making process is reduced as there is only one man in charge [the head of the agency] and investors don’t have to wander around political institutions collecting signatures any more.
Foreign direct investment (FDI) inflows decreased sharply in 2013 and a general scepticism permeates the business community. What is the agency’s view on the current business climate in the country?
In 2010, FDI inflows were around $1 billion per year. They then skyrocketed, reaching $4.7 billion and $4.4 billion in 2011 and 2012, respectively. The mining sector is behind this steep increase, and specifically Rio Tinto’s OT phase I development. This project alone impacted FDI (requiring investments totaling $6.5 billion]. As phase I wrapped up in 2012, there has been no more investment coming in from that side during 2013, which led to the sharp drop we are facing. Next year, if we decide to continue the OT project, FDI figures will likely bounce back.
Still, the skepticism affecting the business community seems to go beyond OT itself and many blame the investment limitations introduced in 2012.
OT has been a major reason for the drop in investment inflows, but other reasons played a role too. Market conditions haven’t been that good this year, with international markets slowing and key commodity prices going down. Domestically, we also had some challenges as 2012 was election year and a few regulatory changes were approved, including the Strategic Entities Foreign Investment Law (Sefil) in May 2012, just before the elections. That law froze many deals. It’s difficult to give an accurate estimate, but there were many talks out there before the law was approved. Overall, the drop in FDI inflows traces back to a combination of factors. As the new government took office, it decided to improve the investment climate by drafting the new investment law approved in October.
How is the new foreign investment law going to improve the country’s business climate?
The new law introduces a more liberal business environment. Previously there were many approval systems in place for companies willing to enter Mongolia’s market, a lot of bureaucracy. The new law now eliminates entry barriers. Obviously some registration system should still be in place, but investors don’t have to apply for permission any more, they just go straight to the registration body with the required documents. In addition, the new law lifts any foreign investment limitation for key sectors such as mining, telecommunications, banking and finance and introduces equal treatment for foreign and domestic investors. It also includes international standardized protection clauses such as no expropriation and free repatriation of profits. And it establishes the IMA in order to better serve investors.
FDI rules have been continuously changed over the last years. Does the new law mitigate regulatory change risks?
The new investment law cannot be changed or amended unless two thirds of parliament agree on it. We don’t have any other such law in Mongolia expect for the constitution, which needs three fourths of all MPs. Also, (the new investment law) provides investors with stabilization incentives as it stabilizes four main taxes over the investment period. The key concept here is that when an investor really implements a project reaching a predetermined investment threshold we make sure his taxes will be stable for certain years – from five years to 22 years, depending on the project size.
The FDI rules introduced in 2012 quickly derailed a $1 billion bid by Chalco, China’s biggest aluminum producer, to secure a controlling stake in one of the country’s largest coal deposit. Many read them as an attempt to limit the influence of Chinese state-owned firms over Mongolia’s mineral resources. Does the new law introduce any discrimination among foreign investors?
Both international agreements and the new investment law don’t allow Mongolia to discriminate against anybody. We even treat foreign investors as our own citizens. And we treat all foreign investors equally – Russians, Chinese, it doesn’t matter. That’s our principle.
As the new foreign investment rules gain traction, what are your expectations for FDI inflows in 2013 and following years?
We expect FDI to reach $2.5 billion by the end of 2013, from $4.4 billion in 2012. Of course I hope we can attract more than that over the coming years. If the government and private investors strike an agreement on some big projects in the pipeline, FDI figures will fly. Then, nobody will be surprised if FDI reaches $10 billion per year.
Which projects are you referring to?
Obviously OT phase II is an important one. Besides, there are many coal deposits to be developed, and the policy is to upgrade the coal process industry introducing coal-to-liquid and coal washing technologies. Then there are many power plant projects in the pipeline, including renewable power plants. And agriculture projects too, an area where we have a lot of potential as we have many resources and it’s a traditional industry. We are also thinking of using our coal to produce steel. We have many ambitions, now we have to make sure we put in place the right conditions.
A new FDI legislative framework has been introduced and the IMA established. Are the “right conditions” now in place to fulfill Mongolia’s ambitions?
We cannot say that just adopting one single law and creating an investment agency is enough. There are many sectors involving rules and bureaucracy. For example mining, where we are discussing the mining policy and law; or energy and transport infrastructure such as railways and highways. All laws and regulations should be correlated and meet the same quality standards. We should improve the legislative framework as a whole.