Having now served three years in Mongolia, this is likely to be my last opportunity to speak to NAMBC’s general meeting. In past remarks, I’ve focused primarily on the trendlines in Mongolian politics. This time, I’d like to take a slightly different tack and speak about two U.S. government-produced documents. Together they provide a micro and macro picture of Mongolia, which I think is particularly useful for observers of Mongolia at this time. The documents are the U.S Embassy-produced INVESTMENT CLIMATE STATEMENT and the Millennium Challenge Corporation’s SCORECARD for Mongolia. The 2015 version of the Climate Statement will “go live” within the next few days, and the Scorecard became important to Mongolia with the MCC Board’s December 2014 decision to enter into negotiations with Mongolia on a second compact. A senior MCC executive heads to Mongolia next week to review the work Mongolian and American teams currently are conducting on a constraints analysis. This analysis will identify the sectors of the Mongolian economy where a targeted investment is most likely to unleash growth and also, importantly, help us look for private-public partnerships. There may be opportunities for some of you arising from that work, and so I want to ensure that folks here have a basic understanding of MCC’s approach.
Turning first to the ICS, as the Investment Climate Statement is called by the cognoscenti, you all know the key facts: Foreign Direct Investment into Mongolia has trended downward since its 2011 peak of $4.7 billion. Overall, FDI into Mongolia fell by 85 percent from 2011 through the first quarter of 2015. As a recently released IMF assessment found, the country faces substantial macroeconomic challenges in the near term. Balance-of-payment pressures generated by the low FDI coupled with weak commodity prices and up-to-now expansionary macro policies are a tough combination. In this type of environment, it is crucial for businesses to have an in-depth assessment of the operating environment. I believe our ICS provides that, covering particularly the Government’s openness to, and restrictions upon, foreign investment; challenges in dispute settlement and the Mongolian judicial system; and transparency of the regulatory system.
The ICS provides the micro picture. The detail is crucial to those like you already IN Mongolia, as well as to investors contemplating new engagement. To use a military phrase, I’m going to put our bottom line up front. In 2014, investors told us that those able to look with realistic, open-eyes at the challenges of Mongolia’s commodity-driven economy and rough and tumble political and judicial processes might find profitable medium- to long-term investment opportunities. Mongolia, as this group knows better than most, has some of the world’s largest untapped mineral reserves. Mining and mining-related services represent potentially remunerative sectors for long-term investment, with potential also in infrastructure, transportation, energy, construction, healthcare, agriculture, tourism, and environmental products and services. But concerns about the weak rule of law in Mongolia, and here I’ll quote directly from the ICS, “require us to heavily caveat even last year’s qualified endorsement.” In short, Mongolia is not a country for the faint of heart or the ill-informed. Collectively, we’re in for a bumpy ride at least through the 2016 parliamentary elections. And, as the IMF says, measures beyond the recently introduced “Comprehensive Macro Adjustment Plan” are needed to underpin fiscal deficit targets, strengthen monetary and banking-sector policies, and ensure the most vulnerable are protected from the impact of the necessary macro adjustment.
How did we get here and what are the major issues identified in the ICS? Mongolia’s elected leaders these days readily accept that government missteps have intentionally or incidentally acted as disincentives to investment; these leaders say they recognize the need to correct course. The new PM has so far received high grades from the Mongolian public for determination, but lower grades for results. Citing an unusual telephone/text poll as evidence of popular support, PM Saikhanbileg, including in an April 5 televised address, has focused on getting the mega-projects of OT and TT moving. As a brief aside, I’m happy, if we have time for Q+A, to offer my views on how this fits with Parliamentary Speaker Enkhbold’s position announced on the opening day of the new session (April 6) that he does not see the need for further negotiations on Oyu Tolgoi and would take steps to remove from office any minister who attempts to finalize a contract for Tavan Tolgoi’s development that lacks parliament’s endorsement.
As most Mongolian eyes focus on Parliament, international investors have an additional and serious concern – the evident willingness of Mongolian state prosecutors and other authorities to unilaterally impose “exit bans” on foreign business executives whose companies become involved in business-related disputes with the government or individual Mongolian citizens. The 2015 conviction and imprisonment of three mining executives (one of them a U.S. citizen) suggested to investors that Mongolian courts do not fully observe principles of due process, and that foreign investors risk being coerced into settling legal disputes on disadvantageous terms.
The fact that several official Mongolian entities are empowered to level exit bans against individual investors and company executives complicates business-risk calculations. The widely held belief that exit bans are applied, or threatened, to coerce foreigners to settle business disputes with the government or Mongolian citizens on disadvantageous terms makes doing business in Mongolia a tough proposition. I have consistently described exit bans and these troubling legal cases as having “significant, detrimental impacts on foreign direct investment.”
Another troubling development in the legal space, is the growing incidence of Mongolia’s criminal courts acting to revoke business rights. In 2013, a criminal court judge’s revocation of 106 mining licenses received widespread attention, but we didn’t, at that time, see it as part of a trend. Of note in that case, at no time did the court offer specific evidence proving that these licenses, among the hundreds granted during a specific official’s term, were improperly granted. In 2015, local legal experts are expressing concern that this type of action is seen elsewhere: with criminal courts assessing substantial fines from, or revoking rights of, companies—termed civil defendants under Mongolian law—based on third-party corruption convictions. Because U.S. companies have been involved in some of these cases, Embassy officials have observed a number of hearings. Of the cases we have observed, the criminal court has not allowed the civil defendants any opportunity to defend themselves before the court during the trial or at hearings specifically focused on proving corporate malfeasance. Local legal experts have noted that Mongolian law and regulation actually do not allow criminal courts to render administrative decisions on the status of use rights or assess taxes and fees owed. However, experts explain that the administrators find themselves in a bind, as they are obliged to act on court orders, without regard whether the criminal court has the authority to order an action. Until this gray area of judicial authority is resolved, investors can have their economic rights expropriated by a part of the judiciary acting outside its remit, without any opportunity to appeal these losses to a proper authority. This, obviously, is troubling.
There are no hard figures for the number of investment disputes involving foreigners in Mongolia. Most foreign investors desiring to do long-term business in Mongolia prefer to quietly pursue or even abandon particular claims, especially if the government has an interest in the matter, for fear of jeopardizing future opportunities. Strong anecdotal evidence suggests that some Mongolian officials from each branch of government have solicited or offered bribes as a means of pre-empting or resolving particular investment disputes with foreign interests. Also troubling are reports we hear directly from some investors that suggest a belief that foreigners, by their nationality, face bias rather than blind justice.
In cases in which the government, at whatever level, is involved directly or indirectly, in a dispute, investors have reported and we have observed substantial government interference in the dispute resolution process, both administrative and judicial. Foreign investors describe three general categories of disputes that invite such interference. The first category comprises disputes between private parties that involve one or more Mongolian government agencies. In these cases, a Mongolian party may exploit contacts in government, the judiciary, law enforcement, or prosecutor’s office to coerce a foreign party to accede to some demand. The second category involves disputes between investors and the government directly. In these cases, the government may claim a sovereign right to intervene in the involved business venture, often because the government itself is operating a competing state-owned entity or because particular officials have undisclosed business interests. The third category involves a Mongolian tax official or prosecutor levying highly inflated tax assessments against a foreign entity and demanding immediate payment, sometimes in concert with imposition of exit bans on particular company executives or even the filing of criminal charges
We’re hopeful the attention we pay to these issues in the ICS – and in venues such as this — may help us to highlight to Mongolian officials how these concerns negatively impact investors. Improvements here would go a long way towards reviving investor confidence.
I don’t want to conclude on a negative note. Since the last NAMBC meeting, two important things occurred. In December 2014, the Mongolian Parliament ratified the Agreement on Transparency in Matters Related to International Trade and Investment (TA). The agreement, signed in 2013 by United States Trade Representative (USTR) Froman and then Foreign Minister Bold, marks an important step in developing and broadening the economic relationship between Mongolia and the United States. The goal of the TA is to make it easier for American and Mongolian firms to do business. The agreement covers transparency in the formation of trade-related laws and regulations, the conduct of fair administrative proceedings, and measures to address bribery and corruption. In addition, it provides for commercial laws and regulations to be published in English, making it easier for international investors to operate in Mongolia. Parliament’s ratification sent an unambiguous signal to foreign and domestic businesses that Mongolia seeks to restore confidence in the statutory and regulatory processes affecting commerce and trade in Mongolia.
Also in December, the Millennium Challenge Corporation’s board decided to enter into negotiations with the Government of Mongolia. As I mentioned at the outset, each year, MCC develops a scorecard on each country that might be eligible for a compact. MCC assesses the degree to which the political, social, and economic conditions in a country promote broad-based sustainable economic growth. In making its determinations, MCC’s Board considers three factors: performance on their defined policy criteria, the opportunity to reduce poverty and generate economic growth in the country, and funds available. If this is a second compact, as in Mongolia’s case, the Board also considers the country’s performance on implementing its first compact. Mongolia’s first $285 million compact was implemented 2008-2013. The most interesting thing about MCC’s approach is that it uses third-party indicators to identify countries with policy environments that will allow U.S. government funding to be effective in reducing poverty and promoting economic growth. I urge NAMBC members to become familiar with MCC’s focus areas — Ruling Justly, Investing in People, and Encouraging Economic Freedom – as well as its strong focus on working with the private sector and incorporating public-private partnerships into their compacts. I believe the second Mongolia compact is going to significantly shape not only the U.S.-Mongolia development dialogue moving forward, but also the broader parameters of the relationship and the space for economic development.
With that, I conclude my remarks. I’d like to thank NAMBC’s leadership for inviting me to speak today and for everything they do to keep the commercial aspect of the U.S.-Mongolia relationship vibrant.