MONGOLIA: PROVINCIAL COMPETITIVENESS REPORT 2013

MONGOLIA ECONOMIC FORUM ECONOMIC POLICY AND COMPETITIVENESS RESEARCH CENTER

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PROVINCIAL COMPETITIVENESS REPORT ULAANBAATAR 2014

ECONOMIC POLICY AND COMPETITIVENESS RESEARCH CENTER

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Dear readers, It seems like only yesterday the Economic Policy and Competitiveness Research Center pub- lished its first report “Mongolia in World Competitiveness” in 2011. And today, we are pleased to offer the second report on Provincial Competitiveness, which employs the same method- ological approach as in “Mongolia in World Competitiveness”. In order for our provinces to achieve local growth and development, it is important to be able to compare them. What cannot be measured, cannot be monitored. And what cannot be monitored, cannot be improved. I am confident that this report will prove to be a valu- able source of information and wisdom for provincial administration and decision makers in identifying policy directions, planning ahead and improving future measures, and facilitating a favourable environment for local people and businesses to further improve their livelihood and revenue. Even though we Mongolians reside on a wide and beautiful plateau, the fruits of development reaches only a small part of it. If our country is to be seen as a single solid body, every cell, every organ should be healthy in order for this body to function properly. Similarly, only when all the provinces, not only the capital city, have their respective competitive strengths, our country will truly stand out on the world competitiveness map. In the past, there have been substantial challenge for provincial development whereby local budgets and decision making were centered in the capital around the state budget. However, we have witnessed big progress in 2013, when those powers were transferred from cen- tral government to local administration and residents. Only when local budget investments are based on public participation, executed with precision and effectiveness, and monitored through all stages, will they be able to contribute to development. However, although public investment is important, we should also not overlook the value of private investment, and neither is more important than the other. I am confident that the time will come soon, where the fruits of development equally reach all corners of our country. With my sincere wishes for success and prosperity,

Puntsag TSAGAAN Chairman of the Board RESEARCH TEAM

Economic Policy and Competitiveness Research Center

Mr. Tsagaan Puntsag, Chairman of the Board Ms. Lakshmi Boojoo, Director Ms. Odonchimeg Ikhbayar, Manager Ms. Tungalag Erdenebat, Head of Research Ms. Delgerjargal Dorjsuren, Researcher Mr. Ganbat Chuluun, Researcher Mr. Otgon-Erdene Khandaa, Researcher Ms. Yesunchuluu Khuderchuluu, Researcher www.ecrc.mn ACKNOWLEDGEMENTS

It is my distinct pleasure to greet you through this report. Last year, the Economic Policy and Competitiveness Research Center (ECRC) first initiated and launched a research project to produce a report which realistically measured development level and competitiveness of provinces. Carrying on and continuously improving something is more important that just starting it off. With annual reports, it is now possible to track changes and new developments in provincial competitiveness, to compare provinces with each other, as well as their current and past indicators. Taking this opportunity, I would like to note the support and contribution of organizations and individuals which were pivotal in the production of this annual report. In particular, I would like to thank local businesses for their time and input in measuring the competitiveness of their respective provinces, and local branches of the Mongolian National Chamber of Commerce and Trade for providing the opportunity to meet them. Moreover, the support of GIZ program Integrated Mineral Resource Initiative in printing the report has been invaluable. Last but not least, on behalf of the ECRC team, I would like to thank you, our esteemed reader, for using this report to reflect on your work and wish you the best of success in your future endeavors.

Boojoo LAKSHMI Director PARTNER ORGANISATIONS

German Society for International Cooperation Integrated Mineral Resource Initiative

Mongolian National Chamber of Commerce and Industry Regional Branches

MONGOLIA Mongolia Economic Forum ECONOMIC FORUM

Statistical data sources

National Statistical Office

Bank of Mongolia PROVINCIAL COMPETITIVENESS REPORT 2013

CONTENTS

Abbreviations...... 9 DEVELOPMENT CALLS...... 10 PRINCIPLES OF ANALYSIS AND METHODOLOGY...... 13 PROVINCIAL COMPETITIVENESS SCOREBOARD...... 19 Competitiveness factors...... 20 Overall competitiveness scoreboard 2013...... 21 Competitiveness structures...... 27 PROVINCIAL COMPETITIVENESS PROFILES...... 31 STATISTICAL TABLES...... 117 1 Economic Performance...... 119 2 Government Efficiency...... 131 3 Business Efficiency...... 141 4 Infrastructure...... 151 ANNEXES...... 175 The fundamentals of competitiveness...... 176 Data sources and notes...... 178

 PROVINCIAL COMPETITIVENESS REPORT 2013

Provincial Competitiveness Profiles

ARKHANGAI …………………………………………...... 32 BAYAN-ULGII ………………………………………...... 36 BAYANKHONGOR ………………………………...…….40 BULGAN ……………………………………………...... 44 GOBI-ALTAI ………………………………………...... 48 GOBISUMBER ………………………………………...... 52 DARKHAN-UUL ………………………………………...... 56 DORNOGOBI …………………………………………...... 60 DORNOD……………………………………………...... 64 DUNDGOBI …………………………………………...... 68 ZAVKHAN ………………………………………………...... 72 ORKHON………………………………………………...... 76 UVURKHANGAI ………………………………………….....80 UMNUGOBI ……………………………………………...... 84 SUKHBAATAR …………………………………………...... 88 SELENGE ……………………………………………...... 92 TUV …………………………………………………...... 96 UVS …………………………………………………...... 100 KHOVD …………………………………………………...... 104 KHUVSGUL ……………………………………………...... 108 KHENTII ………………………………………………...... 112

 PROVINCIAL COMPETITIVENESS REPORT 2013

Abbreviations

BoM Bank of Mongolia

EPCRC Economic Policy and Competitiveness Research Center

GDP Gross domestic product

MNT Mongolian National Currency (tugrug)

NSO National Statistical Office

PCI Provincial Competitiveness Index

SME Small and medium enterprises

VAT Value added tax

 PROVINCIAL COMPETITIVENESS REPORT 2013

DEVELOPMENT CALLS

This second installment of the “Provincial of the impacts of these initiatives as well as to Competitiveness Report” provides us with consider interesting developments taking place the opportunity to not only measure the in the provincial level. competitiveness of different provinces, but also The 2012-2016 Action Plan of the Government to monitor new developments and changes. Last of Mongolia, under the objective titled “A Secure year’s report showed that slow growth and low Mongolian”, includes a goal to Turn provincial development in rural areas were largely due to centers into cities. Starting from 2013, provincial a lack of quality infrastructure, including not only budget powers were expanded, and Local hard (roads, transportation, communications, Development Funds were created. energy, electricity etc.) but also soft infrastructure (healthcare, education etc.). Near non-existent While it is still early too evaluate the results of industrialization and an unfavorable business these projects and programs, annual Provincial environment were other factors delaying local Competitiveness Report will be able to provide development. It was obvious that provinces which substantial information on yearly changes. were able to attract workforce migration with There is still much to do to improve provincial active ongoing mining projects, and consequently competitiveness. According to the results of this a better business environment, were leaders in year’s report, some of the most detrimental growth and competitiveness. issues causing slow growth in provinces are From this year’s report, we would be able to lack of long-term development policies, poor observe in-detail if local development and infrastructure and weak business environment. competitiveness has improved or deteriorated. In order to overcome these challenges and to improve competitiveness, the following issues Orkhon, Umnugobi, and Darkhan-Uul provinces should be considered on the policy level: are still leading the competitiveness scoreboard. Last year, we had Dundgobi and Arkhangai 1. Accurately identifying and formulating provinces respectively taking up last two places. provincial development policy and objectives However, Arkhangai was the least competitive province this year. On the other hand the overall Even though each province has its own competitiveness score of all provinces has development policy, these policies mostly lacks showed improvement. For instance, even though long-term perspectives based on the unique Dundgobi province is still behind on economic characteristics and competitive advantages of that and governance indicators, the new paved specific province. With the recent budget power road to Ulaanbaatar improved infrastructure shift to provinces, it has become increasingly indicators, boosting Dungobi’s total score from important to have clear and accurate development 28 to 43. Similar improvement was also noticed policies on optimal budget spending to facilitate on Arkhangai, with overall competitiveness score local growth. rising from 37 to 41. As a result of budget decentralization and the With an increase in competitiveness scores in increase of provincial budget powers in 2013, all provinces, the gap between the most and total provincial revenue was MNT1,828.9 billion, least competitive provinces is closing up. In increasing 2.3 fold from 9.0 per cent of central other words, if we assume the most competitive budget in 2012 to 20.7 per cent in 2013. In province has full 100 points, score of the least addition, starting from this year Integrated competitive province increased from 28 last year Local Development Funds were established, to 41 this year. with each province and soum having their own Local Development Funds. In 2013, a total of The EPCRC’s production of provincial MNT247.6 billion worth of investment, projects, competitiveness reports coincides with current and programs were planned for rural areas. Even efforts from the government to boost rural growth though it is commendable that budget powers through major projects and programs. Through were boosted at the provincial level, research the Provincial Competitiveness Report it is now and recommendations on effective spending and possible to have quantitative measurements monitoring is still lackluster.

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Each of the 21 provinces in our wide terrain has provinces, Bayan-Ulgii, Uvs, and Khovd. their unique competitive strengths and opportunities Roads are rightfully considered as vessels of based on their respective geographical, climate, development. If by 2015, all 21 of the provinces and economic conditions. Hence, a long-term are connected with Ulaanbaatar via paved roads, development outlook based on these strengths there would certainly be a dramatic improvement and opportunities is important. in their competitiveness. The basic principle of competitiveness for any Another pressing matter for rural population is nation and province is to accurately identify the provision of electricity, heat, and guaranteed its strengths and aim to create a sustainable drinking water. Even though the government’s development based on those core strengths. For plan to turn provincial centers into cities partially a society which traditionally centered on animal covers these issues, they require a long-term, husbandry, further development into modern stage by stage approach. Project “New Soum”1 farming, and branching out to ecologically clean , intended to bring development to soums, manufacturing and organic products would was officially launched in 2013 in three soums, be optimal. If there is potential for agriculture, namely Bayanlig and Buutsagaan soums of introducing high-tech, large scale crop farming, Bayankhongor province and Zamyn-Uud soum and attracting domestic and international travelers of Dornogobi province. by creating comprehensive tourism plan based on its untouched and wild nature, then these This project is expected to reduce migration development policies would be recommended. from the countryside to provincial centers and Such different yet coordinated policy efforts Ulaanbaatar, and improve overall infrastructure are important for provincial and regional in soums. development. And as previously mentioned, long-term objectives, programs, and policy are 3. Improving business environment indispensable to achieve them. Out of 45 thousand private businesses registered in Mongolia, 70 per cent operate in Ulaanbaatar. 2. Developing infrastructure The fifteen thousand businesses operating in the Provincial development is first and foremost provinces have stated that the lack of investment measured by the living conditions of local and financial sources for further growth is their residents, and the quality and sufficiency of basic biggest obstacle. social services, such as healthcare and education. At the moment, not every province meets these During our research, representatives of rural requirements. However, there have been some businesses gave the highest score out of 10 on major improvements in infrastructure indicators, Enabling Business Environment to Sukhbaatar leading to some overall improvement. province, which was 5.8 points. Orkhon and Selenge provinces followed with 5.5 points and About half of Mongolia’s 21 provinces, or 12 of 5.3 points respectively. Umnugobi province, last them, are currently connected with Ulaanbaatar year’s leader on this indicator with 6.2 points, by paved roads. fell down to 4.7 in 2013. The least favorable In accordance with the 2012-2016 Action Plan of business environment was in Dundgobi, with 3.3 the Government of Mongolia and its objective to points. connect all provincial centers with Ulaanbaatar city via paved roads, a total of 1560 km paved road was built in 2013, including those in Dundgobi, 1 Dornogobi, and Bayankhongor. In 2014, “New Construction” medium-term targeted program was approved by the Resolution of the State Great Hural of June 25, 2013, which according to A. Gansukh, Minister of Roads and foresaw the implementation of “Inter-Soum Center” model project with Transportation, 2200 km paved road is planned a purpose to boost rural growth. Main purpose of the project is for construction, connecting the provinces of to establish a public service complex (local administration, school, kindergarten, hospital, dorm, and cultural and sports center with Khuvsgul, Dornod, Umnugobi, Sukhbaatar, necessary engineering solutions and infrastructure) centers of soums Gobi-Altai, and Zavkhan with Ulaanbaatar. By under common standard. This project consists of following three 2015, the Government of Mongolia will have phases: - 2012-2014 or Phase I, 5 soums fulfilled its objective, with completion of paved - 2014-2015 or Phase II, 13 soums roads connecting Ulaanbaatar with the last 3 - 2015-2016 or Phase III, 78 soums

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Access to business loans was easiest in Orkhon Conclusion province with 6.3 points. Small and medium Mongolians say those who move their hands have enterprises do not want cash handouts, but food in their mouth. The state has put forward are instead seeking the modification of loan a considerable amount of effort, and provincial requirements on collateral and interest rate. and soum development is improving at a steady Moreover, having tax policies vary from province pace. But there is still much to do in order to to province based on their development level, bring this their development level to that of geographical condition, and population density, Ulaanbaatar city, if not of the world. While many was also proposed by local businesses. important reforms are detailed above, there also In addition to these policies, in order to improve some additional issues outlined below. business environment in provinces, it is necessary Most of the time, residents are drawn together to reduce migration to cities, improve comfort and in provincial centers, which to some extent living conditions of local residents, and expand increases the challenges faced in urban areas. market potential, because local businesses need For some provinces, issues such as decentralizing a broader market for their products and services, the population, land appropriation and urban in addition to a professional workforce to hire. planning, green spaces within the city, and air The Cabinet meeting of January 18, 2014 was pollution should be looked into as of today. held regarding the amendment of Law on Value In a few words, provincial leaders should work Added Taxes, and has ruled to submit this hard, be responsible and proactive in order amendment to the State Great Hural. Current to optimally utilize opportunities provided by legislation states that businesses with revenue over government initiatives. MNT10 million should pay the VAT. However, the amendment lifts this threshold to MNT50 We hope that this second annual report will million, discharging almost 50 per cent of small provide many valuable and innovative ideas and and medium enterprises from this burden. solutions to provincial decision makers.

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PRINCIPLES OF ANALYSIS AND METHODOLOGY

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THE PURPOSE AND IMPORTANCE OFTHE RESEARCH

The purpose of Provincial Competitiveness create a favorable environment for preserving Research is to make a comparative evaluation their competitiveness edges and supplement the of the current competitiveness of 21 provinces existing advantages. In other words, this report in Mongolia and to define their competitiveness pursues the question of whether a certain province holistically. This study identifies the strengths and enables local business efficiency and prosperous weaknesses of each province and evaluates life for its residents through effective allocation of their potential to compete, thereby creating a resources and by exploiting its advantages. database that is useful for developing a stable, Since this research is designed to compare the long-term development policy. provincial competitiveness, those that are ranked The provincial competitiveness index would give top in the list should not necessarily be the best us an opportunity to observe any improvement performers. Although they are more competitive and changes in provincial competitiveness, than the others, those provinces should promote because this study will be conducted every year their incompetency by using its resources according to the same set of methodologies. effectively and exploiting its advantages. Likewise, those ranked lower in the list should not consider Besides comparing the competitiveness of the themselves to have poor competitiveness, but provinces, this research helps to identify factors rather, they should see themselves as having that influence the provincial competitiveness lower competitiveness than the other provinces either positively or negatively and evaluate and should learn from other provinces and the competitiveness strengths and weaknesses. address the factors that are lowering their Moreover, this becomes an important source of competitiveness. ammunition to determine which province is more competitive and which is not by addressing factors For policy makers, the report on provincial that drags down the provincial competitiveness. competitiveness will be an important source of knowledge and handbook which would help The concept of provincial competitiveness is a them evaluate the current situation and level of relatively new notion and aims to investigate provincial development and to make more effective how efficiently a particular province is allocating policies to develop rural areas. Also, it makes for its resources and potentials, thereby creating its provincial administrators it possible to estimate own competitiveness and enabling a favorable the results of their implemented policies, to make business environment rather than merely studying comparisons with other provinces and learn from its dominance. For these reasons, we ranked the their experiences. Likewise, businessmen can get provinces by comparing a particular province reliable and holistic information from this report against others questioning, whether they could when making business or investment decisions.

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COMPETITIVENESS CRITERIA

It is impossible to evaluate the provincial In Government Efficiency section, provincial competitiveness solely by means of GDP per policies to encourage competitiveness and capita and unemployment. Because there are its spectrum were evaluated by 4 sub-factors many factors such as economic, political, social of parameters: provincial budget, institutional as well as cultural that influence prosperity of a framework, business legislation and societal province and living standards of its citizens. framework. There are 30 criteria in total. Within the framework of this research we adopted In Business efficiency sector 30 criteria of 4 the same main 4 factors for measurement, the sub-factors business environment, labor market, methodology used in the Mongolia in World management practices and productivity, were Competitiveness study – produced by EPCRC used in order to study the capability of provincial in conjunction with the World Competitiveness business sectors to act efficiently and with Center. Some sub-factors within the main factors responsibility and as an entrepreneur. were replaced through another set of criteria Infrastructure involves 82 criteria within following that could reflect the uniqueness of provinces 4 sub-factors of criteria: basic infrastructure, and create more in-depth comparisons. technological infrastructure, science, education Economic Performance, Governance Efficiency, and culture and health and environment. Business Efficiency and Infrastructure are the 4 This way, the competitiveness of provinces main factors which are divided into 4 sub-factors was evaluated according to 180 criteria, and of each. These 16 sub factors comprise of 180 this enables in depth evaluation of provincial criteria in total. competitiveness and prevents any biased In Economic Performance section, 4 sub-factors influence which may have an impact on the of criteria are: macro economy, development general assessment of provincial competitiveness. of economic sectors, standard of living and These criteria were used to create competitiveness employment. A total of 38 criteria were used. indices in each of the 21 provinces.

Economic Efficiency Government Efficiency Business Efficiency Infrastructure • Economy • Provincial Budget • Business • Basic Infrastructure • Development of • Institutional Environment • Technological Economic Sectors Framework • Labor Market Infrastructure • Standard of Living • Business Legislation Productivity • Science, Education • Employment • Societal • Finance and Culture Framework • Management • Health and Practices Environment

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DATA AND INFORMATION SOURCE

The Provincial Competitiveness Index uses Executive Opinion Survey two types of data for the computation of The Executive Opinion Survey was sent to competitiveness. These are: executives in top and middle management in all • Hard data (statistical data) of the provinces covered by the report. The survey questions are designed to accurately reflect their • Executive opinion survey perspectives on the business environment and Of all the 180 criteria to measure competitiveness, competitiveness of the province. 116 or 2/3 rely on hard data whereas 64 or 1/3 We believe the survey results would provide us rely on executive opinion survey. Of the hard with good insights as the survey respondents data, 30 criteria or 25% are informative criteria are experienced and knowledgeable local intended to give general information but not used professionals working in the field. in computing the competitiveness. In order to be statistically representative, we Hard data measures competitiveness over a selected a sample size randomly from each of specific period of time (for the past 1 year e.g.) and the 21 provinces proportional to GDP of the indicates how the competitiveness in each criteria provinces. Moreover, to avoid from non sampling is performed (for example, in terms of GDP). On errors, we surveyed a total of 525 executives the other hand, executive opinion survey is used which is equal to 25 executives on average for for measuring qualitative data that could not be each province. easily measured. Moreover, opinion surveys are used to verify hard data results, clarify and reflect, The survey contained 64 closed questions and how the public and businessmen evaluate the 1 open question. The respondents assessed the current situation. Therefore, compared to hard competitiveness issues by evaluating the questions data the survey responses reflect perceptions on a scale of 1 to 6. Scales of 1-3 indicate negative of competitiveness through business executives’ perception on the question, whereas those of 4-6 perception who are dealing with local business indicate positive perception. The average value situations. Their responses are more recent and for each economy is then calculated according closer to reality since there is no time lag, which to which the rankings are determined. is often a problem with hard data that show a “picture of the past”.

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METHODOLOGY OF COMPUTATION OF PROVINCIAL COMPETITIVENESS INDEX (PCI)

We used 150 of the 180 criteria in computing the 3. Calculating the competitiveness index and competitiveness index (30 criteria for background overall ranking information were not included in computation). Each of the four main factors of competitiveness The following steps were used in computing the is divided into the four sub-factors. The PCI: standardized value means of each of the 16 1. Calculating standardized value sub-factors for each province are obtained by computing weighted mean of the standardized The essential building block for the rankings is the values. Each sub-factor, independently of the standardized value for each individual criterion. number of variables it contains, is assigned an Computing the standardized value is important equal weight of the overall ranking (16 * 6.25% mainly because it enables to convert data with = 100%). Thus, the weight of the sub-factors will different scale unit obtained from statistics and be consistent and the results would be more survey to the same comparable measurement. reliable. It also blocks any diverted impact on Standardized values are computed for each other factors in cases of errors and omissions in criterion and each of the 21 provinces according statistics. to the following formula. The competitiveness index of 16 sub-factors of each province which based on mean . xi-μ STD(x)= standardized value are calculated using the σ following formula.

Where: STD(x)-STD (x) xi – value of the criterion of the province i, I= min STDmax (x)-STDmin (x) μ – mean of x value σ – standard deviation of x value Where: I – competitiveness index With regard to executive opinion survey, the STD(x) – standardized value of the criteria standardized value is calculated after converting STD_min (x) - minimum value of the standardized responses on a six-point scale into a 0 to 10 value of the criteria scale. Moreover, all criteria were reviewed to determine the shape of the distribution before STD_max (x) - maximum value of the standardized calculating the standardized value. In case of not value of the criteria normally distributed data, the standardized value was calculated from normalized data by taking The competitiveness index of the four main the logarithm. factors is calculated based on the mean of the In most cases, a high value is considered to sub-factors index, the overall competitiveness be good and the province with the highest index is calculated based on the mean of the standardized value is ranked first, while the four main factors` index. one with the lowest as the last. However, with Based on the four main factor`s index and overall some criteria the inverse may be true, where the index, we then rank the provinces, the one that lowest value is the most competitive, for example, has a maximum value of index calculated as 100 poverty rate and maternal mortality rate. In such scores, other provinces’ scores are calculated cases, standardized value is multiplied by (-1). according to their values. 2. Criteria ranking The overall scoreboard shows the province`s context of competitiveness compared to the Provinces are ranked based on the mean of the other provinces. Those provinces ranked top standardized values of the 150 ranked criteria. should not be directly considered as the most The higher standardized value indicates more competitive. Although it is right to consider that competitive provinces and the provinces are those provinces are more competitive than other ranked from the most competitive to the least provinces. competitive.

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HOW TO USE THE PROVINCIAL COMPETITIVENESS REPORT?

Provincial competitiveness scoreboard is divided 2. Provincial Competitiveness Profiles (pages into the following sections: 31-115) This section provides a summary of the overall 1. Provincial Competitiveness Scoreboard competitiveness, competitiveness structure, sub- (pages 21-30) factor rankings and challenges facing each The provincial competitiveness scoreboard province`s development. presents the overall rankings for the 21 Moreover, 10 strengths and 10 weaknesses provinces. The provinces are ranked from the by four competitiveness factors (Economic most competitive to the least competitive. Performance, Government Efficiency, Business Efficiency and Infrastructure) are highlighted. It is Competitiveness Factor Rankings important to determine competitiveness strengths In addition to the overall competitiveness and weaknesses as they play a vital role in the scoreboard, provinces are ranked according to current provincial economic situation and future each of the four main factors: Economic Efficiency, development perspectives. By properly examining Government Efficiency, Business Efficiency and its competitiveness strengths and advantages, the Infrastructure. province can identify its comparative advantages. In addition to identifying strengths, addressing its Competitiveness Sub-Factor Rankings weaknesses would help improve that province`s Provinces are ranked according to all 16 sub- competitiveness. factors (4 from each factor). The sub-factor In addition to comparing competitiveness of rankings provide more detailed and in-depth different aimags, this report also provides 25 examination on each of the competitiveness improvements and 25 decreases in comparisons factor rankings. of last and this year’s indicators for each of the provinces. Competitiveness Structures This section compares the values of the four 3. Statistical Tables (pages 117-173) competitiveness factors for each of the 21 This section presents the complete criteria provinces. Charts help identify in which factors list, broken down by competitiveness factor. a province may have a particular strength or a It is possible to find rankings and information weakness. about each of the 150 ranked criteria affecting competitiveness.

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Competitiveness factors

Economic Performance

Economy Economic sectors Standard of living Employment

Government Efficiency

Provincial budget Institutional framework Business legislation Societal framework

Business Efficiency

Business environment Labor market and productivity Finance

C ompetitiveness factors Management practices

Infrastructure

Basic infrastructure Technological infrastructure Science, education and culture Health and environment

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