Mongolia's foreign investment reform: what to expect

Author: Ashley Lee | Published: 4 Oct 2012
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The new Mongolian government last month released its reform platform for 2012 to 2016.

Investors have been wary of Mongolia since the lead-up to its July election, in which politicians argued that ordinary Mongolians had not seen benefits from the massive influx of foreign investment in the last few years. This culminatinated in the passage of the strategic foreign investment law in late May.

Counsel view these latest reforms as an attempt to further quell foreign investors’ fears about protectionism, especially in the natural resources sector.

Angry sentiment towards foreign investment has cooled since the government formed. Chinese state-owned company Aluminum Corporation of China (Chalco) abandoned its contentious bid for Hong Kong-listed SouthGobi Resources.

The latest government action plan should further encourage foreign investors, especially those interested in sectors other than natural resources.

Ulaanbaatar-based Hogan Lovells partner Michael Aldrich said he was cautiously optimistic that the high-water mark had been passed for resource nationalism.

He added that the action plan was the first indication of the goals of the new government. They show its intention to address the anxiety of the international business community and reaffirm its commitment to foreign investment.

Economic diversification

It is clear that the government strongly believes it must reduce Mongolia’s dependence on the natural resources sector.

In an unofficial translation of the action plan it is stated: “The key economic policy objective of the Government is the reduction of dependency on the mining sector, achievement of a long term sustainable development and the creation of a competitive and diversified economy.”

Stephen Tricks, consultant at Clyde & Co, said that although tighter controls will be imposed on foreign investment in the mining sector, there are many other sectors which the government wants to develop and which provide scope for foreign input and investment, such as health, infrastructure and education.

The action plan included an economic diversification policy to spur development of industries such as industrialisation, tourism and advanced technology, to name a few.

But the plan also includes key restrictions. Tricks said that while its tone is positive about FDI, it includes caveats about investment by foreign state-owned companies.

“The government is understandably concerned about the prospect of neighbouring countries trying to control Mongolian natural resources,” he said.

Foreign investment law

It is unsurprising that the new government is cautious about investments by state-owned companies. It has been widely reported that Chalco’s proposed acquisition of SouthGobi resources inspired the Strategic Foreign Investment Law.

Counsel agree that little progress has been made regarding implementation of the foreign investment law. Chris Melville, a partner at Hogan Lovells Ulaanbaatar, said that the coalition government needed some time to form, including selection of ministerial positions.

“Since June, the government has understandably been focused on internal matters rather than addressing the concerns of foreign investors,” he commented.

Although the law was passed months ago, Aldrich noted that he has not seen a specific policy for its implementation from the government. “Inaction on the government’s part allows less enthusiastic attitudes to fester.”

Sources are concerned about the political situation in Mongolia. While many speculated that the Strategic Foreign Investment law would be modified to be more foreign-investment friendly after the election, there are members of the State Great Hural (Parliament) who may not support such reform.

Aldrich added that foreign investors may be less enthusiastic about Mongolia because they do not have a good understanding of the Strategic Foreign Investment Law.

“We have seen incorrect reports about an approval process for any acquisition in excess of 5% of the shares of any Mongolian company, and that is just plain wrong,” he said. “So it is not surprising that there is a tendency for a lot of foreign investors to view the legal situation as being worse than it is.”

Securities development

One of the most important goals of the action plan is the modernisation of the Mongolia Stock Exchange (MSE) facilitated by the passage of the Securities Law. This is on the agenda for the next Parliament session, which opened October 1.

The Securities Law was developed in collaboration with the London Stock Exchange, and included provisions for various instruments necessary for the development of the MSE. Melville said that some progress had been made, including moving to a T+3 settlement system to fit with international standards. But liquidity remains at a low level.

John Viverito, partner at Gibson Dunn, said that the securities law had been delayed multiple times, but was critical for attracting foreign investors.

He commented that it must be in effect for Erdenes Tavan Tolgoi to list on the MSE in conjunction with the contemplated listings on the London Stock Exchange and the Hong Kong Stock Exchange, as the current law does not permit listings in multiple jurisdictions.

But the Securities Law is only the framework law: further legislation providing for supporting regulations such as depository regulations and disclosure requirements are also necessary.

“There’s still a lot of work to be done to ensure the new legislation works together in a coherent fashion,” said Melville.

Concerns remain

Although the government seems more welcoming, investor concerns remain. It has been widely reported that the government may renegotiate the Oyu Tolgoi investment agreement.

“The possibility of renegotiating the Oyu Tolgoi investment agreement would in effect change the rules in the middle of the game and would be a terrible sign for foreign investors contemplating investing in Mongolia,” said Viverito.

“Until resolved, this issue will have a chilling effect.”

He predicted that investors will take a wait-and-see approach. Until things are more clear, few investors will look towards new investments in Mongolia.

As for Parliament’s decisions in its upcoming session, Aldrich said that the reforms implemented will not be anti-foreign in nature.

But he warned that attitudes towards the free market have changed. “Mongolians are learning to trust less in free market principles, and for this reason, are extending state power, which is in line with the current international reaction against the ideology of letting markets regulate themselves," he said. "Mongolians perceive that markets have simply not done a great job at self-regulation.”

For more on Mongolian foreign investment, sign up for IFLR's Asia capital markets forum here:

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See also

‘Mongolia Salkhit financing sets foreign security precedent’

http://www.iflr.com/Article/3068847/Mongolia-Salkhit-financing-sets-foreign-security-precedent.html

‘Mongolia’s new foreign investment law explained’

http://www.iflr.com/Article/3039315/Mongolias-new-foreign-investment-law-explained.html