In a move aimed at reviving flagging FDI levels, Mongolia?s national parliament has approved legislation it hopes will remove uncertainty over investor rights and facilitate the flow of overseas capital into key sectors of the economy.
FDI inflows have fallen sharply in 2013, weighed down by investor caution which was heightened by previous legal changes introduced last year.
However, while regulatory reforms under the new legislation should bring greater clarity regarding tax rates on foreign-owned enterprises, slowing global demand for commodities and ongoing investor wariness could lengthen the time it takes for FDI to regain momentum.
Greater clarity
The legislation, which went into effect on November 1, introduces so-called tax stabilisation certificates that ensure stable tax treatment for a defined period of time, ranging from five to 22 years, depending on the industry. The new rules will apply to value added tax (VAT), corporate income tax, mining royalties and Customs duties. Under the law, local and foreign investors will be charged the same rates.
Chris MacDougall, managing director of Mongolian Investment Banking Group, views the legislation, which was approved in early October, as the most important advance in facilitating FDI to be introduced in the past five years.
?Tax stabilisation measures and provisions that will help to prevent future changes to the legislation should provide investors with the confidence that they need to return to the market,? he told the Bloomberg news agency.
Broader investment opportunities
Analysts have suggested that the legislative changes could pave the way for investment across more of Mongolia?s economy. Under previous regulations, foreign investors were obliged to obtain state approval before they could invest in sectors deemed by the government as strategically important. The requirement has been lifted for private overseas investors looking to pursue opportunities in the mining, banking and telecommunications sectors, although majority state-owned enterprises will still need government approval to invest in these areas.
Lee Cashell, chief executive of Asia Pacific Investment Partners, which is involved in property development and cement production in the Mongolian market, described the law as ?very good news?. ?It was clear the government realised this was an urgent situation that needed to be taken care of,? he commented.
The legislation supersedes the Strategic Entities Foreign Investment Law, which was hastily enacted last year with the aim of blocking the acquisition of a large mining firm by a state-owned Chinese corporation. While the 2012 bill achieved its objective, it also deterred other overseas investors, helping depress Mongolia?s FDI levels. Foreign investment in 2013 is down by an annualised 47% for the first eight months of the year to $1.8bn, as overseas companies delayed new projects.
Uncertainty surrounding Mongolia?s largest mining project, Rio Tinto?s Oyu Tolgoi copper and gold mine, has also dented investor confidence. The multinational announced that it was deferring further investment, estimated to be worth at least $5bn, following a series of disputes with the government over the terms of the second stage of its development. Analysts will be looking to see whether the government?s latest efforts to reassure investors prompt Rio Tinto to lift its embargo on new spending, which, in turn, could lead to other overseas firms following suit.
Still more to be done
While Mongolia?s revised regulations governing investment could help boost FDI levels, a recent report by a parliament working group highlighted a number of obstacles to investment.
The report, submitted to the Standing Committee on Economics in late September, concluded that while the tax rates Mongolia imposed on foreign investors, alongside its regulations and tariffs, were similar to those of other developing economies, the country was still perceived as a risky destination.
Other factors keeping investors away, on top of uncertainty over tax issues, included inadequate infrastructure, excessive bureaucracy and an underdeveloped financial sector, the report said.
The findings also highlighted the significant proportion of FDI – up to 85% – earmarked for the mining industry, which served to underscore the economy?s dependence on a limited commodities pool. Such dominance could hamper Mongolia?s broader-based development in the future.
In its recommendations, the report called on the government to provide incentives for FDI, further improve the legal and regulatory environment and create a system which targeted investors for industries in need of capital.
Some of these issues, such as providing clarification about the tax regime and improving access to more economic sectors, look to have been addressed by the new law. However, investors may well still opt to wait until the amended legislation begins producing results before returning to Mongolia.
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