Mongolia rethinks law on takeovers

Government set to change rules limiting foreign ownership, which have been blamed for the sharp drop in investment and economic growth

PUBLISHED : Wednesday, 04 September, 2013, 12:00am
UPDATED : Wednesday, 04 September, 2013, 3:17am

The Mongolian government looks set to repeal its contentious foreign investment law after just one year as inflows dry up and economic growth grinds to a halt.

Foreign direct investment fell an estimated 20 per cent last year and is believed to have dropped a further 43 per cent this year.

Concerned that the law is hurting Mongolia's reputation as an investment-friendly frontier economy, officials say they want to turn back the clock.

"We'll bring back the old system. The Mongolian investment environment is damaged," says Ch Otgochuluu, the director of planning at the Ministry of Mining.

According to government officials, a new law is being discussed by the cabinet and will be presented to a specially convened session of parliament this month.

The proposed changes will undo many of the restrictions placed on foreign investment in the so-called strategic sectors, including mining, banking and finance, media and telecommunications.

In May last year, Mongolia passed the Strategic Entities Foreign Investment Law, under which an investor acquiring more than 33 per cent of a firm in a strategic sector would require government approval.

An acquisition of more than 49 per cent, or more than 100 billion tugriks (HK$480 million), would require parliamentary approval.

The law was passed just before the last general election following concerns among political parties that the country's mining resources were being sold cheaply to foreigners.

In particular, a bid by Aluminum Corp of China (Chalco) to buy 60 per cent of coal miner SouthGobi Resources saw the government suspend SouthGobi's licence before enacting the law after only a month's consultation. Chalco then withdrew from talks.

Speaking on the sidelines of the Frontier Investment Conference, Otgochuluu said the revised law would still include provisions requiring state-owned firms investing in strategic sectors to seek government approval. He envisions an investment approval bureau similar to Australia's.

Singling out Chalco, Otgochuluu confirmed fears about a Chinese takeover.

"Chalco is a state-owned enterprise and they can buy any mine in Mongolia. They could introduce a dumping price and distort the market. In that case, they might be the buyer and producer at the same time and bring the price down very low.

"The Chinese mining companies want to buy Mongolian mining companies but we don't want that. They have a different system. A state capitalism. We want to protect the small and medium-sized enterprises. Mongolia is trying to have an economy dominated by private ownership. We want prices to be set by market mechanisms."

The government was also considering a seven to 10-year tax-benefit window for companies investing more than US$10 million, he added.

Landlocked between China and Russia, Mongolia often tries to reach out to Western, Korean and Japanese companies and governments. But recent events have diminished the appeal of Mongolia for investors.

Last year's foreign investment law was followed by attempts to rework the terms of a deal with mining group Rio Tinto over Oyu Tolgoi, a giant gold and copper mine that is expected to boost the country's economy by a third. Government officials and mining executives from Rio Tinto are in talks in London. Recently, the mine laid off 1,700 workers.

The Oyu Tolgoi renegotiations and frequent legal and regulatory changes have frustrated domestic and foreign investors.

"Resources nationalism is very damaging to stable investment planning. It's a lose-lose situation for both investors and Mongolia," said Dale Choi, the founder of Independent Mongolian Metals & Mining Research.