May 23 – Mongolian Parliament may pass a law that will bar foreign state-owned companies from controlling its key assets by June.
The draft “Law on Regulation of Foreign Investment in Business Entities of Strategic Importance,” submitted to Parliament two years ago, was accelerated after a public outcry following state-run Aluminum Corp. of China’s move last month to take control of SouthGobi Resources, Vice Finance Minister Ganhuyag Chuluun Hutagt said in an interview with Bloomberg.
According to him, the law isn’t likely to apply to any existing operations. But the draft law, due to be passed before parliamentary elections next month, will be applied to the bid by Chalco, as Aluminum Corp. is known, and is aimed at ensuring no one country or product dominates the economy, according to Ganhuyag.
Chalco rose 0.6 percent to HK$3.24 in Hong Kong, valuing the company at HK$93.3 billion (US$12 billion).
Chalco was allowed last year to buy all of the coal from the East Tsankhi area of Tavan Tolgoi, Mongolia’s biggest coal field, after it agreed to resell 30 percent of the total volume to Mitsui & Co., Itochu Corp. and Korea Resources Corp.
“Mongolia wants foreign investment in key assets to be made by entities that represent several nations,” Ganhuyag said. The country currently exports most of its coal and copper to China.
China accounts for over 80 percent of its neighbor’s import and export trade, according to the World Bank. Exports to China rose to 92 percent of the total in the first quarter, Mongolia’s statistics office said last week.
“We don’t want to be faced with one sovereign,” he said. “Our struggle to get political freedom was a long one and we cherish that. We will not let foreign government-owned entities control strategic assets in Mongolia.”
Purchasing more than 49 percent of a key asset will need parliamentary approval, according to a draft of the law.
The issue of resource nationalism was the number-one concern among mining executives in 2011, replacing capital allocation, Ernst & Young LLP said in its annual risk survey published in August.
“There’s a big issue of discrimination and foreign investors should be just foreign investors,” Dale Choi, chief investment strategist at Frontier Securities said. “You can’t create separate rules for Chinese state-owned companies or Canadian companies. Chalco’s accord is market- based, it represents the way the market wants to go.”
The new law will make sure that any purchase of stakes in so-called strategic assets by a state-owned entity are registered and receive government approval, Ganhuyag said. The list of strategic assets and industries will be made later and will likely include uranium and rare earths among other minerals, he said.
State-owned entities won’t necessarily be barred from owning any assets in Mongolia, Ganhuyag said.
“We’ll review all applications on a case by case basis,” he explained.
“Private companies investing in the country’s key assets will also be scrutinized on their source of income, local hiring intentions and investment timespan to avoid so-called hot money inflows,” the Vice Finance Minister said. Mongolia will also seek to make sure investors don’t use jurisdictions that allow tax minimization, he said.
Mineral resources accounted for 89 percent of Mongolia’s total exports in April, according to the latest data from the country’s Customs General Administration. Exports to northeast Asian countries were US$389 million of a total US$409 million, the data show.
Meanwhile, some critics have come out within the country.
“The biggest challenge of Mongolia’s public governance today is to make a realistic assessment on our experience of foreign investment and to treat this matter with great care and judgment,” the well-known blogger Jargalsaikhan writes in his weekly column in local paper. “A law must be smart, not brave. And those who proposed the law should know that most of our sectors will develop rapidly only with foreign investment.”