Mongolia to scrap controversial foreign investment law - official

ULAN BATOR Tue Aug 27, 2013 11:15am BST

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ULAN BATOR (Reuters) - Mongolia plans to scrap a controversial law designed to curb foreign ownership in what it considers to be strategic sectors, such as mining, a government official said, as the country seeks to kickstart its stalled economy.

The new measure, if passed, will replace the 2012 Strategic Entities Foreign Investment Law (SEFIL), which analysts say has been partly responsible for a slump of 43 percent in overseas investment in the first half of 2013, on an annual basis.

Sereeter Javkhlanbaatar, director of foreign investment at the economic development ministry, said the new law would seek to allay concerns about limits in sectors such as mining.

"We won't separate the market between strategic and non-strategic," he told an audience of investors on Monday.

Sectors identified as strategic by the 2012 law include telecommunications, banking and finance, besides mining.

At the moment, companies looking to buy 33 percent or more of any company deemed to belong to a "strategic" sector must secure government approval. State-owned firms require government approval for any interest in a strategic asset, and full parliamentary approval for a stake of more than 49 percent.

The new law would continue to limit state-owned entities' efforts to acquire Mongolian assets, said Javkhlanbaatar, but would apply to all sectors, not merely strategic ones.

"We won't have approval systems for strategic sectors, but we will have for state-owned companies," he added.

Mongolia hopes to establish an approval board to review proposed acquisitions by state-owned firms, he said, along similar lines as one that already exists in Australia.

The country also planned to create an investment agency, Invest Mongolia, to lure foreign investment, he added.

SEFIL was introduced just before parliamentary elections in May 2012, as lawmakers sought to block a bid by the Aluminium Corporation of China Ltd (Chalco) (601600.SS) to buy a majority stake in a Mongolian coal deposit, but analysts said the law triggered a slump in foreign investment.

"There's no doubt (the law) led to a more uncertain environment for foreign investors," said Nick Plummer, an analyst at the Economic Policy and Competitiveness Research Center in Ulan Bator.

But it was unclear if a new law could reverse the slide, he said.

Investors have also been put off by a stalemate between Mongolia and Anglo-Australian miner Rio Tinto (RIO.AX)(RIO.L) over the development of the Oyu Tolgoi copper-gold mine, the country's biggest foreign investment project by far.

Javkhlanbaatar said the new law alone would not be enough to bring foreign investment back to levels in 2011, when Mongolia racked up world-beating economic growth of 17.3 percent.

He also noted that existing licensing systems governing sectors like mining and banking could be tightened to guarantee national security, which could raise concerns among investors.

Plummer said tougher licensing terms could actually increase uncertainty and extend delays, whether or not the distinction between "strategic" and "non-strategic" was removed.

"Until we see the draft legislation, we can only guess at what changes the government intends to make," he said.

Parliament will discuss the new law next week, Javkhlanbaatar said.

(Editing by David Stanway and Clarence Fernandez)

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