Interview: Jim Dwyer
How do you expect the new investment law to affect the level of investment to industry?
JIM DWYER: First of all, I do think that Mongolia should have such a law; most advanced Western countries do and it’s very necessary for this growing economy. However, the law was drawn up very quickly, partly in reaction to an offer made for SouthGobi Resources by the same state-owned enterprise that is buying coal from Tavan Tolgoi (TT). The legislation lacks clarity, but in principle it is an appropriate law to have. If properly monitored, the law could actually prove to be beneficial for foreign investment – but poor oversight could really hurt it. At this point, given the newness of the policy and the recent change in government, it is unclear how the regulations will evolve. In terms of sectoral impact, it’s quite clear that mining deals will be affected the most, since they depend heavily on foreign investment.
What impact will the election results have on the overall business and investment climate in Mongolia given recent fears of increased nationalism?
DWYER: There might be some spikes in resource nationalism, but hopefully they can be mitigated. Mongolia is not the only frontier market right now, there are others, like Myanmar, so it needs to maintain foreign investment in order to complete big projects like Power Plant Number 5 or TT. It is really important that TT happens, because Mongolia cannot be just a one-horse town relying on Oyu Tolgoi (OT), which accounts for 30 % of GDP. But the initial public offering (IPO) process will be complex, and if the new policy isn’t implemented well, there will be ramifications for the IPO, in which TT is hoping to raise $3bn. I don’t think there’s a bigger priority on Mongolia’s economic front than starting TT.
To what extent does a lack of available capital hinder small business growth, and what are your expectations of financing options on the capital market?
DWYER: Capital is important and bank capital is, presently, far too expensive (20%) for small and medium-sized enterprises. Debt and equity markets are just beginning here. In terms of equity markets it might take another year to get various laws changed and get brokers functioning properly. But when it does get going and we see one or two successful IPOs, there’s going to be a rush from companies to go public. This will be healthy process that could start by 2013 or 2014 at the latest. The debt market only just got started, with only two companies having done debt deals so far. It does make sense for the debt market to pick up, but we need institutional buyers of debt, especially if it’s local company debt. We are now seeing the beginning of private funds looking to provide $4m-10m in investments to non-mining Mongolian entities.
How would you evaluate the communication channels between the private sector and the government as well as the incentives used to promote growth in non-mining sectors of the economy?
DWYER: I think that communication has increased dramatically in the last three years. Five years ago, if there was an investment conference, no companies would have been invited, just the Asian Development Bank and World Bank. I think that the new government is open to recommendations, and I believe it will be very useful for them to listen to international practices in terms of taxes or accounting. Non-mining sectors have benefitted from international interest in Mongolia created by mining investment agreements, specifically OT, which single-handedly put the country on the world map. There had been countless deals put on hold while OT was being negotiated, but once the deal was struck, the floodgates of foreign direct investment opened.
In terms of government support, one of the investors in Power Station Number 5 is a Mongolian company that has an investment obligation of over $100m. There needed to be incentives for them to commit to that level of financing. Meanwhile, another example of current non-mining deals is the wind farm – which is also likely benefitting from some government incentives.
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