A new phase has begun in the relationship between Mongolia and those who invest here, particularly foreigners. Historically this can be seen as the third phase in an ongoing process where economics has often been subservient to politics. The first phase saw Mongolia mostly begging, with palms together, for what was always described as “aid“ from the then Soviet Union. Life in Mongolia was based on subsidies from the USSR, and the term “investment“ was hardly ever used, as it smelt of capitalist investment and exploitation.
Mongolians heard the word “grant“ for the first time when they took the plunge into the uncharted sea of the market economy. It took them a while to understand that it was a euphemism, a sugar-coated alternative to “subsidy and aid“. The last decade of the last century – Mongolia’s first as a fumbling democracy – was replete with “grants“ for the country and its people. These were basically investments and we learnt that in the international lexicon of economic relations, an investor was one who gives a donation and is most likely director of a charity fund.
As market principles and Mongolia became cosier with each other our idea of the investor gradually took new shape. This I see as the second phase of the relationship, when we accepted that investors were entitled to preferential treatment and pulled out all the stops to offer favourable conditions for them to park their money here. Soft loans were made available to them and the tax environment was made friendly and inviting.
A special aid program implemented in Mongolia by the Japanese Government recently finished its initial term. Discussions are on progress on new guidelines for the next stage of the program. These are expected to reflect new insights along with a newly acquired understanding of how to work with investors and donors, for the most benefit to both parties. This adoption of the guiding principle of “Equal relations and cooperation“ when dealing with investors marks Mongolia’s entry into the third phase.
Details are still somewhat hazy but the parameters of the new phase have been put in place. There is clear indication that there would not be any further tax incentives, including preferential conditions and outright exemption. This was the clear message sent out by the Spring session of Parliament. Some semblance of order is being imposed on the haphazard and indiscriminate grant of licences, with small businesses holding uranium licences forced off the stage. The necessary legal environment has been created to facilitate this. A new law prohibiting mining operation near water sources and forest areas has also been passed, with haste after some initial uncertainty.
It is not that only small fry are being targeted in the new policy. Parliament was overwhelmingly in favour of revoking all tax preferences to investment in the Oyu Tolgoimines. MPs also voted to impose restrictions on the generous refund to mining companies of VAT they pay on production of their exported output. The principle the Government and Parliament have been trying to lay down in the last six months is one of “Cooperation with investors within the law“.
As we ponder the possible changes in the investment environment, we must curb the impulse to be judgemental. The proof of the pudding is in the eating, and whether the swing is wrong or right or whether it is sustainable can be assessed only after its effects are felt over a period of time. Mongolian society must not be polarised on the decisions made by its accredited representatives in Parliament. A tax system beneficial to both investors and the Mongolian state is a prerequisite to national development and is the quintessence of an equitable relationship. The goal is a golden mean which will help in the convergence of interests. Cooperation, and not confrontation, is what is needed and for this both sides have to settle on priorities that are not contradictory.
The weeks that have just passed have been marked by debates and the weeks that lie ahead will doubtless see more of them. That is the hallmark of a maturing democracy. The heat of a summer day is usually ended by soothing drops of rain. We hope acrimony and differences will similarly be resolved by good sense and sweet reason.