Throwing out the baby with the bath water
It was announced in early April that a Chinese state-owned company called “Chalco” had reached a deal to buy 57% of shares of “SouthGobi Sands”, a coal mining company in Mongolia, from “Ivanhoe Mines”. In accordance with the announcement, I wrote my article “Who cares about the election? Mongolia is at stake” stating the urgent need to pass a law within a month that would restrict foreign state-owned companies from owning more than 20% shares of a Mongolian company directly or indirectly.
The press and many ordinary citizens, including people from very remote rural areas, who sent letters and made requests to the parliament urging them to pass the new law, supported this timely demand. However, members of our parliament took this too far and came up with a brand new draft legislation that would restrict and regulate too much foreign investment. Their proposal have now become national and international headlines.
The reason their law proposal produced so much surprise is that the draft legislation used the word “strategic importance” to restrict foreign, state-owned or private, ownership to 49% or less, which curtails foreign investment and reduces economic growth.
The need to supportforeign investment
Countries attract foreign investment in order to use it as a tool to boost its development. Doing so will benefit the host country in three ways. Aware of risks, foreign investors bring in the money needed for development, which allows the host country to avoid borrowing from abroad. On top of that, foreign investment will also bring management and technology know-how. Then, the host country is getting industrialized, its foreign trade expands and its national companies enter the international market after becoming able to successfully satisfy the needs of their domestic market.
A country’s strategy is aimed at improving the living standards of people by creating competitive advantage in one of its economic sectors, producing a brand product or service in the world market and building comparative advantage in the other sectors. However, this strategy is carried out by the private sector, not state-owned companies. Living conditions will improve only when people work hard and government makes sure a person who works hard can earns more and live better.
Mongolia is currently the fastest-growing economy in the world because we have successfully attracted foreign investment. Investors are providing Mongolia with the needed financial source, management and technology know how, and some Mongolian companies have already begun entering the world market. However, foreign investors only come into profitable sectors and their objectives obviously do not include loving the host country, its people or becoming a charity. It is an art to maintaining harmony between two different interests of the host country and investors. Mongolia is like a child who has just started learning this art.
The need to restrict foreign investment
The reason foreign investment is almost solely in our mining and minerals sector is that the only product Mongolia can sell in the world market for now are raw materials that belong to these sectors. But then, Mongolia’s laws regarding these sectors are vague and unclear, the government is incapable of ensuring proper implementation of law, those who must demand implementation of law and monitor it are not performing their duty and the government along with its officials who are supposed to be the judges have become players themselves. The blame is on us, not on the investors.
The biggest challenge of Mongolia’s public governance today is to make a realistic assessment on our hundred years of experience of foreign investment and to treat this matter with great care and judgment.
Aware of the fact that foreign state-owned companies cause a great deal of difficulties in doing business, we have not been able to impose restrictions on their operations. The difference between a state-owned company and a private company is that state-owned companies can get limitless budget support and it can destroy the roots of fair competition, which leads to a price distortion. When the government gets too involved in business and starts polluting the environment, it cannot control itself or obey the laws. That is why Mongolia privatized most of its state properties.
As of today, for example, if we fail to restrict foreign state-owned companies’ involvement, our coal industry will be controlled by a foreign state-owned company just like our oil industry is and the whole value chain from mining to end user will be in the their hands.
Instead of that, let us fine those companies, foreign and domestic, that are not complying with laws until they do so. Only the state has the right to do that.
Instead of putting restrictions on the most important thing, members of our parliament have come up with a draft legislation called “Law on Regulation of Foreign Investment in Business Entities of Strategic Importance” only a few days before the election and they are turning this important issue into an election campaign trying to look patriotic. We requested them to restrict foreign state-owned companies’ involvement urgently, but we did not want them to do what they have not done for 5 years and pass a law in haste with no calculation or careful study. Laws passed without any calculation have always brought a loss, not success. It only took a weekend for the parliament to pass the law that imposes a special tax on gold mining. As a result, Mongolia’s gold industry entirely disappeared, most of the gold was secretly taken out across border and added to the shadow economy and one tenth of our populations became “gold ninjas”. In a democratic country, there is always time to receive every stakeholder’s opinion before presenting draft legislation.
However, members of our parliament have proposed to restrict foreign investment to 49% or less in sectors of strategic importance (minerals, power supply, road, transportation, finance), in certain activities of “strategic importance” (production and distribution of industrial explosive materials, operations related to maintaining flight security, television and radio broadcasting, activities for guaranteeing safety, quality and supply of food, oil related activities, power supply activities, road and transportation activities, activities of using water sources of urban settlements, activities which may cause substantial negative impact both directly and indirectly on eco system, natural resources other than minerals, and biodiversity of Mongolia and the given local area, real estate market activities, extraction of radioactive natural resources, preparation and processing of livestock skins, hides, wool, and cashmere, use, production, distribution of chemical toxic substances, use of recombinant technology and substances that cause infectious diseases in biotechnology production, communications services throughout the territory of Mongolia, activities which may directly or indirectly affect the market and price of key export items of mining, including gold, copper, coal, iron ore, and rare earth elements and in business entities of strategic importance (business entities with market value of over MNT 100 billion).
These regulations can be imposed only when we are competitive in all of these sectors and industries and have the assets and technology know how to do so. However, it is not the case and we cannot do that yet and considering today’s situation where most of our educated and skilled people are trying to get into politics, it will not be a wise step to take. Furthermore, those who proposed the law should know that most of our sectors will develop rapidly only with foreign investment.
A law must be smart, not brave
The proposed law calls for regulations on foreign investment under the cloak of strategic importance. The main purpose of this law is not to ensure national security, but to regulate foreign investment. This kind of law on FDI (Foreign Direct Investment) could have smart and obvious purposes such as:
1. Create fair competition between business entities interested in investing in Mongolia.
2. Introduce the world best standards to products and services of each sector and ensure competitiveness on the international markets.
3. Protect the national security of Mongolia and its strategic interests.
However, it should clarify more who will have the right to approve foreign investments, who must monitor them and what approach will be used for approval.
For example, if an approval is not given for the reason that there is a foreign government and its budget behind every foreign state-owned company, it will be accepted obviously.
Australia has the Foreign Investment Review Board (FIRB). This board has the right to examine any foreign investments coming into Australia and to make recommendations based on their assessment. This organization discusses investment proposals case by case and makes recommendations, which neither closes foreign investment flow nor harms Australia’s interests. However, it is stated clearly that what will be restricted, how it will be done and what sectors it should be done in.
It states that foreign investment in the Australian banking sector needs to be consistent with the Banking Act (1959) and the Financial Sector (Shareholdings) Act (1998). Foreign ownership of Australian international airlines is limited to 49% and the same goes for airports, but one airline cannot own more than 5%. Furthermore, foreign ownership in the communication sector will not exceed 35% and an individual’s ownership will be less than 5%. If a main asset’s value is more than $50 million and it has foreign investment and is going to be sold, it must be informed and approved. Also, it has more detailed articles for the defense sector. A special permission is only given after careful examination and assessment when associated with activities regarding uranium and plutonium, and operation of nuclear facilities.
In conclusion, foreign investment is one of the biggest factors of our country’s development and if we do not treat this matter with a smart mind, far sight and great care, we are very close to “throwing out the baby with the bath water”, which will bring great harm and loss of reputation. If our members of parliament pass a law with only one sentence that will restrict only foreign state-owned companies, they will do a great deed for Mongolia. If they fail to do so, you do not need to elect them again.