Adding capacity: Boosting domestic capabilities in preparation to take on a more central role

The rapid expansion of Mongolia’s economy in recent years has had a knock-on effect on construction activity across the country. According to World Bank data, the construction industry grew by more than 25% over the course of 2012, primarily as a result of a handful of government-led infrastructure and housing investment programmes. While local construction firms have been a major presence in the industry since the mid2000s, the sheer scale of the work under way has the potential to put pressure on domestic capabilities in the coming years. With this in mind, local firms are currently investing heavily in new capacity, in an effort to take advantage of the massive projected demand for construction work for the foreseeable future.


While the potential for future growth is considerable, the construction sector faces a number of pressing challenges. As a result of Mongolia’s extreme climate and long winters, for example, construction firms can only operate for a short amount of time each year. With temperatures dropping as low as -40°C in the winter months, construction work is generally put on hold from November-December through April-May, depending on the season. Another key challenge is the lack of a well-trained local workforce. With a population of less than 3m as of the end of 2012, the country faces workforce shortages in many industries. In addition to the sector’s capacity constraints, other key challenges include low levels of domestic materials production; a relatively underdeveloped national transport network, which is a major hurdle to importing building materials; a shortage of financing options for new construction projects; a regulatory and legislative framework that is widely considered to be overly complex and poorly enforced; and relatively high levels of corruption in the industry. Overcoming these and other hurdles is a central objective of the government’s numerous ongoing development plans for the sector. Under the recently formed Ministry of Construction and Urban Development (MCUD), which was established by the country’s newly elected government in mid-2012, the construction sector is expected to benefit from steadily increasing state-led investment in a wide variety of areas, including housing and infrastructure of all types. “It is hard to overestimate the amount of work that currently needs to be done,” G. Mergenbayar, the director-general of MCUD’s strategic policy and planning department, told OBG. “There is a lot going on right now, and it will only get busier in the coming years.”


Prior to the fall of the Soviet Union in 1991, Mongolia’s construction industry was state controlled, employing nearly 30,000 people. “During the communist era Construction Company Number One, based in the capital, carried out 80% of the building work in the whole country,” said Mergenbayar. The sector was scaled back considerably in the early 1990s, as a result of the newly democratic government’s efforts to privatise state-owned assets through the Mongolian Stock Exchange, which was established in January 1991. In 2000 the government launched the “40,000 homes” programme, which was aimed at supplying formal, affordable housing for residents of the rapidly growing informal neighbourhoods sprouting up on the outskirts of Ulaanbaatar, the capital city. From the early 2000s through 2008 construction output increased steadily, fuelled by rising housing prices and mineral exports, and driven by a mix of large-scale foreign players and recently established domestic firms.

The 2008-09 international economic downturn resulted in declining export revenues and, subsequently, a rapid drop in construction activity. By late 2011 the sector had mostly recovered. Since then Mongolia’s construction industry has been expanding rapidly, driven primarily by government spending, which has, in turn, largely been fuelled by mining-related revenues.

Oversight & Regulatory Framework

MCUD’s predecessor, the Ministry of Roads, Transportation, Construction and Urban Development, launched and managed a number of key initiatives, including the “100,000 houses” programme, a large-scale housing project that is still under way – albeit in a slightly revised form – today. Since the new ministry took over in mid-2012, MCUD has worked to update and streamline these projects, in addition to establishing a number of new programmes. While codes and laws covering most aspects of the construction industry have been in place for years, they are currently spread across numerous documents and throughout various agencies, which has made them hard to access and implement. Mongolia has a building code, for example, but there are few people locally who have the expertise and necessary training to serve as inspectors.

According to the World Bank’s 2014 “Doing Business” report, Mongolia ranked 107th in the world in terms of dealing with construction permits, a substantial improvement from its ranking of 132nd in 2013. In 2014, according to the report, acquiring the necessary construction permits and other documents in the country took 20 procedures and 186 days on average, and cost 7.6% of per capita income. These estimates do not account for the additional cost of bribes, which – based on anecdotal evidence on the ground – are solicited by officials throughout the licensing process.

Legal Updates

The sector’s legal environment has been in flux since October 2012, when MCUD oversaw the temporary shutdown of all construction work in Ulaanbaatar after a series of accidents at various work sites around the city. This prompted the ministry to implement immediate updates to safety codes, and, in addition, to take a closer look at all of Mongolia’s construction-related legislation.

“We are currently in the process of updating all of Mongolia’s land, property and construction laws,” Mergenbayar told OBG in early November 2013. Indeed, according to a document released by MCUD in January 2013, the ministry was in the midst of revising existing laws related to land ownership, land fees, property taxes, urban development, and city and settlement planning and building codes, among others.

Additionally, the ministry has drafted new legislation related to urban redevelopment, architectural activities, green areas in cities and settlements, parking and compulsory land expropriation. “We are also in the process of building a digital database to keep track of all the ongoing construction work in the country,” said Mergenbayar. “Currently all business in the sector is carried out on a face-to-face basis and on paper, which is a big challenge for everybody, of course.”

While these updates are still in progress, they are set to focus on improving safety standards throughout the entire sector, improving the quality of construction in all segments, and streamlining planning and inspection procedures. Perhaps most importantly, the government’s revisions are also likely to address the country’s current zoning and urban planning framework, which is considered by many in the sector to be inadequate and incomplete. “A lack of enforceable zoning legislation has been one of the biggest challenges in the industry over the past decade,” Christopher de Gruben, the managing partner at M.A.D. Investment Solutions, an Ulaanbaatar-based property research firm, told OBG. “There is a serious disconnect between city planners and the regulatory agencies, for example.”

By The Numbers

A lack of reliable, up-to-date construction data is considered to be a key hurdle to the long-term development of the industry. According to statistics from the National Statistics Office of Mongolia (NSOM), in 2012 the construction sector’s nominal GDP contribution was estimated at $168m, up 36% from just under $124m in 2011, and up by around 120% since 2010. This rapid growth is in line with similar expansion in the mining sector since early 2011.

While government-led housing and infrastructure development projects are expected to continue to drive activity in the construction sector in the near future, the industry faces both long-term capacity constraints and steadily increasing downside risk as a result of the weak minerals market.

According to data from the World Bank, the economy as a whole grew by 11.3% in the first half of 2013, which is still quite high by international standards, though down from 12.4% in 2012 and – as many local market watchers are quick to point out – 17.5% in 2011.

The construction sector, which is considered to be a key component of the government’s development programme, has been a major beneficiary of a variety of monetary and fiscal stimulus measures in recent years.

Sector Output Increases

According to World Bank data, construction output increased 250% in the first six months of 2013 on a year-on-year basis, from MNT94.2bn ($56.5m) in the first half of 2012 to MNT330.6bn ($198.4m) in the same period in 2013. This is a considerable uptick on 2012, when the sector’s contribution to GDP grew by 25.6% over the course of the year. The jump in construction sector output in the first half of 2013 can be attributed largely to capital infusions made by the nation’s central bank – the Bank of Mongolia (BoM) – as part of the Price Stabilisation Programme (PSP), under which the government has provided subsidised loans to construction firms in an effort to ensure price stability in the sector, particularly in relation to construction materials.

Other major recent sources of construction financing include proceeds from the state-owned Development Bank of Mongolia’s Chinggis bond, which was issued in late 2012, and the government’s MNT1.13trn ($678m) mortgage financing programme (see Real Estate analysis). In line with these programmes, in 2013 the construction and housing sectors were key beneficiaries of credit growth, with the construction industry’s share of bank loans reaching 37.7% at the end of the first half of 2013, up from 16.1% at the end of 2012 and 11.8% at the end of 2011.

The BoM’s loose monetary policy and rapid growth in the industry in recent years have raised concerns among financial analysts and industry players alike about a potential construction bubble.


As of mid-2013 Mongolia was extremely undersupplied in terms of housing, particularly at the affordable end of the segment. This area has been a major focus of construction activity in recent years, and it is only expected to grow for the foreseeable future. According to MCUD data, as of the end of 2012 around 60% of the country’s urban population lived in Ulaanbaatar; 10% lived in Erdenet and Darkhan, the nation’s second- and third-largest cities, respectively; and 30% lived in other aimag (provincial) centres. An estimated 29% of the country’s urban population lived in detached housing, while 45% lived in ger (traditional felt tents, or yurts), 21% lived in public housing and the remainder lived in other types of housing. The current housing deficit can be chalked up primarily to rural-urban migration over the past decade and a half.

Until relatively recently Mongolia’s population was made up largely of nomadic or semi-nomadic herders who lived in ger. Over the past two decades this traditional lifestyle has become increasingly challenging for many herders to maintain, both as a result of overarching socioeconomic factors – which have driven down the price of meat and other animal products in recent years, for example – and due to a series of dzud, or extremely cold winters, which have reduced the size of the country’s herds over the same period.

As the nomadic lifestyle has become increasingly tenuous over the course of the past decade, a steadily increasing percentage of the country’s nomadic population has permanently relocated to Ulaanbaatar’s so-called ger districts, a sprawling neighbourhood of gers and other informal structures on the hills around the capital. As of the time of publication, the ger districts were home to around 55-60% of the capital’s total population. A considerable percentage of this area has yet to be connected to Ulaanbaatar’s power, water, sewage and heating grid. In order to cook and to stay warm during the long, cold winters, ger district residents burn cheap coal, which has been a major contributing factor to the high levels of air pollution in Ulaanbaatar in recent years.

N. Dorj, the general director of Building’s Technology, told OBG, “Two major problems in Mongolia are the heavy air pollution and the shortfall in the electric and thermal supply. These issues will force our construction sector to adopt and implement green technologies in the near future.”

Supplying new homes for ger residents – including the hundreds of new migrants that stream into Ulaanbaatar every day – is one of the most pressing challenges currently facing Mongolia’s government and, by extension, the construction industry. Several federal-level development initiatives currently under way aim to address this issue. Under the 100,000 houses project, a central component of the government’s 2010-16 New Development Programme (NDP), the state aims to construct 75,000 new housing units in Ulaanbaatar and 25,000 new units in aimag centres elsewhere in the country. As of mid-2013 MCUD was moving forward with infrastructure work on a number of new neighbourhoods near Chinggis Khaan International Airport, in the capital area (see analysis).

Additionally, in recent years both the government and a wide variety of international aid organisations and other related entities have launched projects aimed at developing Ulaanbaatar’s ger districts. Some plans call for clearing the land completely in order to make way for high-density apartment blocks, for example, while under others the government would provide utilities and financing in an effort to steadily formalise existing neighbourhoods.The number of plans put forward by various government agencies and international organisations in recent years has resulted in confusion about the long-term viability of any of the individual plans. “Right now there are at least seven different plans to redevelop the ger districts in place,” said De Gruben. “Due in large part to the lack of consensus, none of these projects has made any real progress.”


In addition to housing, upgrading and expanding the nation’s transport links and utilities networks has been a key area of focus in recent years. Under the NDP and other similar initiatives – notably the Ulaanbaatar Master Plan 2020, the state’s development blueprint for the capital area – the government aims to completely revamp the national water, sewage and power grids, for example, with an eye towards improving sustainability, reducing pollution and ensuring that all of Mongolia’s population has access to basic utilities. In the capital area the government is working to boost the percentage of the population that is connected to these utilities networks to 82% by 2020, from less than half as of the end of 2012.

Additionally, construction firms and businesses in the country are beginning to seriously consider green construction and energy-efficient buildings. While still in the early stages of conception, the idea is catching on. “Much needs to be done to increase the energy efficiency of buildings in Mongolia. Therefore, new construction projects will start prioritising this aspect. More support from the government side will help the sector move in this direction faster,” Dorj told OBG. In fact, in November 2012 Buildings Technology announced plans for the construction of its new office building which sought to emphasise a unique low-energy design. Plans for the building also include a special alignment and intelligent building technology that should benefit workers’ health by allowing them to receive more natural light, as well as incorporating traditional designs and elements from Mongolian culture.


As a landlocked country with underdeveloped transport networks and little domestic production of its own, Mongolia’s construction industry relies largely on imported construction materials, primarily from China, Russia, Japan and Germany. Some basic materials – cement, concrete, bricks, wall materials, windows and some fixtures, for example – are produced locally, mostly on a limited basis and in many cases in conjunction with foreign investors. According to World Bank data, from the beginning of 2011 through the end of 2012 construction materials imports into Mongolia nearly doubled. The growth in construction demand has put additional inflationary pressure on materials prices in the country. Over the course of the period 2010-12, prices for cement rose by 64%, those for brick were up 80% and those for iron-reinforced concrete increased by 82%, according to World Bank data.

Construction materials prices in Mongolia are somewhat volatile – they tend to fall during the cold winter months, when the sector is largely inactive, and then rise rapidly over the course of the five- to eight-month construction season, when a flurry of activity in the local market puts pressure on supplies.

The issue of seasonality could potentially be overcome by setting up indoor pre-cast and pre-fab facilities, which could possibly operate during the winter months. Then, during the traditional construction season, firms could work at a much faster pace than they currently are able to do, effectively piecing together buildings from pre-built pieces.

Transport-related inefficiencies are also a challenge. While the government has invested in upgrading the road network in recent years, most of the country’s paved roads are clustered around Ulaanbaatar and other urban areas. Consequently, the majority of construction materials come into the country via rail. Chinese materials – which make up 60-90% of total materials imports, depending on the specific material – must be unpacked and reloaded at the border, as a result of the fact that China’s rail system runs on narrow gauge track and Mongolia operates a wide-gauge network.

Domestic production of construction materials has jumped in recent years, though rapidly rising demand has meant that imports have actually accounted for a steadily increasing percentage of local consumption since 2011. The country is home to a handful of cement producers including Hutuul Cement, Erel Cement, Remicon JSC and Central Asian Cement. Under the PSP, which was launched in October 2012, the government aims to “stabilise the prices of key commodities and products” in four areas, including staple foods, fuel, consumer goods, and construction and housing products. As of the end of the third quarter of 2013 the construction materials industry had received MNT292.1bn ($175.3m) through the programme in total.

Some MNT167bn ($100.2m) of this financing went to 68 domestic materials producers, while the remainder was awarded to 55 importers with a mandate to reduce seasonal materials price volatility. As of time of publication the extent to which the PSP would impact materials prices in the long term remained unclear. “We are working to build up local production, but in the meantime we have to subsidise materials in order to maintain price stability,” Mergenbayar told OBG. “ LABOUR: The cost of local labour has jumped in recent years as well, due in part to the rapidly expanding mining sector, which can generally afford to pay both skilled and unskilled workers much higher salaries than other industries. According to World Bank estimates, as of October 2012 the average wage for construction labourers had risen by around 63% from the same period the previous year, and 101% from 2010. This issue has been exacerbated by the small size of Mongolia’s labour force and national labour regulations, which have been designed to ensure that locals are hired before foreigners. Officially no more than 28,000 foreign workers from a single country are allowed into Mongolia at any one time. Rising demand in both the mining and construction sectors has put pressure on this law, and many local firms currently face labour capacity constraints. Consequently, some construction companies have resorted to hiring illegal foreign workers, primarily from China or North Korea.


Despite the numerous challenges facing the construction industry in Mongolia, most local players are looking forward to continued growth in the years ahead. So long as the government is able to effectively address the numerous existing supply bottlenecks and capacity constraints, the industry has the potential to eventually become one of Mongolia’s largest economic contributors.

The sheer amount of work that needs to be done is simultaneously daunting and, for the domestic construction industry, potentially quite lucrative. “Compared to many other countries Mongolia has only a small number of domestic construction companies currently,” MCUD’s Mergenbayar told OBG. “But this number will grow in line with demand, and we also have seen an uptick in foreign firms in recent years.”

Growth in the sector will likely be driven primarily by housing and infrastructure work. As a steadily increasing percentage of the population relocates to Ulaanbaatar and a handful of other urban areas, demand for housing is expected to continue to rise for years to come. Internal migration patterns and expanding mining and other industrial developments have encouraged the government to invest in a number of major road and rail expansion projects.

Government-funded housing and infrastructure projects are expected to provide the construction industry with a massive amount of work in the coming years. According to the World Bank, an estimated 60% of the financing put forward as part of the state’s various monetary easing programmes in recent years has gone towards construction and housing, for example. While numerous challenges remain and the industry is still considered to be relatively underdeveloped, the potential for substantial future revenues looks bright.

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The Report: Mongolia 2014

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