“We expect a significant increase in FDI this year”

S. Javkhlanbaatar,Director General of Invest Mongolia Agency,explains to MMJ why 2016 should see a considerable rise in FDI.

Several investment agreements were signed last year and tax stability certificates granted. Does this indicate the progress and success of the investment law passed in 2013?
Yes, we were kept quite busy last year with the type of work you mentioned, covering both domestic and foreign investments. These include projects such as MAK LLC’s Khukh Tsav  cement project, and Monpolymet LLC’s Moncement project. The total investment in these projects would be $1.5 billion or MNT3 trillion. Tsagaansuvarga is in the same league as Oyu Tolgoi and Erdenet, and will be as important for Mongolia’s economy, raising export earnings. As for the cement projects, their importance lies in their potential for import substitution.

As for tax stability certificates, seven companies received these for their total investment of MNT3 trillion. Around 30 companies had asked for these, but several of them did not meet the prescribed criteria.

Then again, 15 concession agreements were concluded in 2015, for a total amount of MNT6 trillion. This means our agency, with a staff of 20, last year helped progress in investments totalling MNT12 trillion, an amount more than half of Mongolia’s budget and almost the size of the investment in Oyu Tolgoi.  

How much of this investment has already come in and how much is still on paper?
$600 million is still to come in for Tsagaansuvarga, and $100 million for Khukh Tsav’s cement project. The Moncement project is almost completed, and needs only about $20 million or MNT50 billion.
As for the seven companies that received tax certificates, five have completed their investment.

What is the difference between an investment agreement and a tax stability certificate?
The tax certificate ensures that any rise in the four main taxes during the period it covers will not apply to the company, but a decrease will. An investment agreement goes one step further, in that it protects the company from being affected by any new tax that might be imposed following the agreement, apart from keeping unchanged the rate of the four main taxes.

All this is meant to provide investors with a legally secure tax environment over the long term, and addresses the complaint that doing business in Mongolia is difficult because of our unstable legal environment and tax policy. Now that both have been made stable, investors and businesses will be able to plan ahead their expenses more accurately. Taxes are a major part of a company’s expenses, and now that there is no longer any uncertainty on that score, companies will find it easier to prepare long-term financial plans.

Mongolia has now gone up  to the 56th place in the World Bank’s “Ease of Doing Business” rankings. We would have been higher, at No. 18, but bureaucracy and corruption, along with some other unresolved problems, held us back, despite the benefits offered by implementation of the investment law.

Foreign direct investment was low in 2015. What are this year’s prospects?
According to the central bank, foreign direct investment transactions totalled $70 million in the first 11 months of 2015, but this includes both inflow and outflow. Around 250 companies with FDI were newly registered in the same period. This is not bad when compared to the 2014 figure of around 210. Our regulations are that a company is first registered and then receives the sector-specific licence. A company seeking registration does not have to say it intends to operate in the mining and minerals sector. Often it gets registered as a trade and service concern and only afterwards asks for the special licence for the mining industry. Thus we cannot say right now how many of the 250 newly registered companies will operate in the minerals sector.

We do expect a significant increase in FDI this year. The development of the Oyu Tolgoi underground mine will bring in a minimum of $1 billion. The 15 concession agreements concluded last year were for a total investment of $3 billion. Not all of it would come in any one year, and we estimate an inflow of $1 billion each year. We must not forget, however, that both the private company and the government involved in a concession agreement have certain responsibilities to fulfil before expecting economic and social development to flow from the strategically important project.   
There are power plant projects, too. There has been quick progress on the Baganuur project and on Thermal Power Plant No.5.

Is it true that work on the Altanbulag-Zamiin-Uud highway concession agreement project has stopped?
The concession agreement was cancelled in June last year. As I just said, both parties in such an agreement have certain responsibilities. In this case, the government felt the operator had failed to raise the stipulated capital and had also fallen behind schedule in certain areas. The agreement was accordingly annulled, but the operator has challenged the government’s decision in a court of law.

Building infrastructure such as road, railway and airway connections to Russia and China is essential for our economic development. Everyone agrees this highway   project is vital, but there are differences on whether it should be built under a concession agreement. The original agreement was on a build-operate-transfer basis, and the total investment was put at $10 billion. The toll fees collected from users would go towards repayment of the loan. It is thus important to have a proper estimate of the volume and nature of traffic to fix the repayment period. If such commercial considerations are not found viable, we have to look for some other financing mechanism, maybe with the three countries sharing costs.