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Section 6. Environmental economics
Bolor-Erdene Turmunkh, Ph D., student in Economics, the School of Economics and International Trade Hunan university E-mail: [email protected]
FOREIGN DIRECT INVESTMENT AND INVESTMENT ENVIRONMENT ON MINING SECTOR IN MONGOLIA
Abstract. Mongolia's foreign direct investment (FDI) law, legal environment, current situation of the economy, investment in the mining sector and coal extractions of Mongolia are shown in this research work. The FDI flows are increasing in recent years. Mongolia is one of 25 countries which has natural resources. There are about 30 types of natural resources, including gold, silver, copper, molybdenum, lead, tin, fluorspar, phosphorite, coal and garnet. Here we show that -in the future-Mongolia will have an opportunity to play a main role in the world market for FDI.
Keywords: Foreign direct investment; Investment environment; Natural resource; Gross domestic product.
Introduction percent in 2017 and 6.3 percent in 2018. Also, the coal
Mongolia is a landlocked country which is located export has increased and foreign direct investment in in Central Asia. Mongolia shares a border with Russia Mongolia has revived due to the rise. Growth in for-on the north side and with People's Republic of Chi- eign direct investment is tend to remain stable in 2018 na on the other side. At 1,564,116 square kilometers, and furthermore. This is related to the increase in pri-Mongolia is the 19th-largest country with a popula- vate investment in the mining and manufacturing section of around 3.2 million people. The scientists have tors. Mongolia has experienced a decreased in poverty found that territory is rich in minerals because they during the rapidly growing economy since 2010. The are located in the middle of three large watersheds household income is increased by 2017 and the first and altitude ofAsia according to the geology, geogra- half of 2018, while the growth prospects are positive. phy and ecosystem. Mongolia ranges in a significant Mongolia's economy has been based on agricul-place in the world market through fluorspar, copper ture especially for livestock for hundreds of years. and gold production. Mongolian future economic However, in recent years foreign companies have development is depending on how to process and invested much in the development of mining sec-how to mine those natural resources efficiently. In tors, which is largely dependent on the growth and 2014-2016, Mongolian economy has weakened due development of the country's economy. Whether to a fall of raw material prices and a direct foreign in- Mongolia can become a major competitive indus-vestment. But in 2017 and 2018, the economy revived, try in the world market depends heavily on the legal with GDP growth rising to 1.2 percent in 2016 to 5.3 framework for investment in the mining sector.
Mongolia has several important mineral deposits which are higher in the world market, and as a result of exploration efforts by foreign investors, it is possible to have a high rate of growth in the economy, not only mining sector. Existing deposits are processing the country's mineral resources with iron ore, lead-zinc and uranium, and currently large projects on copper, gold and coal are being implemented.
1. FDI's legal environment and regulations in Mongolia
From the beginning of the 1990's Mongolian economy transited into to market economy with a open economy policy, the Government ofMongolia started paying attention to foreign investment issues. The Government discussed the foreign investment law by the Parliament and approved it in 1990 and created a more favorable environment for foreign investment. Therefore, some amendments have been done in 1993, 1998, 2002, 2008, and 2013, and are intended to bring the international investment standards and to create favorable environment for the investment [1, 663-675].
One of the efficient reforms was the Minerals Law of 1997. This law was considered to be one of the most successful programs among the developing countries by mining sector of the world. A safety policy of mining license owners has reflected in this law and the articles of the law are the driving force behind the rapid expansion of foreign direct investment in Mongolian mining sector.
Foreign investment is protected by the Constitution of Mongolia, Foreign Investment Law, and international agreements to which Mongolia was joined. Under the current law, infrastructure, mineral processing, and export-oriented industry investors are received exemption from tax. Also, the equipment for the mining and technology imports are taking exemption from taxationand customs.
In June 2007, the Mongolian Parliament approved an amendment in tax laws in order to improve competitiveness, create new workplaces, reduce informal economy and bring investment environment
closer to international standards. Therefore, favorable environment for a free trade zone and law of establishing industrial park has being completed.
The Government of Mongolia has signed a double tax exemption agreement with 33 countries and mutual agreements on promotion and protection for investment with 39 countries. And in 1996, the government joined "Convention on the Settlement of Investment Disputes" which was established in 1965 in Washington and joined "Multilateral Investment Guarantee Agency" Convention of Seoul (1985) in 1999.
Mongolia is member of Multilateral Investment Guarantee Agency (MIGA) of the World Bank and investors are entitled to be registered in MIGA. The international institutes also recognize and agree with that the Mongolian government has created these favorable legal environments and regulations.
Mongolia does not impose restrictions on investment in FDI amount and investment, and allows investments except of drug and weapon industries. In Mongolia in the following forms of investments are encouraged. For instance:
• Establish a local branch of a foreign company and foreign invested company;
• Establish a business unit with local business investors;
• Invest in through purchasing bonds and stocks of Mongolian company;
• Purchase licenses according to an agreement which is under the Mongolian law on the mining and processing natural resources;
• Invest in a contractual arrangement of a marketing and management;
• Conduct a financial leasing or franchise.
Although a foreign citizen or foreign company in
Mongolia does not have the right to own a land, they can rent the land up to 60 years, to extend its rent afterwards, and to lease additional money or property from the domestic market or foreign markets. However, the Mongolian Government does not guarantee on foreign loans.
In 2007, 10% of the investment benefit tax was granted to priority sectors which attract attention of foreign investment in Mongolia. These include:
• Manufacturing sector: Petroleum, fossil fuel mining, processing, metallurgy, chemical, ore and automobile manufacturing;
• Agriculture sector: irrigation systems and developing agriculture with irrigation;
• Electricity and natural gas production;
• Construction sector: Establishment of waste processing factory and tourism center;
• Light industry: textile, leather and leather processing factory, shoe factory.
It is legally forbidden in Mongolia to socialize FDI and to seizure it illegally. And the FDI owners have an equal right with Mongolian investors to manage their property. If the investment is more than $20 million, it is able to be signed on Government Stability Agreement up to 10 years, and if the investment is more than $50 million, the Stability Agreement will be signed for a period of 15 years. In the case of investing more than $300 million, the agreement is able to be signed up to 30 years. The foreign investor has the right to implement an investment project without registering a business entity in Mongolia, and establishing its representative office is also provided.
A foreign citizen or a company that has invested in Mongolia has the right to transfer the revenue and payments back to the country without any restrictions, but in this case the tax shall be paid at 20 percent.
2. Current situation of foreign investment in Mongolia
In 1990's there were only two types of FDI such as Trade and Catering; Culture, Education and Science. But since 1993, foreign investment law was inTable 1. - Main mac
troduced into all sectors of the economy. Especially, since 1994, FDI has gone into geology and mining sectors intensive.
Between 1995 and 1999, Mongolia was invested by $53 million FDI. About one-quarter of FDI's was in the mining sector, 15% were in light industry, 10% were in animal-derived raw material processing, 8.8% were in engineering construction, construction materials industry, and 7% were in trade and catering [2, 146-156].
Between 2000 and 2004, total FDI was $165 million. The amount of the FDI has increased by three times since 1995-1999. Looking from the result, a half of FDI was invested in the mining sector, 17 percents were in trade and food industry, 7 percent were in light industry, and 3 percent were in banking and financial sector. However, FDIs in animal-derived raw materials have fallen to 2.7 percent of FDI [3, 86-101].
In 2005-2009 total FDI was $538 million. Comparing with the years of 2000-2004 it has increased also three times. Most of this growth is in the mining sector, and 68 percent of total FDI were in Trade and 22 percent were in catering industry. However, FDI in animal-derived raw materials also decreased to 0.8 percent. Additionally, comparing with the year of 2000-2004, the FDI was decreased in the sectors except ebanking and financial transactions, except for tourism and agriculture sectors.
In recent years economic recovery has revived and domestic investment has grown continuously, especially the investments in construction sector. FDI amount has been increasing due to the use of mining deposits constantly. economic indicators
Last Reference
1 2 3
Inflation Rate 7.3% Jan/19
Government Debt to GDP 79.4% Dec/16
GDP Annual Growth Rate 6.9% Dec/18
GDP 11.49 USD Billion Dec/17
1 2 3
GDP per capita 4071 USD Dec/17
GDP From Mining 1269648 MNT Million Dec/18
Balance of Trade 103 USD Million Jan/19
Exports 607 USD Million Jan/19
Imports 504 USD Million Jan/19
Current Account to GDP -10.4% Dec/17
Foreign Direct Investment 19379 USD Million Sep/18
External Debt 27911253 USD Thousand Sep/18
Source: https://tradingeconomics.com/mongolia/indicators
In order to build sustainable and accessible growth and reduce poverty, Mongolia needs to strengthen the capacity of governance, to effectively manage budget revenues, to rationally allocate economic reserves for investment, cost, savings, and to provide urban and rural people with equal capability. It should be implemented in a manner that protects the environment and ensures equality of the population.
Mongolia has been searching for a small part of Mongolia's natural resources and it is indicating a significant potential for Mongolia's mineral development sector. Future exploration and future processing depend on how the legal, regulation and tax environment would be favorable for foreign direct investment and it also depending on the scale and scope of public investment in road, health, education, and water resource consumption.
Figure 1. FDI inflows by country, 2018.09
Source: Computerized mining cadaster system, MRPAM
This chart shows that China is leading with FDI countries are not willing to invest in Mongolia ex-in Mongolia, but the FDI from the other developed cept China. About the other FDIs are from Canada, countries such as Australia, Russia and Hong Kong investment in the mining sector, from Korea, invest-are estimated lower. As a result of the chart, other ment in trade and food industry, from Virginia and
the Bahamas investment in banking and financial sectors.
3. Current situation of Mongolian investment in mining sector
According to the survey of 2017, the mining sector is taking 23 percent of the GDP due to the FDI on mining sector is high about 74 percent. From 1990 to the end of 2017, about 12,118 companies from 112 countries invested in 20 sectors
Table 2. - Mineral resource reserves registered
with amount of 16.5 billion dollars, and over 13.2 billion dollars or 73.9 percent were invested in the mining and oil sectors.
Since 1991, the majority of FDIs in Mongolia have been invested in the mining sector. With that, GDP of the sector is also high. For example, as a result of growth in coal mining in Oyu Tolgoi's and Tavan Tolgoi in 2011, the economy increased to 17 percents [4, 66-71].
in the State's integrated registry, 2016-2018
Deposit type Unit R Registered reserves
2016 20 17 2018
ore metal ore metal ore metal
1 Gold (rock) ths.t/kg 62864.24 33819.66 8412.8 3211.9 6537.9 18697.9
2 Gold (placer) kg 6581.0 5955.2 3374.7 3015.0 5140.2 4600.6
3 Iron ths.t 54463.2 18030.0 45655.7 11870.9 44969.8 18287.9
4 Polymetallic ths.t 15091.4 — — — 167692.3 —
Cu t - 57547.3 — — — 51909.0
Zn t - 41043.0 — 77.7 — —
eqZn t — — — — — 1174190.0
Pb t — — — 83.4 — 606274.0
eqPb t — — — 1636.3 — 512224.0
5 Molybdenum ths.t — — — — — 132224.9
6 Tungsten ths.t/kg — — 502.6 4.4 36.6 1.4
7 Rare earth elements ths.t/kg — — 0.12 0.041 356.8 125.2
8 Cooper ths.t/kg 2042008.33 7789023.59 29183.0 134.9 — 149.1
9 Tin ths.t — 89.6 — 0.7 — —
10 Fluorspar ths.t 801.1 335.0 1177.56 664.58 6932.0 1239.1
11 Uranium t 4.9 — — — 51583.2 15.5
12 Coal mln.t 1295.43 3579.7 9662.7
13 Pear shaft mln.t
14 Limestone mln.t 155.4 185.8 52.7
Source: Data from Geology and Exploration Division, MRPAM
The economy in 2011 was grown to 17.5, but decreased to 12.3 percent in 2012 and in 2016 it has rapidly decreased to -1.4. The economy is recovering due to the price growth of coal and copper in the world market, and real GDP growth of 2017 has increased by 5.4 percent. Since 2013, processing factories have grown significantly, but coal production was declined and the manufacturing sector has weakened.
While the exports in the first 2 months of 2017, have grown up to $212.0 million (34.6 percent) of the previous year the metal, precious stone and jewelry export have decreased to $33.0 million, exports of auto and air vehicles have decreased by $31.7 million. But mineral exports increased by $265.1 million, of which exports of coal increased by $283.4 million has greatly influenced.
4. Current investment situation in Mongolian coal sector
Mongolian coal resources: Mongolian hypothetical coal reserves are indicated by 173.3 billion tons. More than 300 deposits have been discovered in 15 basins, of which 37.4 billion tons of coal resources are estimated by geological exploration and detailed exploration surveys.
Coal mine. There are currently 49 active coal mines operating in the area and 29 of them are fos-
sil fuel mine and rest of 20 are Khuren coal mine. These are:
• 7 of the mines are state property and 8 of the mines are enterpriser's
• Domestic and joint 28 enterprises and 33 mines
• 7 enterprises and 8 foreign mines with 100 per-ccent foreign investment
Table 3. - Strategic significant of coal deposits approved by the Parliament of Mongolia resolution
Deposit name Company Annual mining capablilty, thousand ton
Tavan tolgoi Erdenes Mongol LLC 35000.0
Tavan tolgoi Tavan tolgoi LC 2000.0
Tavan tolgoi Energy Resource LLC 15000.0
Tavan tolgoi Mongolian Gold MAK LLC 14000.0
Nariin Suhait Qing Hua MAK HC LLC 2000.0
Nariin Suhait South Gobi sands LLC 9000.0
Nariin Suhait Usukh zoos LLC 3500,0
Baganuur Baganuur LC 4000.0
Shivee-Ovoo Shivee-Ovoo LC 2000.0
Mongolian Mining Corporation (MMC): Ukhaa Khudag and Baruun Naran mine have expanded their operations. The total production of the Group increased by 179% and reached to 8.3 million tonnes, while the washed and processed coal increased by 175%.
The net profit reached to $311 million and MMC ranked in the 5 th ofthe TOP-100 enterprises. MMC is being ranked in the 8th place with its employment and in the 2nd place with its disposal in Mongolia. Thus, the positive impacts of MMC (Mongolian Resource) on Mongolian social and economy sector are increasing.
Table 4. - Coal extraction, export, million tones
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Export 7.1 16.7 21.3 20.9 18.4 19.5 14.5 25.8 33.4 36.6
Output 14.4 25.2 32.0 29.9 30.1 25.3 24.2 35.4 49.4 54.5
Source: National statistical office of Mongolia In 2016, Mongolia extracted 35,396.5 thousand tons of coal and 33,831.7 thousand tons of coal was sold, of which 25,809.3 thousand tons of coal were exported. Comparing with the year of 2015, the extraction increased by 146.4%, sales increased by 152.9% and exports increased by 178.4%.
In 2017, 49.5 million tons of coal was extracted and 33.4 million tons of coal was exported from
Mongolia and it was the highest indication of the last 95-year. Thus, Mongolia was the second country which is supplying coal to China after Australia.
Mongolian coal export for the energy is increasing. According to the news from asianmetal.com coal export increased by 162,000 ton ($4 million) in February, 2018 and in March it increased up to 510 thousand tons ($14 million) in March. Coal extrac-
tion has increased up to 350% in a month. This was mainly due to the rise in new anthracite coal exports as a natural non-smoke fuel.
Prime Minister of Mongolia visited the People's Republic of China to discuss several issues and one of which was the congestion of coal transportation in Gashuun Sukhait port. According to the negotiations with the China were more than 500 coal trucks will pass through the port daily in April, 2018. But it has increased dramatically up to 1200 by June, 2018. With the release of this route, Mongolia is expected to export 40 million tonnes of coal in 2018 and would be the same as Australia.
In Mongolia between 1990 and 2016, there are over 13498 foreign invested enterprises from 112 countries have invested over USD18.9 billion foreign direct investment and 80 percent of of the investments were done in 2008-2012. As a result of the previous FDI, about 70 percent of total investment was done in the geology and mining sector, which is one of the reasons for Mongolia's investment tend towards the mining sector, on the other hand, this sector requires substantial investments from other sectors of the economy so it can be assumed to be the majority.
In January, 2017, 5.42 million tons of coal extracted, 3.61 million tons of coal were sold and 2.63 million tons of coal were exported. Comparing the production with January of previous year, the extraction increased by 141.8 percents, sales increased by 73.0 percents and exports by 126.7 percent.
In April 2017, Australia dumped about 20 million tons of coking coal due to Debby storm and it caused a sharp shortage of coking coal supplies in China. In order to fill this space, the amount of coal imports from Mongolia has increased dramatically overloaded at the port of Gashuun Sukhait. As a result of this remarkable case, about 160 km long coal trucks lined up for days in Gashuun Sukhait.
Conclusions:
Since 1990, the Government of Mongolia has been working with the International Monetary Fund (IMF), the World Bank and the Asian Development Bank to make economic reforms and attract international investors.
Mongolia's investment policy has not been studied, the environment is variable, government is unstable and less efficient. Therefore, it is necessary to study and reform investment policy, environment and governance in line with the Competitiveness Policy.
In the future, the fiscal sustainability policies and the positive growth prospects for labor and social welfare will be key to poverty reduction.
The way of increasing foreign investments in Mongolia is about strengthening of economic relationship with China, the Republic of Korea and Russia, as well as the expansion of leading sectors can further increase foreign investment.
Mongolia has more favorable conditions for receiving foreign investment. The impact of Mongolian mining sector on the economy has been increasing constantly in recent years.
The main bridge of increasing property is Mongolian government. The government can create favorable conditions for attracting domestic and foreign investment by implementing a tax policy and sustainable legal policy that promotes investment.
Increasing investment can lead in technological progress, accumulation of savings and research developments, improved foreign trade, improved quality of education and further technological development.
In Mongolia the FDI focuses only on mining, trade and catering. Under these condition, there is a real necessity to make relevant arrangements for foreign investment policy and legislation in Mongolia.
China's coking coal import demand is being provided from Mongolia with cheaper and high-quality coking coal. Most of the coal import is consisting of unprocessed coal.
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