May 2012
There is one draft law which Mongolian legislators must discuss before the Spring Session of Parliament ends. The original draft was initiated by some MPs in 2009 and again in 2010, and was submitted around this time in 2011. This was returned with some suggestions for revision. It is this reworked version that is now the legislators’ priority.The title of the draft is “Law on Regulation of Foreign Investment in Business Entities of Strategic Importance”.
What revived interest in the almost forgotten draft was an announcement by China’s State-owned Chalco that it planned to buy 57.6 percent share in SouthGobi Resources, parent company of SouthGobi Sands (SGS), which holds 29 coal mining licences spread over eight soums in the Southern Gobi. The almost unanimous response to the proposed deal among Mongolians has been that this is an unacceptable case of foreigners trading in Mongolian mineral resources without the permission of its true owners, the people of Mongolia. Several such sales of mineral deposits in Mongolia had taken place earlier, with nobody taking much notice. This time, however, the fat was in the fire. Then came news that Chalco also wanted to buy shares in Winsway, a company that transports and sells our coal.
The resentment to both is neither unexpected nor unwarranted. The only buyer of Mongolia’s coal at the moment, China, is about to own one of the biggest coal mines of this country and to buy substantial stocks in a major transportation company. That gives it a control that may turn into a stranglehold. People are rightly concerned at the developments which they see as failure by the State to protect the country’s treasures. Politicians realised the electoral imperative to defuse the tension and rushed in to pass the law. Failure to do so in the Spring session, the last in the present Parliament’s term, could affect everyone’s fortunes at the hustings.
Interest in the Mongolian response has crossed national boundaries and has grabbed international attention. Investors are keeping a close watch on what our MPs are saying and doing. The current policy on foreign investments will certainly undergo changes, but how much stricter will or should it be?
The SGS deal may be the immediate provocation but demands for regulating foreign investments have been made earlier also. Circumstances in the early 1990’s dictated the need to pass laws friendly to foreign investors. However, we have a totally different scenario today. Starting from two or three years ago, some politicians have been calling for a review of existing regulations and for imposing restrictions on foreign investment in some sectors. There is societal consensus that foreign investments should in no case be allowed to compromise national security and interest. This was the impetus for legislators to work on a draft law to regulate foreign investment.
The National Security Concept says:“The amount of investment made by any (one) foreign country shall not exceed one third of the total foreign investment (in Mongolia). Foreign State-owned companies’ investment shall be restricted and there must be a balance between the amount of investment from the neighboring countries and from other highly developed countries.” Unfortunately, this overriding principle is not backed up by legally enforceable restrictions on foreign State-owned entities buying mineral deposits in Mongolia. The SGS case has highlighted how dangerous this oversight can be and now there is this rush to pass a law to save the situation.
Unanimity on the need for a law did not, however, mean that MPs were agreed on the merits of the revised draft that was submitted for discussion. Among the initiators of the draft is Foreign Minister G.Zandanshatar, but many of his fellow MPs felt it is too unwieldy to be actually implementable. They would like it to cover fewer sectors and a narrower range of activities. The initiators insist the draft seeks only to regulate foreign investment and not to restrict it, but critics feel some of its provisions are too forbidding and would needlessly scare away investors. Even some Mongolian companies have opined that some of the harsher clauses might be counterproductive, and are not conducive to a business-friendly environment.
The softer approach appears to be gaining ground and, at the time of writing this, it seems more than likely that several provisions of the draft law will be toned down drastically, or totally rejected. There is no question that national security concerns come first but they can be protected without scaring away foreign investors altogether. The suggestions of the working group charged with revising the draft acknowledge the need for a balance. Analysts and legal experts have welcomed the recommended amendments. Things are evolving and we cannot predict the final shape of the law as it is likely to be passed. We can only give an account of developments until the time of writing.