This is an update on an earlier post as well as an extended version of an argument that has now been published in English through East Asia Forum and the UB Post, and in Mongolian in Unuudur:
There has been a recent flurry of writing on foreign investment in Mongolia in English-language media, from newspaper accounts to more scholarly arguments from think tanks and the like. To my mind, many of these writings have taken the perspective of a foreign investor, rather than the perspective of Mongolian policy-makers or any Mongolian, really.
Since the Chalco bid for South Gobi Resources prompted the passage of a Foreign Investment Law by the Mongolian parliament in May I’ve been struck by some of the parallels between this law and its counterpart in Canada. Below I examine these parallels and Mongolian policy regarding foreign investors in light of the recent decision by the Canadian government to approve two bids by state-owned companies for companies in the Canadian oil & gas sector.
Similarities and Differences between the Mongolian and Canadian Foreign Investment Law
Before I turn to developments in Mongolia, a quick note on the parallels between the Canadian and Mongolia Foreign Investment Law. This is relevant as Canada is not only an established mining jurisdiction, but has been identified in Mongolia as a potential model for regulatory decisions about the extractive industry.
The greatest similarity obviously is the fact that such a law exists and that this law demands a government review of investments in certain industries triggered by thresholds of the financial volume of these transactions.
The Canadian government recently reviewed the bids of two Asian state-owned companies for Canadian companies. Chinese CNOOC bid for Nexen, a company active in the oil sands, and Malaysian Petrobas planned to purchase Progress, a natural gas company. These bids were approved on December 7 after months of delays and active debate in the media and among policy-makers.
With their approval the government announced that in the future bids from state-owned enterprises (SOEs) would only be approved under “exceptional circumstances” and that bids exceeding $330mil from SOEs would require review, while private bids would only be scrutinized if they surpassed $1bil. The argument that the government presented for the restrictions on SOEs focused on the fear that such bids would put an important sector of the Canadian economy that was emerging in a free market context under more or less direct control of a foreign government. Memorably, Prime Minister Harper argued that, “When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments.” While the government denied that this was a response specific to Chinese investments, clearly the decision was made in a context of expectations of increasing investments from China.
The Mongolian law has also made an explicit distinction between private and SOE bids. It outlines sectors that it applies to (the resource sector is included, naturally) and thresholds at which different kinds of reviews are triggered. A large bid by a foreign investor or any bid by an SOE would thus trigger a review by parliament.
One of the differences between the Canadian and Mongolian context is that decisions on FDI in Canada come in the context of a stable regulatory regime that offers predictability and the attempt to balance investors’ expectations with Canadians’ needs. Stability in the regulatory regime has not been the strong suite of Mongolian mining regulation.
So, this is where the parallels clearly end. Yes, similar principles, but a very different application thereof.
Mongolia as a Cautionary Tale?
Some observers have recently portrayed Mongolia as a “cautionary tale” (Stephens & Krusekopf) when it comes to the encouragement of foreign investment.
Resource nationalism has been one of the themes that non-Mongolian writings about the Mongolian context have focused on, particularly in attempts to understand the detention/holding of Sarah Armstrong, an Australian lawyer for South Gobi Resources for two months until just before Christmas 2012. Resource nationalism is generally equated with some evil movement aimed at nationalization of resource assets.
In Mongolia this claim is most commonly linked to the demand by some parliamentarians and parts of civil society that the Investment Agreement for the Oyu Tolgoi mine, jointly owned between Rio Tinto and the Mongolian government, should be revisited.
But one observer’s resource nationalism is another person’s attempt to preserve the resource wealth of a country and to reap its benefits for current and future generations. The former is a foreign investor, while the latter is a Mongolian.
I would be the first to agree that the process by which Mongolian policy-makers have arrived at some decisions has not been ideal (in the sense of a careful decision that is based on a thorough and dispassionate analysis of available information) – in fact, this process has been awful at times, including the unproductive broad calls for renegotiation without acknowledgement that such renegotiations require the agreement of both parties – but I cannot fault Mongolians or their leaders for their desire to get this decision “right” and their fears of getting it “wrong”.
Striking the appropriate balance between material needs, social aspirations, environmental and cultural protection, and, yes, financial rewards for investors, is not an easy decision. Jurisdictions that have had decades to arrive at appropriate mechanisms for this decision are still struggling with these issues.
Yes, there clearly is a kneejerk nationalism present in Mongolia and the Mongolian parliament that ignores the fact that ownership of mineral resources does not necessarily automatically mean profit from these resources without the skills, technologies and capital to develop them
Yes, there also is a deep-seated ambivalence about Chinese investments in Mongolia. This ambivalence includes fairly rational fears of economic dominance, but also elements of anti-Chinese sentiments.
Such attitudes are often mobilized at election time in a populist attempt to garner votes. This clearly happened in June 2012 when the Mongolian People’s Revolutionary Party under now-imprisoned former president N Enkhbayar made fairly simplistic noises about resource ownership and continues to make such noises now that the MPRP is (still) a part of the governing coalition.
Do these sentiments combine to be an ideology of resource nationalism? Not in my mind, or at least not for a majority of the population of policy-makers.
Some observers have claimed that Mongolia is limiting its economic opportunities by discouraging foreign investment and especially investment from China.
There is no doubt that there is some uncertainty around the regulatory regime for the extractive industry in Mongolia. Surely, this has also scared off some investors. But have enough investors been scared to have an impact on Mongolia? Is the OT mine not such a gigantic project in a resource-hungry world that scaring off some investors might not have a negative impact?
Sure, there is a line where all investors might be scared, but I do not think that Mongolia has come close to that line. Witness the Chinggis Bond sale in late November, raising $1.5b, but attracting orders for ten times that amount. Mongolia with its BB- S&P rating is paying 5 1/8% on these bonds, but that is cheaper credit than Italy has been able to get recently, so not too many bond investors seem scared off. In the end, there are so many investors in the world who have read the news that Mongolia was the fastest growing economy in 2011 and who want to participate in this presumed bonanza (this also in part explains the flurry of recent articles), that there does not seem to be a shortage of investors, even without any large-scale Chinese investment.
Given the Economist’s recent prediction that Mongolia will be the fastest growing economy in the world again in 2013, many investors will continue to look but also press for opportunities to participate in this growth. Given growth of 17.3% in 2011 and another double-digit year in 2012, this implies that the Mongolian economy will have grown by roughly half in three years by the end of this year. With Oyu Tolgoi entering production, the economy will begin to shift from construction to production (copper).
Yet, other than foreign mining companies active in Mongolia (really, only Rio Tinto and some juniors), there are few opportunities for investments that would offer participation in this growth. The very low capitalization/volume of trade of the domestic stock market doesn’t make this a viable option for anyone other than the most dedicated. The privatization of government holdings in sectors other than mining has also been sidelined by the attention paid to the extractive sector.
Some have argued that the Foreign Investment Law has led to a chill in FDI to Mongolia since its passage in May. Part of that slowdown is rooted in uncertainty surrounding the triggers for a review of foreign investments particularly as they are linked to SOE bids for investment. But if a country is so dependent on mining for its future, is a slowdown not a reasonable cost to pay for a more careful (if not always carefully executed, and sometimes even recklessly so) deliberation?
After all, the natural resources in question are unlikely to vanish in Mongolia (or in Canada) and nor is demand for them, at least in the near or medium-term future.
Of course, I can only speak in hypotheticals when it comes to considering the impact of legislative changes on investment volume.
It is important to note, however, that foreign direct investment seems to be somewhat of an example of herd behaviour, especially in the mining industry. The perception of political risk might thus be more important in some circumstances than the actual risk. This is certainly more the case for a place like Mongolia where much of the information (including this discussion) is about perception rather than a measured empirical reality and where information about the country is still relatively limited internationally.
Conclusions
Canada and Mongolia are not alone in the world in wrestling with the appropriate regulation of the natural resource sector. While Canada has a long-established resource sector and its provinces have developed regulatory practices over many years, the need and scope for regulation in Mongolia is much more urgent and larger given the sudden nature of the expansion of its mining industry.
The greatest hurdle to the development of a successful regulatory regime (i.e. one that makes the greatest possible benefit to all Mongolians possible while minimizing social convulsions and environmental impacts associated with rapid development) are the selfish actions of leaders. Mongolian decision-makers must surely be aware of the responsibility that they are carrying for ALL Mongolians, not just for themselves and their immediate social circles. Beyond this hurdle of corruption, the next challenge is an on-going lack of policy-analysis and policy-making capacity and the resources to develop such capacity more fully within Mongolia. As the demands for policy-making are accelerating with the impact of a mining boom on all areas of government activities and social relations, this will be what might hold Mongolia back, not a lack of foreign investment.
When members of the mining industry in advanced industrialized countries complain about governance and regulatory uncertainty in places like Mongolia, they would do well to note shared challenges and some of the parallels in the solutions that policy-makers hit upon.
There ARE lessons in the current discussions for Mongolia, to be sure. An awareness of the perception of regulatory initiatives abroad is surely useful to build up. Mongolian policy-makers might also put themselves in the shoes of the next generation of Mongolians when it comes to investments. If the current generation succeeds in building (financially) sustainable success in the current boom times to carry them through leaner years that will certainly come, then this success might well include some version of a sovereign wealth fund. Such a fund would seek to diversify its holdings internationally and would be regarded as an SOE in some jurisdictions. If Mongolian policy excludes some forms of such investments now, policy-makers should not be surprised if they will be excluded in the future.
References
Dierkes, Julian. “Mongolia’s ‘third neighbour’ policy and its impact on foreign investment”. East Asia Forum, Feb 15, 2011
Li, Justin. “Chinese investment in Mongolia: An uneasy courtship between Goliath and David”. East Asia Forum, Feb 2, 2011
Li, Justin. “Chinese investment in Mongolia: A sequel”. East Asia Forum, Feb 22 2011
McNamara, William. “Boom in Mongolia Deflates After Deal That Started It Is Threatened”. New York Times, Dec 10, 2012
Miller, J. Berkshire. “Mongolia’s Economic Challenge”. The Diplomat, December 8, 2012
Stephens, Hugh and Charles Krusekopf. “Feeding the Hungry Dragon: Canada, Mongolia and China’s Resource Strategy” (PDF). Canadian Defense and International Affairs Institute, November 2012
Wee, Denise. 2012. “Mongolia Attracts Twice Its GDP for Debut Bond”. FinanceAsia, November 30, 2012
