Interview: Jim Dwyer
To what extent has the new investment law been successful at attracting foreign investment?
JIM DWYER: I think the new law is quite fair to all investors, both foreign and local, and will enable companies to feel more secure making large-scale investments. The ability, under the law, to enter into stability agreements and fix key items like tax rates is important in this respect. The regulations also streamlined the registration process, bringing it down to less than a week; more than 300 firms have already registered with Invest Mongolia since the law went into effect.
That said, it is one thing to show interest and another to actually make an investment, which is unlikely to happen until the issues with Oyu Tolgoi’s (OT) project financing are resolved, as it has become a touchstone for international investors. Only then will we know if all of these new policies will have a significant impact.
What can the government do to reassure investors of its commitment to pro-business policies?
DWYER: The government has taken a number of positive steps over the past year. For instance, the signing of the economic partnership agreement with Japan should do more to stimulate investment. Japanese banks are becoming more active in Mongolia and there are a number of large projects being discussed by the Chinese as well, such as coal-to-gas.
The extension of exploration licences under the revised minerals law should lead to an increase in exploration and the reduction of gold royalties from 10% to 2.5% should bring illegal gold miners into the official system. People tend to forget that phase one of OT is also producing; gold and copper concentrate exports have risen in 2014.
Of course there is still much to be done by the new government headed by Prime Minister Ch. Saikhanbileg. For example, if the issues at Tavan Tolgoi were resolved, Mongolian coal could become much more competitive internationally, with narrow-gage rail built to the Chinese border and access to several Chinese seaports. In general, state-owned enterprises are inefficient and should be privatised; more than 50% are losing money. Also, while the government has improved its efforts to bring the private sector into the policymaking process, more consultation is needed. The public-private partnership model needs to be better implemented, so that multinationals can comfortably invest in large projects and attract financing from outside the country. The local banking sector simply does not have the capacity to fund developments of the magnitude currently being discussed – the 15 local banks have an equity capitalisation of around $1bn and a 20% lending limit to a single customer. With more than $60bn in investment needed in the next five years, at least $20bn will have to come from foreign investors.
What are the fundamental strengths of the Mongolian economy as they relate to foreign investors?
DWYER: If Mongolia’s mineral wealth and mineral supply chain can be effectively and responsibly developed and managed over the medium term, there will be significant funds for the diversification of non-mining sectors. Agriculture and food processing have major potential; the country has more than 50m livestock and needs to better monetise them. The recent economic agreements with Russia and Japan on Mongolian meat should lead to increased exports. To take advantage of this, the slaughtering and packing processes must be streamlined. In general, the agriculture sector suffers from a lack of capital and equipment, which could be rectified by channelling funds to its development. Cashmere can be very profitable for Mongolia, if it can move up the curve in terms of fashion and marketing.
Tourism has potential too and needs to be made more accessible. Currently, if travellers want to go anywhere in the country they need to fly through Ulaanbaatar and connect, which requires considerable time. The construction of regional airports with paved runways could help solve this, and Mongolia could do well with the Japanese, Korean and Chinese tourism markets.
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