New restrictions: Regulations related to resource nationalism may have mixed effects

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Mongolia had a relatively open and free telecoms market — that was until May 2012 when the government passed the Foreign Investment Law of Mongolia that, among other things, restricted investment in the key areas of minerals, banking, finance, media and communications. The law was primarily motivated by the growing concern that foreign interests would take over the country’s mining assets. The law came before the June 2012 elections, in which resource nationalism played a large role. Telecoms also comes under the purview of the law as it is seen as strategically important.

The new law established a number of thresholds and requirements for those who pass them. If a foreign company makes an investment in a strategic sector of more than MNT100bn ($70m) and buys from 5% to one-third of the stock, it must give notice to the government. Those buying from one-third to 49% of the stock of a strategic company must obtain permission from the government. Above 49%, they must get parliamentary approval. However, at the end of December 2012 there was talk of reforming the law to increase the thresholds, which some investors have cited as off-putting, especially in a time of falling global demand for mineral resources. In the case of 33-49% investments, the law requires the government to answer within 95 days, a timeframe that is likely to be considered too long by many investors. The need for parliamentary approval was seen as tantamount to a foreign investment ban. Few major international investors could expose themselves to the risks of open debate of their investment.

A DANGER TO DEVELOPMENT: The law is an obvious problem for miners and for the country, which needs mining wealth to fund its growth. The Foreign Investment Law plus the conflict between the government and Oyu Tolgoi effectively shut down foreign mining activity, leaving the country in serious fiscal straits, until the recent bond issue. The law is also problematic for the telecoms industry, and some suggest that it poses a real danger to economic development. The information and communications technology (ICT) sector is essential for every other major industry, from mining to transportation to infrastructure, and for the government, they argue. If Mongolia is going to succeed, it needs the best possible ICT sector, and it will only get that if it allows for free foreign investment in communications. “If the foreign investment law is too restrictive, it will affect companies, as their shareholders will lose motivation to do business. ICT has to be very innovative. Almost all industries use ICT,” said Koichi Kawase, the chief strategy officer of MobiCom.

FOREIGN INFLUENCE: The Mongolian telecoms sector has a good deal of foreign participation. Mongolia Telecom Company is 40% owned by KT (formerly Korea Telecom) and MobiCom has two major Japanese shareholders with a total of 60% of the shares, Sumitomo Corp and KDDI, which each hold 30%. Previously, other companies had major foreign shareholders. Unitel was founded in 2005 as a 50:50 joint venture with Korean interests, and Skytel, formed in 1999, also began with Korean strategic shareholders. Only G-Mobile has always been entirely Mongolian. Providing service since 2007, it has never had foreign shareholders.

SELLING DOWN: Two of the companies with foreign investors have become fully local. In September 2010 MCS Holdings bought the 22.82% of Unitel that was owned by South Korea’s Taihan Electric Wire. Within two months, it was announced that the company was 100% Mongolian owned. The following year, Unitel became a subsidiary of MCS. In January 2011 SK Telecom sold the 29.3% of Skytel that it owned. Industry observers say that the exit of SK from the market after over a decade was not related to anti-foreign sentiment; rather it was part of the company’s efforts to realign its business and focus on better growth opportunities. In September 2010 the company sold 3.8% of China Unicom and in 2008 it sold a US operator.

MobiCom, the only telecoms company still more than 49% foreign owned, believes its position is safe.

“The law does not require us to change structure,” said Kawase. “It does not apply to existing companies.”

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The Report: Mongolia 2013

Telecoms & IT chapter from The Report: Mongolia 2013

Cover of The Report: Mongolia 2013

The Report

This article is from the Telecoms & IT chapter of The Report: Mongolia 2013. Explore other chapters from this report.

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