49430-005: Aimags and Soums Green Regional Development Investment Program

Project Rationale and Linkage to Country/Regional Strategy

In 1990, upon disengaging from the Soviet Union, Mongolia entered a transitional period. Aimag and soum centers were unable to play their role as anchors of economic activities. The quality of animal products and livestock value chains, which began to rely on quantity with low price differentiation and incentives for quality, deteriorated. Herders started to migrate to urban areas in response to (i) the low value of livestock; (ii) higher exposure of their animals to disease because of poor livestock breeding, feed supply, and veterinary services; and (iii) massive losses of livestock caused by dzud (succession of droughts and severe winters), especially during 2000 2001 and in 2010. Many rural households settled on the outskirts of Ulaanbaatar and in aimag centers, overwhelming the capacity of cities to absorb them, and formed vast unplanned settlements, known as ger areas, which account for about 60% of Ulaanbaatar’s population and more than 70% of the population of aimag centers. In 2020, the urbanization ratio in Mongolia represented about 70% of the country’s 3.3 million population. This caused urban systems, already exceeding their planned service life, to further deteriorate and become undersized to meet existing and future needs for Mongolia’s growing urban population. With 1.6 million population, Ulaanbaatar accounts for 69% of the urban population, and 63% of gross domestic product. The demographic and economic weight of the capital city illustrates the country’s drastic territorial imbalance.

The combination of herders expanding herd size to compensate for anticipated livestock losses (especially from dzud), open access to pasture, unbalanced herd composition (with a high proportion of goats), and poor rangeland management practices has put Mongolia’s rangelands under severe threat. Overgrazing is on average 22.6% above the rangeland carrying capacity, as a result, about 70% of pastoral land has been degraded. The situation has impacted livestock productivity and made herds more vulnerable to climate events and disease, resulting in deteriorating quality of meat, wool, and other livestock products and lower incomes for herders, who compensate by further increasing herd sizes. This vicious cycle has led to uncontrolled and exponential increases of livestock heads. While livestock numbers ranged from 20 million to 25 million heads during 1970-1990, it has reached 60 million in 2017 and 66 million in 2018. Ongoing rangeland degradation is also associated with considerable reduction of above- and below-ground biomass, and lessening the carbon storage capacity of soil. Improving rangeland management thus offers huge climate change mitigation prospects. It is estimated that Mongolia can avoid emissions of more than 440 million tons of carbon dioxide equivalent over the next 20-year period from soil carbon sequestration.

During the last decade, the Government of Mongolia has set policies and objectives to reverse overgrazing trends and reduce overall livestock numbers to sustainable levels. However, those attempts failed to reverse the exponential increase of animals and overcome complex and interrelated barriers inherent to the livestock industry. The Swiss Agency for Development and Cooperation through the Green Gold project has established pasture user groups (PUGs) and rangeland use agreements (RUAs). Green Gold project activities were gradually handed over to the National Federation of Pasture User Groups and the Aimag Federation of Pasture User Groups. Yet, few RUAs have been officially registered and even fewer stocking adjustment rates have been formulated. PUGs lack incentives and marketing opportunities to sell animals and reduce herd sizes. The lack of well-functioning cooperatives, certification systems, and linkage with agriculture value chain led to a dearth of quality livestock raw materials and failure to establish sustainable mechanisms to reduce herds and ensure sustainable rangeland management.

Weak small and medium-sized enterprise development. Development of small and medium-sized enterprises (SMEs) in Mongolia is constrained by unaffordable interest rates and short-term loans; high and rigid collateral requirements, especially for immovable assets; overly complicated administrative procedures; and low financial literacy of SME borrowers. In remote aimags, SMEs lack access to appropriate urban and economic services. Local agricultural enterprises and value chains suffer from weak finance ecosystems; dominance of large agribusiness companies based in Ulaanbaatar; low entrepreneurial skills; and lack of start-up capital and support to access available financing, affordable financing products, and supportive national program and policies. These challenges impede agribusiness investments at the point-of-need, preventing job creation and local development, which are required to promote economic diversification, counterbalance Mongolian’s overdependence on mining, and reverse the flow of migration to Ulaanbaatar.

Western aimags. The three western aimags of Bayan-Ulgii, Khovd, and Uvs have fragile ecosystems and rely heavily on mountain pastureland, high mountain water flow, and oases. The population and environment of these three aimags are particularly vulnerable to climate change. Melting permafrost and glaciers, rising temperatures, and changing precipitation patterns are severely affecting the composition and distribution of water resources. The overgrazing rate, estimated at 27.4% more than the carrying capacity, is five percentage points higher than the national average. The lack of investment in the three western aimags has left them isolated and underequipped, despite (i) being a strategically important trade and western development link along Central Asia Regional Economic Cooperation corridor 4a; (ii) the importance of the area in balancing Mongolia’s territorial development and boosting regional trade; and (iii) the prominence of animal husbandry in employment (it accounts for about 38%-51% of total employment).

Government road map. The government is fully aware of the severity of the situation and has formulated Vision 2050, a two-stage framework to guide long-term development and promote human development, quality of life, green development, and sustainable regional development. Its first implementation stage (2021-2030) contains the following development goals that will serve as the program’s road map: (i) create a healthy and safe environment in urban settlements, especially by reducing air, water, and soil pollution; (ii) develop infrastructure in priority economic regions and sectors; (iii) introduce a system to provide affordable housing; (iv) support environmental protection, optimize the use of resources, and reduce resource scarcity through rehabilitation of degraded habitats; (v) develop an environment-friendly, resilient, and socially responsible agriculture sector and shift the emphasis from quantity to productivity and quality; (vi) promote employment and skills, entrepreneurship, and financial support for herders to support business creation and improve access to markets for animal products; and (vii) develop a green financing system and promote environment-friendly and efficient technologies. Ministries have developed sectoral plans and policies to support and guide the implementation of the Road Map. The Ministry of Construction and Urban Development (MCUD) and the National Development Agency are implementing territorial and regional development studies that formulate key strategic directions for aimag development and priority public and private investments. The Ministry of Food, Agriculture and Light Industry (MOFALI) formulated the State Policy on the Food and Agriculture Sector (2016-2025), 2015; the Mongolian Herders National Program, 2020; and the Action Plan of Mongolian Agenda for Sustainable Livestock, 2018. Finally, Mongolia’s Third National Communication drives the national climate action plan.

Program priorities and approach. Implementing the comprehensive government Road Map in remote aimags and soums will help arrest the vicious cycle of interrelated and mutually reinforcing sector bottlenecks described above, further aggravated by the coronavirus disease (COVID-19) crisis. In this context, a piecemeal, short-term, or single sector-oriented approach would be unsustainable and insufficient. For example, investing solely in infrastructure in a stagnating economic context would be inefficient and would not promote a functional and dynamic urban development process. Providing financial support for livestock husbandry while failing to address lagging infrastructure, complicated SME administrative services and the problem of poor animal value would not be enough. Supporting better management of natural resources would be unsustainable and less effective without parallel provision of services for herders and support for market links to promote inclusive and green value chains. Through its comprehensive and multisector long-term approach, the MFF program of the Asian Development Bank (ADB) will ensure that real transformation takes place within rural communities, motivated and sustained by low-carbon and climate-resilient livestock value chains (LCLVCs), with livable aimag and soum centers acting as anchors for private sector investment. The MFF program will incorporate this approach into a regional development strategy and develop a green agro-territorial model supported by policy reforms and institutional strengthening at both the local and national levels.

Policy framework. Aligning with the long-term strategic development objectives of the Road Map, the program will follow integrated and synergetic guiding principles for its policy framework, capacity development, and investment outputs: (i) inclusive and green urban-rural transformation, through improved living conditions and performance of priority urban settlements as anchors for local economic development, to attract LCLVC investments at the point-of-need and reconnect urban and rural economies; (ii) sustainable, climate-resilient, and low-carbon rangeland management, driven by incentives to encourage better rangeland management practices, grassroots organization, and transitional support for herders; improve animal feed, breeding, and health to support more productive and quality animals; reverse ecosystem degradation and increase its capacity for carbon sequestration; and enhance rangeland and herder communities’ resilience to climate change; (iii) well-functioning and inclusive LCLVCs, hinged on accessible and responsive financial and non-financial support for herders and SMEs operating in the aimag and inter-soum centers; and (iv) improved planning, capacity, knowledge, and institutions, to support transformational low-carbon, climate-resilient, and inclusive territorial development plans and policies.

Strategic context. The strategic context and long-term support of the Road Map is (i) consistent with the ADB’s country partnership strategy for Mongolia, 2021-2024, especially with its post-COVID-19 recovery action plan, and will contribute to overcoming economic contraction and exacerbated inequalities to promote sustainable economic growth, diversification, and inclusiveness; (ii) aligned with the seven operational priority plans of ADB’s Strategy 2030; and (iii) supports Central Asia Regional Economic Cooperation 2030 and its Common Agenda for Modernization of Sanitary and Phytosanitary Measures for Trade by contributing to agricultural trade and regional public goods, mitigating desertification and climate change, and containing transboundary animal health problems.

The strong dependency of Mongolia’s economy to primary sectors of agriculture and mining makes its economy highly volatile and cyclical because of harsh weather and changing global market prices for commodities. Thus, Mongolia urgently needs economic diversification. The secondary sector, which encompasses manufacturing and construction, has experienced similar volatility over the past 15 years indicating its close links with the mining and other primary sector activities and limited diversification into higher value products for domestic and foreign markets. There are significant untapped potentials in light and green industry, agro-industry, forestry, trade, and tourism which are underdeveloped, and prevent aimag and soum centers from playing a more significant role in job creation, economic diversification, territorial balance, and migration control.

Most infrastructure was built during the Soviet-era from 1925 to 1991. Since then, limited infrastructure improvements to accommodate the demands of the growing population have been made. Urban growth was not controlled by adequate urban planning regulations. The gaps between urban services supply and demand are mainly caused by (i) lack of urban services being extended to informal and unserved peri-urban settlements, (ii) underperforming water production and wastewater treatment systems, and (iii) limited resources dedicated to operations, maintenance, and service delivery. Some efforts to fill the gaps have been made, for example through previous and ongoing Asian Development Bank (ADB)-financed projects, but aimag and soum centers still need financial and technical support to better manage and deliver their infrastructure and urban services gaps.

Current economic difficulties call for immediate action to restore macroeconomic stability and ensure social stability, thus, long-term actions and investments to promote efficient urban development and a robust local economy need to be implemented now. Otherwise, population growth and activity in Ulaanbaatar will continue to be coupled with unexploited local economy and a high dependency on volatile economic activity. Due to slow development, rural areas will not retain its population, thus aggravating the migration to Ulaanbaatar. Disconnection between urban and rural economy will further increase and services in abandoned areas will be less financially viable to sustain. The overall equilibrium of Mongolia will be affected and inequality and poverty will worsen. Further, the situation will be exacerbated due to Mongolia’s vulnerability to climate change.

ADB’s country partnership strategy for Mongolia, 2017 2020 indicates the necessity to develop a more resilient and diversified economy that can consistently deliver rapid, inclusive, and sustainable growth. To support this, the National Urban Assessment (NUA) for Mongolia has identified priority RUC systems as key assets to catalyze local urban economic growth. Upgrading infrastructure and creating synergies between economic and urban development in the RUCs will increase economies of agglomeration and critical mass, making RUCs a powerful engine of socioeconomic improvement. Tailoring investments and institutional support that are adapted to local needs and potentials of the RUC will (i) address urban services bottlenecks to ensure a livable and non-polluting urban environment, (ii) improve territorial competitiveness and balance the country’s territorial development, (iii) decrease the migration to Ulaanbaatar, (iv) improve economic and industrial diversification, (v) improve the country’s resilience and adaptability to climate change, (vi) enhance job opportunities created by the interface between urban and rural economies, and (vii) improve the livelihoods of low-income and vulnerable groups.

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