S. Javkhlanbaatar, Director General of the Foreign Investment Regulation and Registration Department at the Ministry of Economic Development, answers questions from S. Bold-Erdene of MMJ on how the new Investment Law is working.Are things in place for the Investment Law and regulations related to it to be implemented?The Law has been formally in force since November, and now governs all aspects of investors-Government relations, including the services investors can demand from the state. As for regulations, at the moment there are none. We have learnt from experience that it does not pay to have too many regulations, and we have also seen how projects can be held up for months because regulatory approvals are delayed. Under the new law, those investing above MNT500 billion can ask for an investment agreement only if they desire it, without any compulsion.
An investment agreement with the government is no longer mandatory, and it is up to the investor to ask for one, provided that the investment amount is above MNT500 billion. Procedures for this have been laid down, and the emphasis now is on consultation between the Government and the investor.
The law provides stability of four kinds of taxes for all investors, but those investing more than MNT 500 billion can choose to do without a tax stabilisation certificate and go for an investment agreement proper, which will incorporate the tax issues. We now have clear directives on which minister will review the request for the inclusion of which tax, and also on the steps and principles to be followed in coming to a decision. And everything is unamuous, for we believe a decision is easier to reach when both sides clearly understand the issues involved. At the same time, we realise that new and unforeseen issues could crop up during the discussions preceding an agreement, and there is enough leeway for these to be properly negotiated. Almost a total absence of regulations and flexibility are the two main distinctive features of the present law, when compared to its predecessors.
Article 2.4 lists situations where investment proposals will be rejected. These include threats to national security and harmful impact on the economy. These are not really quantifiable, so who will take the final decision and on what basis? Any lack of clarity could lead to uncertainty?Naturally, in such cases, the Government will be the sole arbiter. No country can spell out everything that is needed for political or economic security. There is no exact parameter of what provides economic security, and it is for every government, especially in a democratic country, to decide for itself if a project might harm the economy, and then to deny it permission to take off or continue. Also, the Government must be free to decide which sector is threatened, and any part of society can help it understand and assess the perceived impact. This means our domestic private sector is also free to claim that any particular foreign investment proposal will unfairly restrict competition. Of course the Government will apply its mind when deciding on the merit of any such protest.
Has any company asked for a stabilisation certificate or an investment agreement?No investment agreement proposal has come as yet. We guess investors are still studying the new law.
There have been a few requests for a stabilisation certificate, but in most cases, the supportive documents are incomplete. We are helping them with advice, information and suggestions, and my rough guess is that the first such certificates will be ready in April, provided, of course, that the required documents are submitted well in time.
Has there been a rise in the number of investors approaching or addressing you since the Investment Law began to be implemented five months ago?Until some weeks ago, applications under the new law were received from 95 foreign-invested companies. As far as numbers are concerned, it is not bad, but we also have to consider their quality. The trend is quite positive. You have to understand that the Investment Law by itself cannot resolve all the concerns of a potential investor. Its thrusts have to be reflected in the laws and regulations in other spheres also. That is the next step we have to take. The general principles are now established, but these have to be strengthened in the laws in other sectors. It is the total picture that matters.
Well, the Minerals Law is going to be changed. What about other sectors?Liberalizing the business environment and making it more attractive is a comprehensive exercise, and, accordingly, the government is taking measures in various directions simultaneously. For example, a working group has been set up to study how the number of permissions required can be brought down.
Are we attracting more foreign direct investment?Look, the absolute numbers for different years are not as important as the movement of the graph illustrating a trend. Statistics will tell you that FDI is high during implementation of a project, only to fall sharply when its construction is over.
FDI in our country also depends greatly on the state of the global economy. This has shown no real recovery this year until now. Investment funds and companies are waiting and watching. Our advantage as a small economy is that just one or two projects can make a great difference.
Investment in the mining sector has certainly decreased, but how are others like infrastructure, or the service sector doing?As of now, the mining sector’s share is 80 per cent of all investment, but it has only about 400 of the total 8,000 foreign-invested companies in Mongolia. The other sectors are host to too many small and medium investors. Investors in a large project will come only when the economy is robust and also when there is a reliable mechanism to protect them from risk. For example, the construction sector has been the premium sector in the past two years, attracting both foreign and domestic investors. For this to continue in the long term, we need to resolve many issues such as pricing, import-substitution of material, etc. Agriculture is also a major sector and can show high growth if we adopt a policy based on our experience of past mistakes and successes.
Has the proposed Investment Council been established?Yes. It has nine members, representing the State and NGOs. We are preparing to hold its inaugural meeting. Its main responsibility is to assess requests for stabilisation certificates. The law is clear about what the Council has to do. This includes finding out if new technology is to be brought in, how many new workplaces are to be created, if a proper environmental assessment is done, etc. You can understand that the Government representatives are all professional people from the relevant ministries.
I believe the Economic Development Ministry Has received 888 proposals to increase exports and for import-substitution. Surely, the Government cannot provide the capital for all of these. Or, can you? Are you considering looking for foreign investment in these projects?We are considering it. But first the government has to select the projects and decide on how they will be supported. After that, we begin talks with the project owners on how we can mediate between them and foreign investors, provided, of course, that they are interested in foreign collaboration.