Currently, Mongolians are at odds with each other over the constitutional amendments. Especially heated, are the debates over questions as to the property rights of natural resources, and whether it should be in sole ownership. The legislators have been discussing whether natural resources should be “public” (people’s) or “state property”. During the working group meetings, both sides, the Parliament and the President, have settled to combine the two terms so that the wording reads as “state and public property” for now.
Irrespective of ownership, the management and development plans of the land, its entrails, the forests, water, fauna, flora, and other natural resources, must ultimately be brought to the table as well. Even if only for the legislators who need to determine how Mongolian’s wealth fund will look like in 30 years.
Classification of Sovereign Wealth Funds
The State of Kuwait, an oil-rich country, established the world’s first sovereign wealth fund in 1953. Several dozens of countries with abundant natural resources have set up sovereign wealth funds (SWFs) which play a crucial role in their economy, and its investments have been dramatically increasing. In 2018, the Sovereign Wealth Fund Assets Under Management totalled US$7.6 trillion. To bring this into perspective, the Norway Government Pension Fund Global is the largest SWF with total assets amounting to US$1.1 trillion.
The sovereign wealth funds are classified into five categories based on their objectives. In fact, most countries have created wealth funds with multiple objectives.
Table 1. Category and Objectives of Sovereign Wealth Funds
IMF, “Sovereign Wealth Funds: Aspects of Governance Structures and Investment Management”, 2013
While on the one hand, the constitutions of China, Kazakhstan, South Korea, Qatar, Saudi Arabia, and Chili stipulate that natural resources are the property of the State, on the other, the constitutions of the United States, Australia, Canada, Sweden, Finland, New Zealand, Austria, France, India, Singapore, Japan, Botswana, and Norway do not provide any provision on the ownership of natural resources.
For instance, in Norway, instead of providing a constitutional provision on ownership of natural resources, Act 29 November 1996 No.72 relating to petroleum activities stipulates that “The Norwegian State has the proprietary right to subsea petroleum deposits and the exclusive right to resource management”. It is noteworthy that Article 112 of the Norwegian Constitution states “Natural resources shall be managed on the basis of comprehensive long-term considerations which will safeguard this right for future generations as well.”
Norwegian Wealth Fund
In 1990, the Norway Government Pension Fund was established in order to properly manage natural resources based on long term considerations under Government Pension Fund Act (“the Act”) adopted by the Norwegian Parliament. The Act stipulates that the Ministry of Finance is responsible for the management of the Fund and entitled to issue necessary provisions to implement the Act. In accordance with the Act, the Ministry of Finance has granted Norges Bank the right to manage the Fund under the management mandate and make investment decisions independently of the Ministry of Finance. The Norges Bank is under obligation to restrict the equity portfolio to 60% and fixed income to 40%, to carry transparent management, to consistently provide quarterly and yearly reports. Moreover, the relationship between the Ministry of Finance and the Norges Bank is specified clearly within the management mandate.
Mongolian Wealth Fund
Nowadays, the mining sector constitutes one-quarter of the Mongolian economy and 85% of the total export. Therefore, a combination of stabilization and saving funds should be established to fairly distribute revenues originating from natural resources.
Mineral resources are not created by human beings but formed naturally, hence each citizen is entitled a share from revenues deriving from natural resources. However, it must be pointed out that the enterprises and investors who bear the financial risks of exploration, production, distribution of natural resources should receive their shares before citizens can receive a certain amount of the share through the government budget.
The income to Norway Pension Fund Global consists of revenues originating from petroleum activities (total petroleum revenues after subtraction of government investment and costs related to the sector) which are transferred from the central government budget. The total revenues include: total tax revenues and royalties from petroleum activities; tax on carbon dioxide and nitrogen oxides emissions due to petroleum activities; revenues from production licenses and interest from shares owned by the State. The Fund’s net cash flow consists of returns from the investments of the respective year. The fund can be transferred to cover the budget deficit or support the expansionary fiscal policy only with the parliamentary approval.
A creation of a sovereign wealth fund is essential in the distribution of income derived from natural resources in Mongolia. Furthermore, the Mongolian government should follow the best practices of the Norwegian wealth fund and preferably avoid the political influence by making the fund management and operations independent from any public body. The more independent the fund, the more productive it will become.
2019.09.05
Trans. by Riya.T and Ariunzaya.M