Various forms of graft are already a major element in doing business in Mongolia
In an emergency session of parliament, Mongolia’s political leaders are scrambling to reverse the disastrous results of their attempt last year to prevent the threatened domination of their economy by state-owned Chinese companies.
Foreign investment in Mongolia fell by 42% in the first half of this year with World Bank predictions that economic growth will be only 13% in 2013, compared with around 17% in recent years.
Mongolia’s dramatic reversal from being the darling of international risk-takers to an almost pariah status stems from a law passed in May last year. This required government or parliamentary approval of investments by foreign state-controlled companies in Mongolia’s “strategic” economic sectors, defined as minerals, financial institutions and communications. But many elements in the law remained ill-defined, such as what constituted a “foreign state-owned entity.” The result was a lot of uncertainty among foreign investors, especially the injection of political discretion in the approval process, which increased the likelihood of corruption. Various forms of graft are already a major element in doing business in Mongolia, which, as in many developing countries, has yet to embed the rule of law as a cultural and administrative concept.
Soon after his re-election in June, President Tsakia Elbegdorj, whose Democratic Party also controls parliament, held a crisis meeting with former presidents, prime ministers and political party chairmen to try to get a consensus on a new foreign investment law.
The resulting draft law now before parliament, the Great Khural, removes many of the uncertainties and ambiguities under last year’s effort.
The draft simplifies the process of registering private foreign investment projects.
It removes the classification of strategic economic sectors for foreign investment. It defines a foreign state-owned entity as one where the government directly or indirectly holds more than 50% of the equity.
The Ministry of Economic Development is designated as the only authority to give approval for all investments by foreign state-owned companies.
The draft law has been welcomed by foreign investors and analysts, who see it as providing a predictable and fair playing field for business in Mongolia.
Last year’s restrictive law was in large part a knee-jerk reaction to strongly voiced public objection during last year’s parliamentary election campaign to the takeover of a privately owned Canadian coal mine, Ovoot Tolgoi, flagship enterprise of Toronto-listed SouthGobi Resources Ltd., by Chalco, the Aluminum Corporation of China. Chalco is the leading importer of Mongolian coal and has problems with the Ulaanbaatar government over another coal mine, state-owned Tavan Tolgoi, with deposits reckoned to be around 7.5 billion tonnes.
Production at Tavan Tolgoi, which could deliver 50 million tonnes of coal a year, was halted by the Mongolian government at the beginning of the year in a dispute with Chalco over price.
The Mongolian government is, however, trying to dilute the influence of China over the Tavan Tolgoi project by encouraging American, Japanese and South Korean companies to become involved in other phases of the development.
Mongolia’s fewer than three million people have a long history of suspicion of their two overbearing neighbours, Russia and China. Mongolia was part of the Chinese empire for 200 years until the collapse of the Qing Dynasty in 1911. But 10 years later Mongolia was swallowed by the Soviet Union and remained a pawn of Moscow until independence in 1991.
The two decades since have been a tempestuous time as Mongolians try to adjust to unfamiliar and sometimes alien economic, political and legal concepts. Particularly difficult to absorb has been the realization that Mongolia’s economic future rests on its vast untapped mineral resources, especially of copper and coal. This requires a difficult cultural and social shift for a people whose history rests on semi-nomadic herding across the country’s endless grasslands and deserts. •
More important for Mongolia’s immediate economic future than the new foreign investment law is the outcome of a debate raging over a draft mining law.
This draft, widely criticized by potential foreign investors as overly restrictive and resounding with resource nationalism, is heavily influenced by Ulaanbaatar’s experience with the massive Oyu Tolgoi, which was brought to the market by Vancouver’s Ivanhoe Mines (TSX:IVN).
If approved, the new law would put environmentally sensitive parts of the country, such as forests and watersheds, out of bounds to prospectors, and require Mongolian representatives on the boards of mining companies to ensure “accountability and transparency.”
Oyu Tolgoi, in Mongolia’s southern Gobi Desert, is one of the world’s largest untapped copper reserves and conveniently close to the border with China, where the manufacturing industry yearns for reliable supplies of the metal.
The Oyu Tolgoi saga is a torrid tale of machinations in corporate boardrooms and the corridors of power.
The potential place in the Mongolian economy of Oyu Tolgoi is so large it has inevitably exerted huge influence over the entire debate about mining law, the role of the state and the birthright of the country’s people. The first open- pit phase of Oyu Tolgoi can deliver 300,000 tonnes of copper concentrate this year. This would produce revenue of $1 billion, a large slice of Mongolia’s gross domestic product, which last year was $10.2 billion.
The estimates are that by 2020 Oyu Tolgoi could be producing earnings of $7 billion a year.
But successive governments in Ulaanbaatar have struggled with nationalist leanings among the public, especially in the capital, and their own inclinations about how large a stake the state should have in the project and how much it should invest.Any source
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