7. State-Owned Enterprises
The Mongolian government maintains various state owned enterprises (SOEs) in the banking and finance, energy production, mining, and transport sectors. The Government Agency for Policy Coordination on State Property (PCSP: ) manages the non-mining and non-financial assets. The Ministry of Finance manages the State Bank of Mongolia and the Mongolian Stock Exchange, and SOE Erdenes Mongol holds most of the government’s mining assets. The PCSP does not provide a complete list of its SOEs. Investors can compete with SOEs, although in some cases an opaque regulatory framework limits both competition and investor penetration. Both foreign and domestic private investors believe the current government approach to regulating SOEs favors Mongolian SOEs over private enterprises and foreign SOEs. Although many private companies have been created or registered in Mongolia in recent years, including foreign private companies, the Mongolian government has also created several dozen SOEs over the same period. The 2006 Minerals Law of Mongolia (amended in 2014) and the 2009 Nuclear Energy Law grant the government the right to acquire equity stakes ranging from 34 percent up to 100 percent of certain uranium and rare earth deposits deemed strategic for the nation.
Businesses have cautioned against the growing role of state-owned enterprises in the private sector, which they see as having the potential to crowd out business opportunities and limit investment in a free-market economy driven by an open private sector. Specifically, they worry the Mongolian government’s desire to maximize local procurement, employment, and revenues may compromise the long-term commercial viability of mining projects. Investors also question the Mongolian government’s capacity to execute its fiduciary responsibilities as both owner and operator of mines. Observers are concerned that the Mongolian government waives legal and regulatory requirements for state-owned mining companies that it imposes on all others.
Generally, approval for relevant environmental and operating permits for private coal mines in Mongolia takes at least two years. However, there are indications that the Mongolian government has exempted the Erdenes Tavan Tolgoi mining operations from regulatory requirements imposed on other operations. Preferential treatment for SOEs creates the appearance that the Mongolian government has one standard for its SOEs and another for foreign-invested and private domestic invested companies, and it also provides SOEs with substantial cost advantages via a more lenient interpretation or outright waiver of legal requirements.
Mongolian SOEs will source from foreign firms only when inputs are not available locally or cannot be produced competitively in Mongolia. SOEs and private enterprises are under political pressure to source locally as much as possible and often resort to creating local Mongolian shell companies to act as domestic storefronts for foreign-sourced goods. This unofficial requirement adds inefficiency and cost to serving the Mongolian market. Finally, Mongolia is not yet a party to the WTO Procurement Agreement, although it remains an observer.
Mongolian Compliance with OECD Guidelines on Corporate Governance of SOEs
Mongolian SOEs do not adhere to the OECD Corporate Governance Guidelines for SOEs; however, they are technically required to follow to the same international best practices on disclosure, accounting, and reporting as imposed on private companies. When SOEs seek international investment and financing, they tend to follow these rules. Many international best practices are not institutionalized in Mongolian law, and SOEs tend to follow existing Mongolian rules. At the same time, foreign-invested firms follow the international rules, causing inconsistencies in corporate governance, management, disclosure, and accounting.
The SOE corporate governance structure is clear on paper: an independent management answers to an independent board of directors, which reports to the Government Agency for Policy Coordination on State Property (PCSP: ). In reality, government officials note that management and board of director operations and appointments are subject to political interference.
Parliament’s 2016 National Action Plan references privatizing some state-held assets, but the government has yet to identify the specific assets to privatize or the process to implement privatization. The Mongolian government routinely floats the possibility of privatizing through sales of shares or equity in the Mongolian Stock Exchange, the national air carrier MIAT, the Mongol Post Office, and other properties but so far has sold only 30 percent of the Mongol Post Office to private buyers through an initial public offering on the bourse. While stating it welcomes foreign participation in privatization efforts, the Mongolian government has not clarified a tendering process for the privatization of state assets not to be sold via the stock exchange. Mongolia has no plans to privatize its power or rail systems. The latter is jointly held with the government of Russia, but the law does allow private firms to build, operate, and transfer new railroads to the state.