Lack of transparency to amend the law on investment
- By Myagmardorj Buyanjargal -
- Apr 12,2023
By R.Oyundelger and B.Myagmardorj
It has been more than two years since the Mongolian government established a working group to draft the renewal of the Mongolian Law on Investment. However, the draft and its progress remain unknown to the public, as only a few points from interviews in 2022 have briefly mentioned about it.
According to the Mongolian Law on Legislation, a renewal of a law is considered to have taken place when the fundamental concept of the law or more than 50 percent of the law is proposed to be changed. This means that the review will have a significant impact on the investment sector in Mongolia. The frequent changes in the legal framework have contributed to the perception of Mongolia as an unstable investment destination. The instability of the legal environment for investment has been a longstanding concern in Mongolia. For example, the 1993 Law on Foreign Investment was amended 10 times, with a total of 110 changes made to 64 clauses of the law. Similarly, the 2013 Law on Investment was amended 11 times within just 10 years, with a total of 40 changes made to 27 clauses of the law. The frequent changes in the legal framework have contributed to the perception of Mongolia as an unstable investment destination. It has also been reported that the instability of the legal climate, as well as the government’s actions and policies, affect the foreign direct investment (FDI) inflow.
Since Mongolia first established legislation for foreign investment in 1993, the country has seen a gradual increase in FDI inflow, with a noticeable decline between 2013 and 2015. Many believe that it was not a coincidence that the country renewed its investment legislation by adopting the 2013 Investment Law. Then, since 2017, the FDI inflow increased until 2019, however, coinciding with the COVID-19 pandemic, there was the next major decline.
As FDI plays a crucial role in Mongolia's economy, both the ruling parties and the government have made promises to enhancing transparency and the legal environment for investment. The current government's long-term policy document, "Vision 2050", and its action plan for 2020–2024 both prioritize this issue, highlighting the importance of creating a stable and predictable environment to attract investment and foster economic growth.
Chapter 4 of "Vision 2050" outlines that Mongolia’s goals for improving public debt management, reducing debt burdens, and creating a favorable environment for FDI during stage I (2021-2030). The plan also aims to establish Mongolia as a competitive investment hub in Northeast Asia during stage II (2031-2040). Additionally, Article 4.5.3 of the government's action plan for 2020-2024 highlights specific measures to support foreign investment in priority sectors such as infrastructure, mining, energy, food, agriculture, tourism, and mega projects. The government pledges to consistently safeguard the interest of foreign investors, and facilitate to concessional loans and grant assistance.
However, the process of proposing or adopting new laws in Mongolia is not always transparent, as confirmed by the Mongolia Investment Climate Statement from the U.S. Embassy in Mongolia. While the regulations of related laws align with the Transparency Agreement between Mongolia and the U.S., the government does not consistently enforce it. The Transparency Agreement requires each party to publish proposed measures in advance and provide interested parties with a reasonable opportunity to comment on such measures. Likewise, articles 4.1.1 and 4.1.2 of the Law on Legislation set the same principles for the process of drafting and proposing new legislation.
entatives, B.Solongoo (the current vice-minister of Justice and Home Affairs (JHA), who was previously in charge of the task, and Ch.Khurelbaatar, the current minister of Economy and Development, who is currently in charge of the task) attended meetings organized by the American Chamber of Commerce in Ulaanbaatar, Mongolia. This could be seen as an attempt to fulfill the government’s obligation under the said Transparency Agreement as a formality. The reason to believe so is that, in August 2022, B.Solongoo states that the government would publish the full draft of the renewal in both English and Mongolian, and the proposal would be submitted to the speaker by December 2022. She and Kh.Nyambaatar, Minister of JHA, said that the renewal draft has seven chapters and 30 sections, indicating that they had already finalized the draft but had not made it public.
In February 2023, the spokeswoman of the Prime Minister announced on Twitter that the Ministry of Economy and Development had withdrawn the draft of amended investment law, which was prepared by the working group led by the vice-minister of JHA, B.Solongoo, and will submit it after reflecting their proposals on the draft. It appears that the draft was already submitted without being made publicly available. It has been reported that the representatives of the working group participated in investment-related meetings to introduce or to discuss the draft. However, as of now, the renewed investment law is not included in the parliament’s spring session agenda.
Under article 4.1 of the Legislation Law, the principles of transparency and public participation must be observed. However, it seems that the current government and the parliament are frequently disregarding this principle. The most recent and glaring example was the new Law on Protection of Human Rights on Social Media, which was passed in January 2023 with the lightning speed, just one day after becoming public knowledge. Thanks to active criticism from citizens and civil society organizations, President U.Khurelsukh vetoed the law in full, along with the amendments, and the Parliament accepted the president’s veto.
For the above-mentioned law, the Prime Minister exercised his power to request an immediate discussion of the proposal under article 14.1.18 of the Act of Parliament and article 21.1 of the Law on Parliamentary Session, claiming that it was related to ensuring the economic dimensions of national security. However, both of them failed to provide a clear explanation or proof that it was indeed related to national security.
There is a trend where the ruling party seems to be using “immediate discussion” regulation frequently. For instance, the renewal of the Law on Tourism was also submitted for the same procedure but was not successful, and the reasons were not publicly available.
According to B.Solongoo, the bill that the working group led by her aimed to increase foreign investment by establishing a council to protect investors' interests and ensure their trust. The legal framework will be improved to implement non-tax support for investors, align tax support with relevant tax laws, and clarify regulations for dispute resolutions and enforcement of court judgments/arbitration awards.
In her interviews, B.Solongoo stated that the proposed renewal of the investment law includes the creation of two categories of investment sectors: economic priority sectors and economic sectors supported within a certain scope. Currently, the law requires foreign investors to invest at least 100,000 USD, but the draft law proposes that the share capital of the legal entity or company should be at least 100,000 USD. This change aims to eliminate the difficulties that most foreign investors face when establishing a joint venture with domestic investors. Furthermore, the proposed renewal includes the establishment of an agency for Foreign Trade and Investment under the Ministry of Economy and Development. The proposal also includes regulations aimed at eliminating the tax obligation for investors who buy companies with licenses. Finally, the proposal seeks to clarify the definition of a foreign-invested company.
Although the proposed amendment of the investment law may have positive effects on the economy, it is crucial for the government to ensure that the principles of transparency and public participation are followed throughout implementation process. While the government representatives' presentations and introductions are appreciated, the actual content of the draft is of utmost importance. Unfortunately, the entire process lacks transparency and engagement with interested partners and stakeholders, which obviously raises concerns. To truly attract investment, improve the legal climate for investment, and foster trust, the government should prioritize transparency and comply with applicable bilateral agreements, treaties, and laws on legislation. By doing so, it can create a favorable environment that encourages investment and promotes sustainable economic growth.