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09.12.2013, Investment Protection Issues in Mongolia, D.Jigjidmaa


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D. Jigjidmaa, Investment Promotion Program Manager, IFC Mongolia

Published in: Business
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09.12.2013, Investment Protection Issues in Mongolia, D.Jigjidmaa

  1. 1. IFC Investor Protection Project for Mongolia December 2013
  2. 2. MODULE 1: INVESTOR PROTECTION AND CONFIDENCE, AND INVESTMENT The Case for IP Reform Political risk (PR) has emerged as one of the most important constraints for foreign investment in developing countries, including Mongolia, a finding that has been consistently sustained by investor surveys reported in MIGA’s World Investment and Political Risk. As such, PR affects governments’ ability to successfully attract and retain investment and can result in: a. Lost investment: More than a quarter of corporate investors surveyed by MIGA in 2012 and 2013 said that in the past year, political risk had caused their companies to withdraw from existing investments or cancel planned ones. b. Significant (investment) opportunity costs: Even when investments take place, PR imposes a risk premium that investors initially absorb but ultimately pass on to the host country, through increased demand for incentives or reduced benefits / or scope of investments. c. Risk of high-cost investor-State disputes: PR exposes host governments to loss of the investment, damaged reputation, and significant cost of litigation and arbitral awards (average of $3 million in administrative costs and $10.4 million in damages per case). d. Weak Governance: PR is associated with weak governance structures characterized by low levels of transparency, high corruption etc. which, in turn, make the business environment less competitive.
  3. 3. Expansion of established investments –and keeping existing investors happy-- is as important as to attract new investors…. Reinvested earnings are becoming increasing sources of FDI…
  4. 4. Perceptions of political risk can deter investment Ranking of the most important constraints for FDI in Developing Countries (MIGA 2012)
  5. 5. Stability and predictability is key for investors
  6. 6. Why should Governments be concerned? One out of four corporate investors either withdrew from an existing investment or canceled planned investments due to political risk concerns over the past twelve months 0 5 10 15 20 25 30 Transfer and convertibility restrictions Breach of contract Non-honoring of gov't guarantees Expropriation/nationalization Adverse regulatory changes War Terrorism Civil disturbance Withdraw existing investment Cancel planned investments Source: WIPR 2012 Political risks that investors are most concerned about relate to government actions
  7. 7. Mongolia faces the same issues Political risk has been increasing for the last 4-5 years: ♦ Adverse regulatory changes ♦ Breach of contract ♦ Expropriation ♦ Policy and decisions gap between central and local government Resulted in: ♦ Drop in FDI ♦ Deterioration of Investment climate and sinking reputation ♦ Lost investment opportunities ♦ International arbitration Measures and first steps: ♦ New Investment law – stabilization and incentives. Abolishment of SEFIL. Implementation? Effective incentive policy? ♦ Investor protection through grievance management mechanism – GoM/IFC project (implementation starts in July 2014)
  8. 8. Increasing Investor Protection and Confidence – ultimate goal of the project Objective • Unlock investment constraints through identification, tracking of investor protection issues (such as expropriation, breach of contract, arbitrary government action and lack of transparency, transfer and conversion of currency) • Implementation of regulatory frameworks to reduce political and regulatory risk Overall Impact • Retention of existing investment • Prevention of investor-State disputes
  9. 9. Implementation is critical…. How Can the IP Project Help? Expropriation Lack of transparency, unpredictable and arbitrary government action Local Government decisions Investors face problems relating to… INVESTORS 1. Tracking and Monitoring System For each grievance/ problem record: a) Investor profile and amount of stock of investment b) Issue area c) Government agencies involved d) Impact of grievance on investment plan e) Impact of grievance on revenue and other aspects f) Action taken by investor g) Existence of a domestic/international court case relating to grievance; current status of case. 2. Grievance Management Mechanism Key objectives will be: a) Establishment of the Lead agency and its attributes b) Information Sharing c) Early Alert d) Best practices on problem solving techniques e) Implementation of solution Breach of Contract
  10. 10. Example: Grievance Tracking and Monitoring Grievance A Grievance B Grievance C RESOLUTION Investment Retained $ Investment not retained $ Arbitration Dispute Investment not retained + cost of handling dispute Grievance filed with tracking and monitoring system GRIEVANCE MANAGEMENT SYSTEM NO RESOLUTION Investment at Risk $
  11. 11. Grievance Management: Preventing grievances from escalating into legal disputes Conflict becomes a dispute (notice of Intent for Investor-State Arbitration) Grievance Management Dispute resolution Investor-State Arbitration State or Agreement GrievanceProblem Award Countries could improve their investment climate by taken care of Investors’ grievances an this stage
  12. 12. THANK YOU! IFC Mongolia Investment Climate Program