David Beckstead, Foreign Legal Consultant at Lehman, Lee & Xu, on reviving Mongolia’s appeal as an investment destination: Viewpoint

 David Beckstead, Foreign Legal Consultant at Lehman, Lee & Xu

Throughout 2014 there was a continuation of the drastic decline of foreign direct investment (FDI) in Mongolia, a shift that began in early 2013. With global commodity prices remaining low, and the dispute between the Mongolian government and Rio Tinto over the Oyu Tolgoi copper and gold mine ongoing, an economic recovery does not seem likely in the short term. However, I believe that in the long term the Mongolian economy has no direction to go but up.

The Mongolian government has recognised the need to stimulate the economy by attracting more foreign investment. The 100-day economic acceleration campaign in early 2014 was well intentioned, although it did not yield the concrete results the government had sought. That being said, there have been a number of significant legal achievements over the past two years that will pave the way for an improved investment climate, including the adoption of the new Petroleum Law; the replacement of the Foreign Investment Law and the Strategic Entities Foreign Investment Law with the new Investment Law; the amendment of the Minerals Law; and the repeal of the prohibition on issuing new exploration licences. The government has also recently announced its intention to open more territory for exploration purposes, which will unquestionably pique the interest of foreign mining companies.

The temptation for lawmakers in a weakening economy is to believe that the passage of certain laws alone will immediately boost the country’s economic prospects. Although the parliament and the government can create the conditions to improve Mongolia’s economy, the investment climate will only improve with the government’s demonstrated commitment to foreign investors. The process of establishing Mongolia as an attractive investment location has already begun, but more needs to done to solidify this reputation.

To this end, much can be done to strengthen the rule of law. Mongolian statutes have a tendency to contain vague provisions that can be interpreted in numerous ways. At times, it seems that administrative bodies interpret the vagueness of certain provisions in ways that suit their particular agendas. While there has been some improvement in this area in recent years, the problem in the drafting of laws still exists.

For example, Article 35.9 of the Minerals Law was added with the amendments passed on July 1, 2014, and calls for licence-holders to “give priority” to Mongolian taxpayers when procuring goods and services. While this may be a noble policy objective, in the absence of regulations outlining how licence-holders are to “give priority” to Mongolian taxpayers, this statutory prescription is problematic. How can a licence-holder be deemed to have “given priority” to Mongolian taxpayers? Is it sufficient to receive one offer from a Mongolian taxpayer, but then ultimately choose to go with a non-Mongolian taxpayer? Or is more required from the licence-holder, for example opening the contract to a bidding process? This provision lacks clear guidelines for a party acting in good faith to abide by. Eliminating this type of vague legal drafting would be a great benefit to the rule of law in Mongolia.

The adoption of the Budget Transparency Law on July 1, 2014 should be seen as a positive development in promoting more accountability in the public sector. Lawmakers should be applauded for recognising the need to shed light on how government agencies spend their budget allotments. Further developments in promoting transparency, predictability and consistency in the application of laws and regulations will be greatly beneficial for the country’s long-term growth.

The immediate solution to Mongolia’s economic recovery is not to devise new or even better laws. Put differently, Mongolia’s current economic crisis is not linked to any particular weakness in Mongolia’s laws. Still, much can be done to improve the legal framework by strengthening the rule of law and creating the conditions for long-term growth. Better drafting of statutes and regulations, as well as the dismantling of arbitrary administrative practices, would do a great deal to improve the legal framework for long-term prosperity.

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The Report: Mongolia 2015

Legal Framework chapter from The Report: Mongolia 2015

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