Drawbacks of investment environment identified
- By Amarjargal Munkhbat -
- Jan 22,2024
Recently, the European Business Organization Worldwide Network (EBOWWN) report’s results were presented. It states that the govern ment’s efforts in attracting investment through positive amendments to the Investment Law are plausible and potentially attractive. However, currently, investment opportunities are hindered by an inefficient judicial system, poor enforcement, corruption, and overall government inefficiencies. Court cases take 6.2 years on average and only 10 percent of investor’s complaints are resolved. Introducing interest in judgments could limit the judicial system’s abuse, and the creation of courts specialized in addressing commercial legal cases could help improve the efficiency of Mongolian courts.
The report stated that, in the mining sector, one of the major drawbacks is that the Mongolian Tax Authority (MTA) has considerable levels of discretion and flexibility in valuing minerals licenses. This affects future investment in mineral exploration and mining through the creation of significant uncertainty for foreign investors. MTA should have a less active role in the valuation of licenses and impose a tax on the sale price (after reasonable cost deductions) rather than on the project cost. Moreover, mismatches between national and local government decisions lead to delays in projects: to start operations, mining companies need to obtain land utilization permits from local governments in addition to licenses and permits from the national government. The report further explained challenges of four sectors, financial sector, renewable energy sector, agriculture sector, and Information and Communications Technology sector (ICT). In the financial sector, a refined regulatory framework of allowing banks more freedom in providing trade loans, more favorable short-term foreign currency swap conditions, and lower risk weights for Letters of Credit, are needed. Moreover, hedging mechanisms to protect business from currency fluctuations should be developed.
Furthermore, the report explained that the government is not honoring its agreement signed with businesses in the renewable energy sector, with high tariffs set in USD, and the businesses cannot compete with state owned enterprises that supply (dirty) energy at subsidized prices. The reason behind this was the higher tariffs on renewable energy projects and the lack of electricity storage solutions. A paradigm shift and liberalization of the energy sector are needed. Despite the potential for trade and investment in the agriculture sector, high altitudes, extreme fluctuations in temperature, long winters, and low precipitation are limiting the possibilities. Therefore, intensive farming could address this issue and increase productivity in agriculture.
Finally, the report recommended that the government should create an enabling environment for investment funds, ease the tax burden, provide subsidies/grants to incentivize innovation activities and protect intellectual property to develop ICT. Businesses have expressed concerns over the Labor Law 2021 which requires the work and rest shifts must be equal. Employers need to hire more staff to achieve the same staffing levels as the old rules, with a greater administrative burden, and particularly with chronic shortages of skilled labor, this worsens the situation and creates a serious lack of competitiveness.