Vice Chairman of the Foreign Investment and Foreign Trade Agency (FIFTA) Mr Z.Battushig talks about Foreign Direct Investment (FDI) in an interview with the Mongolian Economy Magazine.
-The amount of Foreign Direct Investments in Mongolia is rapidly increasing and is expected to reach USD3 billion this year. How would you define the current state of the Mongolian investment environment?
-As Mongolia transited from a state-directed economy into a market economy, great efforts were made to increase levels of foreign investment in the country. Accordingly, a law providing tax exemption to foreign investment companies in some sectors and for a certain period of time was adopted.
For example, foreign textile companies investing in Mongolia enjoyed tax exemption for a period of 3 to 5 years. However, although bringing benefits, the law also entailed negative consequences. Along with the creation of jobs, cases of abuses of the legal system also increased. Nevertheless, a new policy to stop discrimination between foreign and domestic investors by treating them equally was finally adopted and is still in vigor to this day.
Today, because of its vast mineral resources and its promiscuity with minerals hungry China, Mongolia attracts the interest of major foreign investors from around the globe. As a result, investments made into the country’s mineral resources sector have greatly increased.
-The mining sector alone constitutes more than 80% of FDI in Mongolia. Does such a situation not threaten to destroy the competitiveness of Mongolia’s non-mineral economy and risk resulting in the dutch disease?
-The main way to prevent dutch disease is to diversify the country’s economy. In other words, it is necessary to attract foreign investments into the non-mining sectors of the economy to rapidly enhance their development. It is also vital to conduct comprehensive studies on the type of policies to be conducted to favor this kind of development.
Since the increase of foreign investments in the mining sector, we now need to review our foreign investment policy. For that matter, a working group set by the joint regulation of the National Development and Innovation Committee and the Ministry of Foreign Relations and Trade will soon draft a foreign investment strategy. The draft will be crucial and should benefit from the participation and inputs of our best economists and scholars.
-What are the Government’s policies to attract investments into the non-mining sectors of the economy right now?
-The Government has already been undertaking certain reforms in this area. In order to support small and medium enterprises, about 700 types of equipments were freed from customs duty and value-added tax. For the Year of Business Environment Reform, we also implemented certain measures to improve the country’s legal system. For example, the Government cut down on red tapes practices. In addition, a list of projects to be implemented within the framework of public-private partnership is now issued with the adoption of the Law on Concessions. Such reforms contribute to the progress and development of the non-mining sectors.
-Since we talked about the strategy draft, we should probably touch upon the issue of national security. It now seems that the annual doubling of the value of investments in Mongolia comes without surprise. Do you think it will be necessary in the future to restrict the amount of FDI in certain sectors?
-I think it is important to conduct preliminary studies and analysis before implementing any major tasks. But along with studies of other countries’ experiences regarding the levels of investment restrictions in certain sectors, Mongolia’s unique characteristics must be taken into account to adapt these experiences to the country’s current conditions. Only then will we be able to determine which sectors require protection and restrictions. For example, the telecommunication sector is considered to be of strategic importance for most countries, and it is common practice to set high criteria for all investments directed to this sector.
-There is a constant criticism that the information provided to investors is insufficient. For instance, statistical data on FDI vary and confuse people. The Mongol Bank states that in 2010 FDI amounted to more than USD1.6 billion, but according to your Agency’s estimates, it reached just over USD1 billion. Why is there such a difference in the data?
-This is a really important issue. FIFTA issues a data based on the equity fund of foreign investment companies registered in Mongolia. On the other hand, the Mongol Bank, in respect to the balance of payments, concurrently reports the funds entering bank accounts of given companies.
Another issue is that in recent years, domestic companies have accumulated capital on the international market. Therefore, it is necessary to improve the registration and information system of future foreign investments. Our Agency started to take concrete actions in this area. It is likely that domestic companies will soon start investing abroad too, so we need to be prepared and improve our system. For example, when a foreign investment company is established, it registers its equity fund with our Agency while the capital flow information of its bank account is kept at the Mongol Bank. Meanwhile, data on its number of Mongolians employees should be made to the General Authority for social insurance reasons. Only once these data are combined will a comprehensive overview emerge. For this we need to improve our coordination and put into operation a common system using modern technology and adapted to international standards. This will be a major task, but it is a very important issue. Decisions are made based on such investors’ data. For instance, China keeps a very good record and announces flow of investment outputs and inputs.
- You said that our companies will very soon start investing abroad. Is there a specific Government policy to support their investments abroad? China, for instance, renders substantial support to its domestic business entities to invest and conduct businesses abroad…
-Our economy is rapidly growing and new issues constantly emerge. Only recently, it was inconceivable to issue shares abroad. However, these last few years, cases when investments originated from the international stock exchange rapidly increased. Actually, based on the experiences of other countries, it can be observed that quite often companies benefiting from foreign investment grow independently and invest abroad.
Now Mongolians are buying back businesses which were set up thanks to foreign investment. In other words, domestic investors are becoming more capable and knowledgeable, and it can be assumed that in the near future Mongolian companies will start investing abroad. But truly speaking, there is still a lack of legal environment to support or reward investments abroad.
Nevertheless, Mongolia has established bilateral agreements to promote investments with 44 countries to this day, and double taxation avoidance agreements with 34 countries. In addition, Mongolia became a party to many international treaties such as the Washington Convention on the Settlement of Investment Disputes, Seoul Convention on the Establishment of Multilateral Insurance Guarantee Agency for example, thanks to which Mongolian companies have now the opportunity to invest abroad.
It could be said that to a certain extent a favorable legal environment has been established. In the future, it will be necessary to study in detail and determine specific ways to support the country’s domestic companies.
-Currently the majority of the money invested is directed towards the mining sector. What should Mongolians and Mongolian companies do in order to generate high profits, and to direct these profits into the economy as much as possible?
-In a first time, it is important to develop sectors dependent on the mining sector. Businesses related to the supplying of food and equipments following the implementation of large-scale mining projects have a good potential for development. However, in order to supply to global-scale companies, domestic business entities will also have to conform to international standards. Actually, it is wrong to assume that foreign investments only bring money. Along with money come know-how, techniques, technologies and culture; it is very important to import and develop such concepts as corporate governance and private business culture in our country.
In the end national companies should have no difficulties accessing the world market. Only then the investment made into the mining sector will be redirected into our economy and truly benefit its different sectors.