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: http://www.pcsp.gov.mn/en ) 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. Indeed, both foreign and domestic private investors believe the current GOM 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 GOM has also created several dozen SOEs over the same period.
In 2010 Mongolia passed and implemented the Law of Mongolia on Competition applying to private enterprises and SOEs alike. Prior to passage, competition between state-owned and private businesses had been declining for the simple reason that many SOEs had been privatized. Currently, firms from Mongolia, China, Japan, Europe, Canada, and the United States have sought opportunities for renewable and traditional power generation, a sector still dominated by state-owned coal-fired power plants and a state-owned transmission grid. However, few want to invest in the power generation field until the regulatory and statutory framework for private power generation firms up and tariffs reflect commercial best practices and true cost recovery.
The 2006 Minerals Law of Mongolia (amended in 2014) and the 2009 Nuclear Energy Law grant the GOM 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. Once acquired, these assets are vested with Erdenes Mongol, the state-owned entity for mining assets. Mongolia requires Erdenes Mongol to use its profits to “benefit the Mongolian people.”
The role of the state as an equity owner in management of revenues and operation of mines remains unclear. Investors question the GOM’s capacity to deal with conflicts of interest arising from its position as both regulator and owner-operator. Specifically, they worry that the GOM’s desire to maximize local procurement, employment, and revenues may compromise the long-term commercial viability of mining projects. Investors also question the GOM’s capacity to execute its fiduciary responsibilities as both owner and operator of mines. Observers are concerned that the GOM 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 GOM has exempted Erdenes Tavan Tolgoi (ETT) mining operations from regulatory requirements imposed on other operations. Preferential treatment for SOEs creates the appearance that the GOM has one standard for its SOEs and another for foreign-invested and private domestic invested companies; and 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 World Trade Organization Procurement Agreement, although it has expressed a desire to join.
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: http://www.pcsp.gov.mn/en ). In reality, government officials note that management and board of director operations and appointments are subject to political interference to an almost crippling extent. In support of developing a professional management, the Asian Development Bank is funding a USD 35 million corporate governance strengthening project for Erdenes Mongol, an SOE holding key copper and coal mining assets.
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 GOM routinely floats the possibility of privatizing through sales of shares or equity in the Mongolian Stock Exchange (MSE), 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 MSE. While stating it welcomes foreign participation in privatization efforts, the GOM has not clarified a tendering process for the privatization of state assets not to be sold via the MSE. 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.