О.Chuluunbat: This reporting assesses Mongolian FDI conditions

Apr 9 • Business, Economy, Interview, News • 2095 Views • No Comments on О.Chuluunbat: This reporting assesses Mongolian FDI conditions

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Interview with O.Chuluunbat, Deputy Minister of Economic Development. He was moderator of the public discussion on 2013 Investment report of Mongolia held by UNCTAD for the first time in the last week.

This is the first collaborative event of the government of Mongolia and UNCTAD to report on foreign investment conditions of Mongolia. What are perspectives of the investment policy and conditions?

-This event or discussion is characterized that UNCTAD assessed independently on Mongolian investment environment, its policymakers’ consistency for ensuring current accelerated growth and evaluated what are the advantages and setbacks of Mongolian FDI conditions. UN’s team of analysts assessed preliminarily on our condition and held broad discussions on its findings. The discussion was held openly for the public and among the related government officials of the ministries and agents, researchers from international and domestic institutions and its significance was high. Mongolia’s investment environment is generally favorable and Mongolia is one of the developing countries too. The most favorable tax policy we have and FDI is in good shape, supports domestic investment as well.  As a result, economic growth reached 17 percent from 13 percent of the last year. And we have promising perspective in this year. However, in recent years, some economic indicators showed insufficient performances as we expected for, for instance, budget revenue declined. The valuation of all Mongolian projects which are listed in foreign stock markets reduced up to 70 percent in the last year. There are 30-40 big projects such as “Oyu Tolgoi”, “SouthGobi Resourse”, “Centerra Gold”, “Energy Resource” and “Hunnu Coal” is being exchanged in foreign stock markets. We should not think this reduction is just reflection of their valuation. However, it shows defame of Mongolia. It is like “we have $US 1000 of salary, but in reality we have to work for only $US 300 which are suitable for our capability.”

-How is the condition in domestic stock market?

-Let’s assume that Mongolia lost its reputation in abroad. But in Mongolian Stock Exchange, security trading went down by 11 percent in the first three months. Even though the economy has been growing, security trading has been declining at the same time which means capital outflow is taking place in here. There is stagnation in renting offices from bigger companies and foreign companies. In fact, our biggest banks lend mortgage loan for 40-50 people annually in total, however, they lent for 400-500 people in time. Now, a bank’s borrowers do not exceed 10-20 people. This is not good indicator. Investors are reputable in creating jobs. If investors are flowing into, at least they are using houses, cars and foods. And their demand for the biggest mining equipment will boom and thus many jobless people will get jobs and paid. If they are leaving us, the unemployment will increase. That exactly happened in here. People who have income have already got their mortgage loan. But newly recruited people should get their mortgage loan. But they are not. These are just my explanation of benefits on FDI.

-Then what are the reasons behind capital outflow and FDI from Mongolia?

-The last year, we approved hastily the new FDI law. (Referred as the law on regulation of FDI in strategically important sectors) Then we are having disputes with Oyu Tolgoi and Chalco which in turn the market itself assessed its evaluation for Mongolian economic policy. This is not my comment. It is high time to revise our FDI conditions and its legal environment. It does not mean to spend extravagantly like happened in 1997. Today we are discussing that those enterprises/person that have special permission to use our wealth have to pay for the country, to transfer the licenses for those who have money and for professionals. Otherwise, current situation of keeping and re-selling of mineral licenses is not the development of mining. Professionals get started their work as they get the licenses which in turn they will create a lot of jobs.

-Is the reason behind FDI decline is related to the completion of Oyu Tolgoi project? And there is no bigger investor like it?

-Yes. However, the FDI stagnated and some of them mainly explained by our treatment with OT. We are not only the country who has wealth. We think ourselves pompously but there are a lot of them like Myanmar and Mozambique, Mexico, Bolivia, and some African countries. We should not have to exaggerate our wealth. Our country once was listed in the countries with the most favorable FDI conditions. Therefore we are trying to build stable but not favorable conditions for the FDI inflow. The investor who has $5 million USD would not work with Mongolia, but let them work at least for 4-5 years in protected stable legal condition. But, currently we have the conditions that some ministries have made contracts and pushed the government to approve and also this process of approval was no open and transparent to the public. Then the public wreaked havoc on this agreement. That is why there is need to regulate by the law.

-The government submitted the draft amendment on the new FDI law. Is that sufficient enough?

-This is appropriate step for the right path. But it is not big decision but just amendment to the new FDI law of May. Under the amendment, there would not be benchmark on total amount of FDI, and the government and parliament shall approve for the FDI where foreign state owned company will enter the country. There would not be forbidden legal provisions for foreign investors. The key criticism on our FDI conditions from abroad is that the foreign party always is on attack after the agreement made between two parties.  The foreign party is looking for its benefits from the agreement and we are also as well. Mongolia people are responsible so that both agreed parties will receive their benefits from the agreement. If we think that Mongolia suffers a lot, then we should charge the responsibilities for officials who made the agreement with the foreign party. However, those people are silent and thus it created havoc in the society. They should promulgate that “No, we have protected rights of Mongolians” but not to push the foreigner. This is my wish for them.

-Do you think that Oyu Tolgoi agreement should continue to work?

-Their production should be started. Let’s see at least for the first 2-3 years. Oyu Tolgoi investors have not received their benefits. If it is approved that they get more than ours, we can talk with investors in many different ways.  The managers who leading OT are also clever and perceive that they have to share the country’s wealth with its citizens as they are utilizing the wealth.

-Then why people discuss it even at parliament level: “Oyu Tolgoi is not paying the taxes”? And even it is further discussed at the Government level, conflicting each other and have not reached any consensus. The Minister of Economic Development always reminded that this agreement should be amended as well as the Mining Minister when they were the parliamentarians.  Have their opinions been changed when they became ministers?

-In my opinion, the attempt of stopping OT projects is not from Mongolian heart also is not reflection of Mongolian state policy. But I do not know where does it come from? But I should emphasize that Oyu Tolgoi made agreement with the government and is taking responsibility for Mongolian people. They declared publicly about their responsibility that 70 percent out of Oyu Tolgoi’s wealth will be distributed to Mongolian and 30 percent will be part of the investors. This is the best expression from them. Isn’t it their responsibility taken on behalf of the Mongolian people? The ownership is not very important. Even though the Mongolian Government has no ownership in it, it will own the most of its revenue. However, now it has indebted because of its ownership.

Let’s take an example of “Boroo Gold” and it made stability agreement with the government in 1999. This is not good one. This project was 100 percent foreign owned. No percent of share was Mongolian but one who sold its share. However, during its implementation of 10 years, it exploited 1 trillion MNT of gold. Of which 60 percent was distributed to Mongolian. I have checked the balances. Even though Mongolia was not ownership of the project, it received all sorts of payments. It included royalty, profit tax, social insurance contribution and also paid for energy, transportation and even foods in Mongolia. They have built several infrastructures. In order to start production, they have built paved roads to Zuunkharaa and energy lines too. However, for OT case, people are competing for the Government ownership. We are seeing the results of state management in state owned company from MIAT. Even on “Erdenet” there are discussions on billions of MNT for bribes and it is certain that state management in Erdenet is the worse than MIAT. Even for the “Erdenes Tavan Tolgoi”, if the state owns everything all the things will be the same as MIAT. We determined to be having efficient economy in 1991 since we embarked on the transition. However, we are trying to keep the most profitable mining project to be state owned despite the fact that all state owned companies are working inefficiently.

-People still concerned that initial investment of Oyu Tolgoi was planned to be 4.6 billion USD but it exceeded to 7 billion USD.  How did they spend this amount?

-Obviously, the majority of them spent on equipment. In addition to that, they are paying 20-25 million USD for Mongolian employees monthly for the last two years. They have spent 250-300 million USD annually, reaching trillion USD for the wage and salary long before the start of OT. This amount is not only spent for several expatriates of directors but for 10-20 thousand Mongolian employees. This expenditure is now in the form of construction and buildings in Ulaanbaatar and saved in Mongolian banks and leads to increase Mongolian money. Also, “Oyu Tolgoi” is paying money for 1000 Mongolia companies. Mongolians do not produce everything. However, Mongolians are providing with water, meat, transportation, coal and energy for them. We are providing what we can and earn what we are capable of. They are paying all eligible taxes and even paid prepayment. Therefore it shows that FDI have been flowing into Mongolia. However, the distribution of created wealth is not correct. For instance, in decade ago, per capita GDP was USD 1000, but today it reached around USD 4000, increased almost 4 times. However, the majority of the population is living still in the same conditions as in decade ago and only 5-10 percent of them are sitting on the wealth. This inequality leads to political instability. But they are trying to take measures to solve it.

– which measures?

-They are trying to implement several big project even under the debt which in turn trying to create jobs and to Mongolian get paid. It is the best way of making money which is not same phenomenon like making debt of 500-600 million USD beforehand and distribute it for the citizens happened in preceding period of election.   It is necessary to supply with jobs and get paid for people. For example, construction of 5th Power Station  and of Medical Diagnosis Center  are big projects and will be financed by the Development Bank of Mongolia in small extent will be done in offshore manner but the projects are beneficial for Mongolians and have benefits in the longer terms. However, if we build road, 80-90 percent of the construction work of roads will be left for Mongolian and in this sense we are trying to push those projects which are beneficial for Mongolians so as to monetize them. I think this is not wrong.

Translated from Newsweek


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