As a large, landlocked country bordering only two others – Russia and China – Mongolia depends on its land and air transport systems to get goods and services to market. Economic development has also meant the country is undergoing rapid urbanisation, placing increasing pressure on its urban transport infrastructure, while boosting a need for better internal links.
Indeed, the key new driver of the economy, mining, depends greatly on an adequate transport structure to get bulk cargoes to processing facilities and markets. The realisation that the existing infrastructure is far from adequate for this places a major challenge on Mongolia’s transport sector. However, this also creates enormous opportunities for investors.
A DUSTY ROAD: Arriving in Ulaanbaatar, the country’s capital, gives a picture of just how much needs to be done. The airport is a dated, Soviet-era facility, and the road into the city is also sub-standard, with heavy trucks and the freeze-thaw of extreme temperatures cracking the thin tarmac. Traffic jams crop up quickly in Ulaanbaatar’s main streets; the city was designed for a time when very few people had cars.
Leave the city for any distance and the road surface quickly deteriorates. Large parts of the 1.56m-sq-km country have no metal roads at all, with a terrain that in the north is frequently mountainous and in the south gives way to the Gobi Desert.
While there are some rivers, waterways remain largely undeveloped and the railway system consists mostly of one main line, connecting the Russian border with the Chinese, via Ulaanbaatar. To make matters even more difficult, as a former communist bloc nation, Mongolia built Russian, broad gauge railway tracks – 1520 mm – while China uses standard gauge tracks at 1435 mm. Trains thus need to be re-gauged at the Chinese border, which delays crossings.
NO COMPETITION: The transportation challenges faced by Mongolia are considerable. Their impact on the economy as a whole is thus significant, with a 2011 UN Development Programme (UNDP) report stating that in 2008 transportation costs alone accounted for around 18% of the country’s average world price for exports and 11% of its imports. The lack of infrastructure also restricts the growth of Mongolia’s domestic demand, while leading to an unofficial trade barrier in many regions, as goods and services from outside become too costly and thus uncompetitive to deliver, while goods produced in those regions cannot be brought to market.
An example of this is in dairy products, a major staple of Mongolia’s large rural community of herders, who produce more than enough milk to satisfy the country’s demand, yet cannot ship the milk to market because of the poor transport infrastructure. The result is the importation of milk, aimed at the urban market in Ulaanbaatar, at a cost of around $300m each year.
Successive governments have been all too aware of the negative impact underdevelopment has had, and a major strategic initiative is now under way to address this. Indeed, in mid-October 2011, Prime Minister S. Batbold announced the government would be spending $1.17bn on road and rail projects in 2012. This major investment will likely not be the last.
STRATEGIES: In 1999, the World Bank developed a transport strategy for Mongolia with the Mongolian authorities. After that, the government’s action plan for 2004-08 had major implications for the sector, setting out the framework for a multi-modal, integrated transport plan. Since then, several more plans have been drawn up. There is the National Development Strategy (NDS) 2007-21, the National Transport Strategy for Mongolia (NTS), the “Transit Mongolia” programme of 2008-15, the Mongolian Road Master Plan (RMP) 2008-20, and a 15-year investment programme that is being run by the Ministry of Roads, Transportation, Construction and Urban Development (MRTCUD).
This ministry is the central body for the road sector, with two other key bodies reporting to it – the Transport Service Centre, which watches over the country’s road transport companies, and the Road Research and Supervision Centre, which manages and delegates road construction and maintenance businesses.
When it comes to air and rail, these subsectors report to the Mongolian Civil Aviation Authority (MCAA) and the Railway Authority (RA), respectively. Each of these in turn reports to the government.
Meanwhile, with such a range of programmes and numerous studies and recommendations from international organisations, such as the Asian Development Bank (ADB) and UNDP, the challenges faced are well-documented. The scope of plans also varies from domestic transport networks to global ones, with these now well integrated, at least at the planning level.
TRANS-ASIA EXPRESS: At the international level, Mongolia has a road plan that connects it to three main continent-wide routes. These are AH-3, AH-4 and AH-32, which are all part of an important network that will eventually provide efficient linkage by road from the southern tip of the Korean Peninsula to the Finnish border, and from southern China to Istanbul.
Mongolia has signed intergovernmental agreements on road transport with Russia, China, Kazakhstan, Ukraine, Belarus, Turkey and the Kyrgyz Republic, as well as international transport conventions such as the International Transport of Goods Under Cover of TIR Carnets, the Convention on the Contract for the International Carriage of Goods by Road, and the Convention on Road Traffic, Road Signs and Signals. There are also a number of regular bilateral meetings on road transport held every year with Russia and China.
LINKING UP THE COUNTRY: Work on these three main arteries is clearly vital for the country’s ongoing economic development, as well as in providing a central structure for the rest of the road network. All require a great deal of work, however.
According to the MRTCUD, the Trans-Mongolian Highway alone requires an investment of $1.9bn over the lifetime of its current plan for development, which runs 2010-14. All provide major long-term benefits, however. Development of the AH-4, which follows an ancient trade route travelling from China into Siberia, will likely bring increased traffic in goods, while also providing improved access to a beautiful mountainous region to the benefit of the tourism industry.
The AH-32, meanwhile, provides the key link between western, central and eastern Mongolia, and is currently the only east-west land transport connection. The AH-32 thus provides an important social and political link through the whole length of the country.
The AH-3 highway forms a key part of the country’s industrial development strategy, with Zamyn Uud and Altanbulag both developing free trade and free economic zones. B. Odgerel, the country manager at DHL, told OBG, “The first phase of the Zamyn Uud free economic zone, a new international free trade zone, is expected to be completed in 2014.” Meanwhile, Sainshand is set to be the location of a major new industrial centre, using coal and minerals from the giant Tavan Tolgoi (TT) and Oyu Tolgoi (OT) mines.
This last detail illustrates another aspect of the challenge. Both TT and OT currently lack a proper metal road for the entire stretch of the route from the mines to Sainshand. Until a planned railway line is built (see analysis), the mines will thus be obliged to ship bulky cargoes in giant trucks for the 100-km trip to Sainshand and the existing railhead.
These huge vehicles – in October 2011, Erdenes TT, the state-owned mining firm, bought four 250-MT trucks for its fleet – naturally make short work of existing, sub-standard road surfaces. Thus, investing in the secondary, but also vital, road network is essential, with the MRTCUD plans calling for an investment of $2.1bn in the domestic road structure, in addition to the AH-3. This involves some 5600 km of road being either upgraded or built, with a timeframe on this running until sometime in 2016.
URBAN FLOW: Another key priority for the Mongolian government is to ease current levels of congestion in Ulaanbaatar. The city has grown quickly in the last few years, with its population in 2010 around 1.3m, up from just over 1m in 2008. Much of the main downtown area was constructed in Soviet times, when car ownership was extremely unusual, with a public transportation system based around the use of buses, electric trolleybuses and taxis.
With privatisation came a host of small public transport operators, particularly minivans, while the taxi service has been largely replaced by freelance drivers. The custom is simply to hold out your hand on the street and wait for someone to stop, official taxi or otherwise, with the fee then based on a fixed rate per km.
Privatisation also introduced a major acceleration in car ownership. Recent figures from the World Bank put automobile ownership in Mongolia overall at 72 per 1000 in 2008, up from 62 per 1000 just a year before. The rate has almost certainly jumped again since, while there is likely a higher concentration in Ulaanbaatar than elsewhere in the country, given the generally higher incomes of urban citizens.
Thus, a major congestion problem has arisen from overloaded roadways. This rapidly deteriorates road quality – which was often not high in the first place. There are also major safety issues as well. Poor traffic management adds to the problem, producing a high rate of traffic accidents – most famously in 2007, when the current president was left in critical condition after his car suffered a crash with a motorcycle.
REHABILITATION EFFORTS: A major new project is therefore under way to revamp Ulaanbaatar’s road network. According to MRTCUD data, in 2010, 54% of the capital’s roads were more than 25 years old, with only 5% in the 1- to 5-year-old bracket. Thus, under the ministry’s scheme, a total of 350 km of roads in the Ulaanbaatar area will be rehabilitated, with 212 km of new road built. There are also seven new flyovers planned at key road junctions. The total investment this represents is $0.8bn, with the timeframe for the work set to run from 2010 to 2016.
The plan also has to take into account expected future developments in Ulaanbaatar’s demographics. A current plan to build 100,000 new, affordable houses in the city to replace the ger (traditional Mongolian tent) districts, largely to the north of downtown, will mean new roads are needed there.
At the same time, a plan to bring the capital’s institutes of higher education together at a single unified campus, located outside of town, might also help to reduce population numbers in the city centre.
ADDING IT UP: Altogether, some $4.8bn is being invested in the country’s road infrastructure between 2010 and 2016. This represents a huge opportunity for road design, construction, management and operation companies. Many of these projects require international expertise, particularly in specialist building work, such as flyovers, bridges and tunnels.
At the same time, the government is aiming to see some 1800 km of new railway laid between 2012 and 2016, at an estimated cost of $5.2bn, $4.5bn for track and $700m for rolling stock (see analysis).
These schemes not only represent a major challenge for businesses, but also for the government, as it seeks financing for all these major public works. In recognition of this, the government has been establishing a financing framework since 2010, which it hopes will not only provide for transport infrastructure, but for many other projects as well. In this, the private sector will also play a leading role, as the government sees public-private partnerships (PPPs) as a vital component of its long-term infrastructure plans.
The Development Bank of Mongolia (DMB) will be central to the realisation of these projects. It has been tasked with managing and overseeing the financing of the whole state infrastructure portfolio. The DMB was officially launched in May 2011, with the South Korean Development Bank (KDB) awarded a four-year contract to manage the DMB. The Mongolians hope that the KDB’s 60 years of experience at raising capital and facilitating projects will provide a good model for the venture under way in Mongolia.
The DMB’s financing is likely to come via bond issues, with a $650m issue planned currently, aimed at financing the 100,000-unit housing project. The country’s Human Development Fund, which includes the Stabilisation Fund and the Social and Health Insurance Funds, may be one source of demand for the DMB bonds. Other potential financing could also come through overseas loans, with the Russian and Chinese Eximbanks in particular seen as likely suppliers.
LEGAL MATTERS: Another structure now in place that should help ease financing concerns is the Concessions Law, which became effective as of March 1, 2010. This legislation provides a legal basis for PPPs, and recognises seven different varieties: build-transfer, build-operate-transfer, build-own-operate, build-own-operate-transfer, build-lease-transfer, design-build-finance-operate and renovate-operate-transfer.
Government support for concessionaires can also include a variety of loan guarantees, tax credits and exemptions, while land use rights can be transferred to the concessionaire. The agreement can also include provision for recourse to international courts should disputes between parties arise, and should both parties be in agreement to including such a clause.
It is hoped that the implementation of the Concessions Law will see a surge of interest in transportation infrastructure development in Mongolia — particularly from overseas companies. The law is being used in several sectors throughout the economy, with the new Ulaanbaatar airport road, among other local projects, planned to be dealt with as a concession.
The law and the DMB are both within the remit of the New Development Programme passed by Mongolia’s parliament in June 2010, which also establishes the Economic Standing Committee which will oversee all the required implementation efforts.
A NATURAL HUB: While Mongolia faces some enormous challenges in developing its ageing transport sector, the rewards of doing so are potentially vast. The country is a natural transit route between China and Russia, and has been for hundreds of years. It can provide the shortest route for many Central Asian goods to reach Pacific ports, and the wider world beyond.
Logistics may therefore be a future industry to watch in Mongolia, even if, for now, it is still in its infancy. According to a 2009 Asian Development Bank report, there were around 60 freight forwarders operating in the country that year, while DHL, FedEx and UPS offer air express and courier services via local partnerships – a requirement under Mongolian law. “There are 18-20 global forwarding companies operating in Mongolia; however, if the industry continues to grow at the current pace, the market could sustain up to 30 firms,” Odgerel of DHL told OBG.
DHL works in a joint venture with the Central Post Office, while FedEx works with Tuushin Deliveries and UPS with the Selenge Group. Chinese and Russian companies have become an increasing presence in the local market as well.
Currently, the capital, Ulaanbaatar, acts as the logistics centre for the whole of the country, with the development of other centres for the western and eastern regions also a requirement for the industry going forward. Frequent bottlenecks have required the Mongolian Logistics Association to move forward with plans in late-2011 to open a logistics academy in Ulaanbaatar, which would invite foreign and Mongolian specialists to train sector stakeholders in logistics.
OUTLOOK: There is clearly much to be done in the transport sector, from road to rail to air. Indeed, there are also schemes to revive the long-neglected waterway transport system, which was in operation before 1990, but these days is responsible for only around 2000 MT a year of goods traffic. For investors, the opportunities are widespread, with the authorities extremely keen to collaborate with overseas transport specialists when it comes to these major projects.
Mongolia’s transportation and construction companies are by and large small affairs, with an abundance of local knowledge but little expertise when it comes to handling major projects. There is also scope for partnerships, joint ventures and sub-contracting work. The sector, in short, looks about to be transformed.
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