On 18 February 2015, the last day of its autumn session, the Parliament of Mongolia ("Parliament") adopted a number of new laws and important amendments to existing laws that will affect the investment framework and the Mongolian economy in general.
In particular, two pieces of important legislation in relation to the minerals sector, namely laws amending the Minerals Law and the Law on Implementing the Law on the Prohibition of Exploration and Mining in Headwaters of Rivers, Protected Water Basins Zones and Forested Areas, also known as the "Law with the Long Name" ("Implementation Law") were adopted on this day.
The official versions of the new laws and resolutions are now publicly available, and we set out below a summary of those amendments which we consider most relevant.
1. AMENDMENT TO THE MINERALS LAW
In order to provide more flexibility in relation to mineral deposits of strategic importance, the Government of Mongolia ("Government") submitted the Law on Amending the Minerals Law for approval by Parliament on 5 February 2015.
Previously, the Minerals Law provided that the state was entitled to an equity interest in a mineral deposit of strategic importance of between 34 to 50 per cent depending on variables such as the source of funds, the amount of investment made and the amount of reserves, and subject to Parliamentary approval.
Although the amendment is rather brief with only three articles, it addresses an important issue concerning the utilisation of mineral deposits of strategic importance by introducing the concept of a special enhanced royalty for mineral deposits of strategic importance. It provides an option for the Government either to exercise its right to either take an equity interest in such deposits or to impose a special royalty in lieu of such interest.
The amendment allows the state's equity interest in a mineral deposit of strategic importance to be transferred to the licence holder, and in return the licence holder will pay a special royalty to the state budget for the mineral deposit of strategic importance. The exact amount of royalty will vary depending on the specifics of the asset, but is capped at a maximum of 5 per cent in addition to other royalties payable under the Minerals Law and supplementary legislation. The amendment does not make any reference to the price or consideration payable for the transfer of the state's equity interest to a licence holder other than a swap of the equity interest for an increased royalty.
2. AMENDMENT TO THE IMPLEMENTATION LAW
In order to respond to concerns over environmental protection issues relating to the mining sector, in July 2009 Parliament adopted the Law on the Prohibition of Exploration and Mining in Headwaters of Rivers, Protected Water Basins Zones and Forested Areas ("Mining Prohibition Law") and the Implementation Law. Both laws are rather brief in terms of content, consisting of only 6 articles and 2 articles respectively, but they have had a profound effect on the mineral sector and the Mongolian economy in general.
The Implementation Law provided for the revocation of licences where the subject areas overlap with those areas protected by the Mining Prohibition Law, namely those areas that are located within the boundary of headwaters of rivers, protected water basin zones and forested areas. Such revocation was to occur within five months of the date of the approval of the Implementation Law. According to Government statistics, the Implementation Law affected more than 1330 licences (mainly alluvial gold deposits) belonging to some 830 legal entities.
The implementation of the Implementation Law was prolonged and hampered by several factors, including determination of the physical borders of the protected areas and the payment of due compensation to licence holders whose licences were affected.
The amendment introduces two new articles and amends the existing two articles of the Implementation Law. The main change is that licence holders may continue their operations subject to undertaking a number of obligations in respect of the protection and restoration of the environment. Specifically, the amendment provides that if a licence holder wishes to continue its operations, it should submit a request to the Mineral Resources Authority of Mongolia ("MRAM") within three months from the effective date of the Law on Amending the Implementation Law (16 March 2015) and also enter into an agreement with the Mongolian Ministry of Environment, Green Development and Tourism, the MRAM and the governor of the relevant aimag (province). If a mining licence holder does not submit such request and enter into the necessary agreement, the mining licence will be revoked and there will be no compensation payable to the licence holder. We note that this provision makes specific reference to "mining" rather than "exploration" licences.
The amendment provides that the Government shall approve the procedures for the revocation of licences granted in the headwaters of rivers, and for the undertaking of certain measures, including the restoration of the environment in respect of licensed areas located in the "ordinary" protected zones of water basins where mining operations have already commenced. The Government will also approve the associated model agreements that licence holders must enter into. The amendment provides that the procedures and the agreement should include provisions concerning the deposit of funds equal to the cost of environmental protection and restoration for the project and the obligations and responsibilities of the government officials in charge of monitoring the same. The amendment also provides that if a mining licence holder does not restore the mining area (after the project is completed), the costs for restoring the area shall be payable by the licence holder taking into account the profits gained during the mining period.
We note that the amendment restricts the application of the procedures and the agreement to be approved by the Government to "ordinary" protection zones rather than headwaters of rivers or other protected zones. This implies that licences granted in headwaters of rivers and other protected zones may still be revoked in accordance with the original provisions of the Implementation Law. "Ordinary" protection zones for water basins are determined as being 200 metres from the banks of such body of water. Further, the amendment provides that holders of mining licences in forested areas must comply with certain requirements under the Law on Forests. Some of these requirements include the planting of ten or more trees for every tree cut, payment of compensation for damage caused to forests and a prohibition on the cutting of young forests and fruit trees. We note that the requirements and procedures relating to exploration licences are rather vague in that the amendment provides that the matter shall be resolved in accordance with procedures specified in the Law on Forests and Law on Water.
In light of the amendment, the Minerals Law has also been amended to state that a breach of the Implementation Law and/or the agreement entered into in accordance with the law shall constitute grounds for licence revocation.
3. OTHER LAWS AFFECTING THE INVESTMENT ENVIRONMENT
As mentioned earlier, Parliament approved several laws and resolutions including the approval of the Law on Debt Management, the law on the ratification of the Agreement between Japan and Mongolia for an Economic Partnership ("EPA") and a Resolution on Measures to Overcome Economic Difficulties.
(a) Law on Debt Management
The Law on Debt Management aims to provide a comprehensive legislative framework for a state and local government debt management system. The law introduces a number of important definitions concerning government loans and debt-related issues and imposes certain criteria and procedures on the creation of debts and the issuance of government securities and guarantees, forward-lending of loans, registering, reporting and monitoring of debts which may be repaid from state or local government budgets.
(b) Mongolia – Japan EPA
The EPA addresses a number of matters in relation to increasing trade between Japan and Mongolia and improving the investment framework. For example, the EPA proposes to eliminate and reduce customs duties for large number of goods, and addresses a number of issues such as e-commerce, intellectual property, competition issues which aim to promote and protect bilateral investments. The EPA is to become effective once the same is ratified by the Japanese Parliament. This is the first EPA Mongolia has entered into with another country.
(c) Resolution on Economic Difficulties
Finally, in light of the decline in foreign direct investment, foreign trade and foreign currency circulation, Parliament has also approved a resolution on Measures to Overcome Economic Difficulties. Over 60 measures have been identified to stabilise the macro economy and support economic growth for the next two years. Some of the key measures include the establishment of a budget stability fund, moving forward large-scale projects such as Oyu Tolgoi underground mine, Tavan Tolgoi Power Plant, Power Plant No.5 and certain railway projects, establishing investment funds with foreign banks and financial institutions, establishing a national re-insurance corporation, and undertaking measures to privatise certain state-owned enterprises.
During its autumn session, Parliament approved several other important laws and resolutions in an effort to revive the economy. These include the approval of the new Law on Free Zones, the Law of the Registration of Legal Entities, the 2015 Budget Law and a resolution on Certain Measures to Implement the State Policy on Railway Transportation. Of the laws that were recently enacted, the amendments to the Minerals Law and the Implementation Law are of significant interest to investors in the mining sector.
The introduction of a special royalty in place of the state's equity interest in mineral deposits of strategic importance is an interesting development that provides options to reduce the involvement of the state in mining operations while enabling the government to improve revenue generation.
With regard to the amendment to the Implementation Law, it is certainly a positive development for investors whose operations have been halted since the adoption of the Law. The requirements with respect to the protection and restoration of the environment are commendable. However, although the amendment provides some clarity as to the scope of the Implementation Law, it also provides that the procedures and conditions for the revocation of licences and the continuation of licence holder operations will be determined by regulations to be approved by the Government at a later date. Therefore, the implementation of the amendment remains subject to regulations which are yet to be adopted in the context of a relatively tight statutory deadline.