Foreign investors welcome Mongolia's change of tack

By bne IntelliNews April 19, 2013

Terrence Edwards in Ulaanbaatar -

Mongolia's parliament Friday, April 19 passed an amendment to its controversial foreign investment law of last year, which should allow over 100 pending investment deals in the country to now progress.

The Strategic Entities Foreign Investment Law (SEFIL) was rushed through parliament in May 2012 as protests grew about the increasing foreign (read: Chinese) control over the country's vast mineral wealth. But the wide-ranging nature of the law caused investment to fall through the floor as international investors felt the law was designed to deter all foreign participation in the economy.

The new amendment to SEFIL exempts private sector foreign companies from the full scope of the law, which demands government approval for the purchase of any stake in a Mongolian company operating in the mining, banking and finance, communications and media sectors in Mongolia.

At the same time, the amendment tightens restrictions on foreign state-owned entities (SOEs) investing in Mongolian firms, by removing a 100-billion tugrik ($71m) threshold triggering government intervention. Thus, all SOE investment is now subject to government approval, and for acquisitions by SOEs of stakes above 49%, parliamentary approval will also be required.

Tightening control of SOE investment is a sop to hardline resource nationalists, who began the push for SEFIL following last year's $926m bid from state-owned Aluminum Corporation of China Ltd. (Chalco) for a majority stake in coalminer SouthGobi Resources. Many Mongolians saw the bid as part of a worrying trend of seeing its resources sold off to its giant southern neighbour, with whom it has a tricky historical relationship.

The wide-ranging nature and stiff penalties of SEFIL - companies found in violation of the law could even have their permission to operate revoke - ended up scaring off much foreign investment. According to the local brokerage Mongolia International Capital Corporation, the country saw its lowest monthly inflow of foreign investment since at least 2010 in February with $81m, while foreign investment in 2012 fell 17% to $3.9bn.

"I think this is the first step in Mongolia's recognition of how the law impacted private companies from completing transactions and how it has driven down investment," says Chris MacDougall, managing director of Mongolian Investment Banking Group. "Now we can expect transactions on hold since SEFIL to be completed."

Grey areas

Some analysts caution that the law still fails to clarify key details. Although the amendment just passed by parliament has not yet been released in full, law firm Hogan Lovells told clients in a note that the scope of what is known about the amendments are "narrow" and need further work.

"The proposed amendment has not provided sufficient clarification for the law's vagueness," says Michael Aldrich of law firm Hogan Lovells. "In addition, the official wording of the amendment has not yet been disclosed so we do not have a clear view on the precise nature of the changes. At this juncture, it looks like some officials might be overselling the idea of a liberalisation."

From what Hogan Lovells knows about the amendment, key terms have been left vague: the mining sector could include mining service companies that assist the operators at mines and even oil extraction; there is also no mention of how pension funds and sovereign funds factor into the law; nor is there even a complete definition of a state-owned entity.

However, the law will likely be enough to allow deals involving private firms to move forward, such as an agreement by Teck Resources, a large Canadian miner, to join up with Erdene Resource Development Corporation as a partner in its mineral exploration in Mongolia. Erdene said the deal hinged specifically on clarifications to SEFIL.

Chimed Saikhanbileg, the government's cabinet secretary, told parliament that the Ministry of Economic Development is already in the process of drawing up a new law to replace SEFIL and resolve these remaining questions. The government hopes to bring greater certainty to investors that Mongolia is a home for long-term investment, he said.

Mongolia's opposition party, the Mongolian People Party (MPP), has also declared its intention to draft a competing law. The MPP, which has been the ruling party for most of Mongolia's history as a democracy, is eager to reclaim power and will likely use the law as a point of debate while highlighting perceived failures of the current ruling government. The opposition party has called for the resignation of Prime Minister Norov Altankhuyag of the government-leading Democratic Party, holding him responsible for the falling foreign investment.

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