Discussion of Mongolia's Draft Future Heritage Fund Law

UPDATE, 1 December 2015: Since this post originally appeared, the Mongolian legislature has revised its draft of the bill. An English translation of the new bill, and new comments from NRGI experts.

The Future Heritage Fund represents an important development in Mongolia’s emergence as a mineral producer. Designed to save a portion of mineral revenues in foreign assets for the benefit of future generations, the fund has the potential to help address macroeconomic challenges while improving the governance of mining revenues. In terms of macroeconomic management, the fund could help mitigate Dutch disease effects, help address the perverse effects of upside revenue volatility, and encourage inter-generational equity. With regard to governance improvements, the fund could draw public attention to the finite nature of mineral revenues, expand oversight of resource revenues, and make them even more transparent.

In this paper, the authors draw on international experiences and an understanding of Mongolia’s current public financial management system to develop recommendations on how to improve the bill and better incorporate it into the Mongolian legal framework. Specifically, they highlight the need to sequence debt reduction efforts and accumulation of assets in the fund, as well as alternative processes to nominate governing board members, methods to reduce investment risk, and suggestions on how to improve transparency and oversight.

Success of the Future Heritage Fund will depend on establishing context-appropriate rules and broad-based acceptance of the rules governing the fund. International experience indicates that if the fund’s operational rules are too constraining on public finances or if principal policymakers do not all agree to governing rules before the fund is launched, then the rules are likely to be broken. In the best case, breaking the rules undermines confidence in the public financial management system. In the worst case, it can lead to financial mismanagement, corruption or poor development outcomes.

The recommendations shared in the paper are designed to help mitigate these risks, with an eye to both the short-term implications of establishing the fund and the long-term goal of generating an endowment for the citizens of Mongolia.