The Mongolian parliament recently passed major legislation to establish Mongolia’s first Sovereign Wealth Fund – an attempt to redistribute the country’s financial gains from its mining industry. The Diplomat interviewed the former vice minister of economy and development, Narantsogt Sanjaa, who is currently serving as the CEO of Erdenes Mongol LLC, a state-owned enterprise. In this interview, we covered topics like tackling corruption, redistribution of national wealth, and financial transparency and management.
Mongolian Prime Minister Oyun-Erdene Luvsannamsrai emphasized that one of the major goals of the Sovereign Wealth Fund is tackling corruption. There have been past examples such as embezzling of education funds and small and medium enterprise funds. How will the establishment of the Sovereign Wealth Fund improve Mongolia’s corruption within the government? How is it different from past efforts?
The establishment of the Sovereign Wealth Fund demonstrates the government’s commitment in action to tackling the power of oligarchs, who have for too long taken money away from the Mongolian people through corruption and other illegal activities present in the mining sector. The key rationale behind the Sovereign Wealth Fund is to achieve a balanced distribution of mining sector revenue by enhancing transparency and governance within mining companies and reducing the influence of the hidden/shadow economy.
Placing a significant proportion of the resources generated by the mining sector in the hands of the Mongolian people will tackle the problem of the wealth from this industry being concentrated in too few hands and out of public sight, circumstances in which corruption can thrive.
The amended Law on Minerals limits ownership of a legal entity holding a special license for a strategic mineral deposit to a maximum 34 percent share. However, there is an exception on investment agreements such as Oyu Tolgoi project. The exact amounts of the percentages of state-held shares will be determined by the State Great Khural on a case-to-case basis in careful consideration of the investment amounts.
First, this aims to address oligarchic concentration and promote equitable distribution among Mongolians. Second, it aims to improve governance of closed companies, enabling them to benefit from the growth and success of our mineral sector.
This builds on the huge strides forward made in our anti-corruption measures over recent years under the prime minister’s “Year of Anti-Corruption” initiative. The latest statistics from Mongolia’s Independent Authority Against Corruption (IAAC) show that losses from corruption in Mongolia plummeted by 83.1 percent between 2022 and 2023 – from 5 trillion Mongolian tugriks (MNT) to 0.845 trillion MNT.
The establishment of the Sovereign Wealth Fund is a key part of the next stage of this fight. Mongolia is one of the only countries to introduce such a scheme to given citizens a share in its national wealth fund.
What are some of the measures being adopted to fight corruption and increase transparency and accountability on those proposed funds?
The National Wealth Fund law is designed to uphold Article 6.2 of Mongolia’s Constitution, which emphasizes state ownership of land, subsoil, and its resources, including minerals, forests, water, and wildlife. Also, it highlights ensuring that the majority of benefits from strategic mineral deposits go to the public, and should be regulated by law.
For example, the “Savings Fund” will support citizens’ health, education, and housing so that every present-day citizen of Mongolia equally and fairly benefits from underground resources.
Inspired by the Norwegian model, the goal is that, by 2030, the structure and governance of the funds will progressively align with the Norwegian model.
The Sovereign Wealth Fund is one component of the unified budget. Parliament will endorse its annual budget while consulting with the public and industry leaders during the approval process. The estimated value could reach $2.9 billion by 2030, which will support Mongolia’s long-term development plan.
Through the Sovereign Wealth Fund, the government is also increasing the amount of work it does with civil society and international partners, aimed at shielding institutions from future corruption. Experts from organizations such as the IAAC and the Brookings Institution have already teamed up with officials from Mongolia to place the country on a path toward sustained transparency and accountability.
How do the Sovereign Wealth Fund regulations affect Mongolia’s mining giants and foreign investors?
Generally speaking, the government of Mongolia is committed to maintaining a thriving minerals sector that delivers significant financial returns for our investment partners. It provides the country with significant wealth and allows us to diversify our economy to new industries. The Sovereign Wealth Fund looks to extend these relationships by facilitating new opportunities for Mongolia to partner with international investors on projects of mutual benefit, for example on projects outside of Mongolia.
Let me explain detailed explanation of amendments to the Law on Minerals, which were misinterpreted by some lobby groups.
In order to align with the principle of the Constitution, some minor amendments to the Law on Minerals, specifically Article 5.4 and Article 5.5, were made to address the conditions under which the state can acquire shares in joint ventures involving strategic mineral deposits. I would like to highlight that there were no principal changes made from former regulation.
Article 5.4 now stipulates that if a strategic deposit, and its associated deposits identified through state-funded exploration, are jointly utilized with a private entity, the state can hold up to 50 percent of shares in that entity free of charge.
Similarly, Article 5.5 states that the state can hold shares equivalent to up to 34 percent of the capital invested by the possessor of a strategic deposit and its derivatives if the reserves are explored without state budget involvement. The exact amounts of the percentages of state hold shares will be determined by the State Great Khural on a case-to-case basis in careful consideration of the investment amounts. Also, this amendment applies to only “strategic deposits.” These regulations may be replaced by royalties for mineral deposits of strategic importance.
Moreover, our relationship with the mining partners remains incredibly strong. Recently the introduction of the Law of Public-Private Partnership delivered long-term support for the implementation of new infrastructure projects, including those to support our critical minerals sector for years to come. We are also reforming our foreign investment laws to remove restrictions on investment and simplify tax, regulation, disputes, and visa requirements to help encourage more investment in this sector and support the industry.
Considering the enlargement of Mongolia’s government, does the government expect an increase in government spending? Will these Sovereign Wealth Funds be included in government spending, and how can the people of Mongolia manage these accounts?
The design of the Sovereign Wealth Fund is to accumulate its funds without any spending till 2030. Therefore, the government spending from the Sovereign Wealth Fund will be negligible. We expect government spending will increase gradually after 2030. To manage the governance of this spending, the government will transfer its mandate to the Bank of Mongolia for financial investment of the accrued wealth in the Fund.
The Sovereign Wealth Fund is only one component of the unified budget. Specific projects such as housing, healthcare, and education projects will not be accounted for as government expenditures. The reason behind this inclusion is to maintain a positive balance of macro-stability through our fiscal policies.
The legal framework prohibits any withdrawals until 2030. This will give the government the ability to save a portion of fiscal revenues, preventing “boom-and-bust” spending cycles.
The Future Heritage Fund will be under the strict management of the Bank of Mongolia. The Development Fund, which will support the implementation of development projects and programs, will see a boost from any surplus in the state budget, with 50 percent collected to support these programs.
One key example we are implementing involves using the Savings Fund to provide mortgage loans using resources of 500 billion MNT from Erdenes Mongol LLCs’ investment in the Savings Fund, along with 500 billion MNT from the Bank of Mongolia and 200 billion MNT from commercial banks. This 1.2 trillion MNT will be used from 2024 to provide mortgage loans to citizens. Currently, over 10,000 households are eligible to participate, opening up the housing sector to many citizens for the first time. These will not be accounted as government spending.
We understand that the prime minister has asked the mining giants to cooperate in this initiative. What are some of the opposing views, and how the SWF will mitigate these challenges moving forward?
Major mining companies and big investors support the Sovereign Wealth Fund Act. However, there is a need to have a common understanding of the amendments to the Law on Minerals related to ownership shares. There will be certain negotiation with some companies who hold strategic deposits to open their ownership and transfer some of their shares to the government and other investors. But it is beneficial for the long-term sustainable operation of large mining companies.
The Sovereign Wealth Fund will be subject to key transparency measures with oversight both from the government and the general public. In addition to this, industry leaders will also be consulted in on all aspects of key projects and programs, including on the implementation of the policies. We remain in constant dialogue with all key industries, including the mining sector, in what further steps we can take to support their objectives in line with those of the Mongolian people.
Moving forward we will continue to find new avenues for expanding our industries and ensuring the Sovereign Wealth Fund builds a stronger relationship between businesses and residents in Mongolia.
In recent years, the government of Mongolia has been working effectively with key stakeholders in mining sectors, such as Erdenes Mongol and Oyu Tolgoi. Our remaining aim is to give our industries increased confidence in our management and economic direction to drive new investments, whilst also delivering benefits to the Mongolian people. Mongolia is also working to identify new opportunities to bring greater support to the future of this industry.
What are some of the policy models Mongolia is adopting from Norway in its establishment of the Sovereign Wealth Fund? What are the common themes between the two countries that Mongolia can adopt?
The principle of Norway’s wealth fund governance and management is fully reflected in Mongolia’s Sovereign Wealth Fund. The government has started the process of establishing and operating these fund investment management company based on Norway’s model. Thus, it can be understood that the introduction of the Norwegian fund model has already begun.
Norway’s incredibly successful implementation of its own Sovereign Wealth Fund has given key insights into how we might be able to emulate this success. Norway provides an inspiration for how to better operate and manage a fund of such magnitude. The success that they have had using many of the same strategies will demonstrate the positive possibilities of what the Sovereign Wealth Fund can deliver.
Like Norway, our objective is to ensure future generations of Mongolia have the opportunity to step onto the housing ladder and invest in their home country. We will continue to monitor the successes and challenges of the Norwegian implementation to see that Mongolia delivers a Sovereign Wealth Fund that benefits the people.