Technical Assistance Consultant’s Report Project Number: TA 7110-MON: Regional Logistics Development Project—Component 2 Zamyn Uud Logistics Center 31 December 2010

MAIN REPORT Prepared by TERA International Group, Inc. Sterling, Virginia, United States of America For: Ministry of Road, Transport, Construction, and Urban Development This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. All the views expressed herein may not be incorporated into the proposed project’s design.

Asian Development Bank

i

CURRENCY EQUIVALENTS (as of 2 August 2010)

Currency Unit – Tugrik (Tg) Tg 1.00 = US$0.000675 US$1.00 = MNT 1,482

LIST OF ABBREVIATIONS USED

ADB Asian Development Bank AH Asian Highways ASYCUDA Automated System for Customs Data BOOT Build Own Operate Transfer BOT build-operate-transfer CAREC Central Asian Regional Economic Cooperation DFR draft final report EA executing agency EBRD European Bank for Reconstruction and Development EDCF Economic Development Cooperation Fund EDI Electronic Data Interchange EIA environmental impact assessment FEZ Free Economic Zone FS feasibility study FTZ Free Trade Zone FZ Law Law of Mongolia on Free Zones GDP gross domestic product GOM Government of Mongolia GTI Greater Tumen Initiative GVC Global Value Chain HA hectare IA implementing agency IEE initial environmental examination IFFC Intermodal Freight Forwarding Company IFI international financing institution IMAR Inner Mongolia Autonomous Region IRR internal rate of return ITR Interim Report KM kilometer KfW KfW Entwicklungsbank Kph kilometers per hour L/M Linear Meter LPI Logistics Perceptions Index LSMS Living Standard Measurement Survey M meter MC Ministerial Conference MCC Millennium Challenge Corporation MDGs Millennium Development Goals MM Millimeter MNT Mongolian Tugrik MNTTFC Mongolian National Transport and Trade Facilitation Committee MoET Ministry of Environment and Tourism MOF Ministry of Finance MRA Mongolian Railway Authority MRTCUD Ministry of Roads, Transport, Construction, and Urban Development MT metric tons MTZ Mongolia Temur Zam (Mongolian railway) NCTTF National Committee of Trade and Transport Facilitation NDS National Development Strategy NGO non-government organization NPV net present value O/D origin-destination

ii

ODA official development assistance OT Oyu Tolgoi PIA project impact area PKM passenger-kilometer PPP public private partnership PRC People’s Republic of China PSP private sector participation RF Russian Federation RFID Radio Frequency Identification RFP request for proposal ROK Republic of Korea RP resettlement plan SIDA Swedish International Development Cooperation Agency SPC State Property Committee Sq. Km square kilometer TA technical assistance TERA TERA International Group, Inc. TEUs Twenty-foot Equivalent Units TKM ton-kilometer

TOR terms of reference TT Tavan Tolgoi TTFS Transport and Trade Facilitation Strategy UB Ulaanbaatar UBTZ Ulaanbaatar Temur Zholy UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme UN ESCAP United Nations Economic and Social Commission for Asia and the Pacific US United States of America USD U.S. Dollar USTDA United States Trade and Development Agency WTO World Trade Organization XUAR Xinjiang Uyghur Autonomous Region ZU Zamyn-Uud ZULC Zamyn-Uud Logistics Center 3PL Third Party Logistics

NOTES In this report $ refers to U.S. Dollars. The Government’s Fiscal Year is the calendar year.

iii

TABLE OF CONTENTS

I. BACKGROUND ...................................................................................................................... 1 A. STUDY OBJECTIVES AND SCOPE ........................................................................... 1 B. PROJECT OVERVIEW ............................................................................................... 1 C. EXTERNAL ASSISTANCE TO THE TRANSPORT SECTOR ................................... 11 II. PROJECT FRAMEWORK AND RATIONALE ....................................................................... 13 A. CURRENT CONDITIONS AND CHALLENGES ........................................................ 13 B. DESCRIPTION OF THE PROJECT .......................................................................... 16 C. PROJECT RATIONALE ............................................................................................. 17 D. DESIGN AND MONITORING FRAMEWORK ........................................................... 20 III. TRAFFIC FORECASTS ........................................................................................................ 22 A. TRADE CLEARED THROUGH ZAMYN UUD CUSTOMS ........................................ 22 B. TRADE THROUGH ZAMYN UUD UNDER BONDED TRANSPORT........................ 31 C. SUMMARY TRAFFIC PROJECTIONS ..................................................................... 37 IV. TECHNICAL CHARACTERISTICS ....................................................................................... 39 A. INTRODUCTION ....................................................................................................... 39 B. ALTERNATIVES ANALYSIS ...................................................................................... 39 C. GENERAL CONDITIONS OF THE SELECTED SITE ............................................... 45 D. PHYSICAL CHARACTERISTICS .............................................................................. 47 E. TERMINAL OPERATIONS AS DESIGN CONSIDERATIONS ................................... 52 F. ZULC LAYOUT AND COMPONENTS ....................................................................... 54 V. ENVIRONMENTAL ASSESSMENT ...................................................................................... 67 A. INTRODUCTION ....................................................................................................... 67 B. DESCRIPTION OF ISSUES ...................................................................................... 67 VI. SOCIAL AND POVERTY ANALYSIS ..................................................................................... 75 A. INTRODUCTION ....................................................................................................... 75 B. LAND ACQUISITION AND RESETTLEMENT .......................................................... 76 C. MAIN CHARACTERISTICS OF THE PROJECT IMPACT AREA .............................. 76 D. BENEFICIARY GROUPS .......................................................................................... 77 E. POVERTY ANALYSIS AND VULNERABLE GROUPS ............................................. 78 F. THE POTENTIAL IMPACT ON POVERTY ................................................................ 79 G. MONITORING AND EVALUATION ........................................................................... 80 VII. LEGAL AND REGULATORY FRAMEWORK ........................................................................ 81 A. GENERAL LEGAL AND REGULATORY ISSUES ..................................................... 82 B. RAILWAY SECTOR LEGAL AND REGULATORY ISSUES ....................................... 90 VIII. IMPLEMENTATION ARRANGEMENTS ................................................................................ 98 A. INTRODUCTION ....................................................................................................... 98 B. IMPLEMENTATION STRUCTURE ............................................................................ 98 C. ASSESSMENT OF FINANCIAL MANAGEMENT ................................................... 100 D. REPORTING REQUIREMENTS ............................................................................. 102 E. RISK ANALYSIS ...................................................................................................... 104 F. DISBURSEMENTS ................................................................................................. 105 G. ACCOUNTING ........................................................................................................ 106 H. AUDITING ............................................................................................................... 106 I. INSTITUTIONAL STRUCTURE DURING OPERATIONS ....................................... 106 J. DESIGN AND SUPERVISION CONSULTANT ........................................................ 107 K. TERMINAL MANAGEMENT CONTRACTOR ......................................................... 107 L. PRIVATE SECTOR PARTICIPATION ...................................................................... 108 M. PROCUREMENT PLAN .......................................................................................... 109

iv

N. IMPLEMENTATION SCHEDULE ............................................................................ 111 IX. FINANCIAL EVALUATION .................................................................................................. 112 A. FINANCIAL RATE OF RETURN ............................................................................. 114 B. SENSITIVITY ANALYSIS ........................................................................................ 120 X. ECONOMIC ASSESSMENT ............................................................................................... 121

1

I. BACKGROUND

A. STUDY OBJECTIVES AND SCOPE

1. This report is prepared by TERA International Group, Inc. (TERA) pursuant to the terms and conditions of the Contract for Consulting Services dated 17 November 2008 (Contract No. COSO/80-170), between the Asian Development Bank (ADB) and TERA. The Project involves Technical Assistance (TA 7110-MON) services to the Government of Mongolia (GOM) for Regional Logistics Development Project. The Ministry of Road, Transport, Construction and Urban Development (MRTCUD) of Mongolia is the Executing Agency (EA).

2. This Report includes a discussion of the Project’s background in Section 1, followed by Project framework and rationale in Section 2, and traffic forecast in Section 3. Sections 4 through 10 cover each functional area of the Consultant’s evaluation: Section 4, technical assessment; Section 5, environmental impact assessment; Section 6, social and poverty assessment; Section 7, legal and regulatory framework; Section 8, implementation arrangements; Section 9, financial evaluation; and Section 10, economic assessment. Supplementary information is provided in the Consultant’s Supplementary Final Report Volumes 1, and 2.

B. PROJECT OVERVIEW

1. The National Development Strategy and the Transport Sector Planning Framework1

3. The Government’s priorities for investment in all sectors are guided by the National Development Strategy (NDS) that was approved by the Ikh Khural (Mongolia’s Parliament).2 This document was developed to support the process of achieving the Millennium Development Goals (MDGs) and provides the overall strategy for infrastructure development within the country from 2007 to 2021, including the transportation sector. A semiannual progress review is made of the NDS by the relevant ministries, donor agencies, and nongovernmental organizations. To generate information to be included in the NDS, MRTT, the predecessor agency to MRTCUD, developed a long-term (15-year) investment plan. Assisting with the overall development of the transport sector in Mongolia and the monitoring of progress is the Transport Sector Working Group (TSWG), chaired by MRTCUD. This group, co-chaired by the ADB, examines all transport sector developments and strategies in the country.

4. The NDS serves as the primary document to guide the country’s development and activities for achieving the MDGs. The 2007-2021 time frame included in the NDS is divided into two separate implementation segments: the period of intense economic development, 2007-2015; and the period of transition to a knowledge based economy, 2016-2021. The GOM plans to establish a new organization to implement the NDS as well as monitor, evaluate and analyze the results on an on-going basis, including a preliminary, intermediate, and final stage evaluation. This new organization will ensure

1 The discussions in this and the next sub-section are adapted and updated from draft ADB Transport Sector Roadmap, undated, prepared under Contract A16701 RSC-C80839 (MON): Transport Sector Strategy in Mongolia. 2 The Parliament approved the NDS on 31 January 2008 per Resolution No. 12.

2

that the goals of the NDS are considered in relation to the economic and social development strategy, annual budgets, and monetary policy.3

5. Each relevant Ministry, state institution, research organization, and non-governmental organization will take part in the monitoring process, examining progress to date and comparing it to previously determined targets. In the first quarter of each year, the GOM will provide a report to the Parliament detailing the progress toward achieving the MDGs in the preceding year.

6. Within the NDS, key areas for development have been highlighted. In the 2007-2015 period, the following are the key goals of the transport sector: (i) improve the legal environment for the development of roads and the transport sector; (ii) expand and develop the road network; (iii) introduce modern equipment and technology to the road subsector and improve road maintenance and services; (iv) increase the competitiveness of the rail subsector and improve traffic safety; (v) continue reforms of the aviation subsector, including infrastructure development and increasing the number of services offered; (vi) create a favorable legal environment for investment and private sector involvement; (vii) improve the road network within Ulaanbaatar; and (viii) reduce the negative impacts of vehicles on the environment and traffic congestion. For the 2016-2021 period, the GOM plans to expand the network of all transport modes and complete the process of connecting Ulaanbaatar to all aimag centers with paved roads.4

7. Mongolia’s transport system has evolved from a wholly state-owned and operated network with related institutional and policy frameworks, to one that reflects to some degree the recent political and economic liberalization which has resulted in more freely functioning markets for labor, capital, goods and services. While there have been some reforms affecting the transport sector in relation to institutional and public sector re-structuring, transport laws and regulations, and private sector involvement in the provision of transport services (notably, road transport for passengers and freight, urban public transport, domestic air services, and waterway services), more needs to be done to ensure sustainability, efficiency, integration, safety and overall improvement of the sector.

8. The nature of the issues affecting the transport sector in Mongolia are a reflection of the new challenges associated with the changing characteristics of global production and trade practices, and people’s growing aspirations for a better quality of life. Responding to these challenges requires the adoption of transport policies with supporting regulations that are more sustainable economically and financially, as well as environmentally and socially. The increased sophistication, complexity, and variety of issues requires the Government taking the lead in fostering more partnerships at the local, national, and international levels and to learn lessons from past operational experience.

9. The increased reliance on market economy mechanisms and a free enterprise system points to a commitment by the Government to apply economic efficiency principles in the design of a transport policy, in particular in the decisions regarding investments in transport infrastructure. This infrastructure is capital intensive and makes large demands on the country’s limited resources. Economic efficiency means also to

3 Government of Mongolia. 2008. National Development Strategy: 2007-2021. Ulaanbaatar. 4 Government of Mongolia. 2008. National Development Strategy: 2007-2021. Ulaanbaatar.

3

rely on market prices and not on Government-controlled prices. This will mean, for instance, moving public sector transport entities toward commercial viability, and reducing subsidies that cannot be justified on economic grounds taking full account of life cycle costing of all investments.

10. To support the NDS, MRTCUD has been drafting a strategy paper with assistance from ADB5 that ties together the various existing transportation sector development strategies. These different documents include the 15-year investment program developed by MRTCUD, the national transport sector strategy (NTS) developed with assistance from the ADB, the World Bank's "Infrastructure Development Strategy for Mongolia" and “Mongolian Road Master Plan 2007-2021”, and the "Ulaanbaatar City Development Master Plan" prepared with assistance from the Government of Japan. The NTS is a cohesive, implementable sectoral strategy that will govern interventions across the transportation subsectors and seek to accomplish the goals of the NDS. The first revision of the revised NTS was completed in April 2008 and was presented at a meeting of the TSWG, where a discussion of the concepts was undertaken to provide further refinement. Following the inclusion of comments from other Ministries and stakeholders within the GOM, as well as insights obtained at the TSWG, the final version of NTS and the three-year Rolling Investment Plan (RIP) has been completed in November 2008.

11. The challenge associated with implementing transportation sector investments is in determining a realistic and practical level of investment and agreeing upon the top priority projects to be financed using the limited funds available for infrastructure development in Mongolia. The goals and priorities described in the NDS and the projects within the MRTCUD-generated investment plan must ultimately be in agreement. The ADB provided funding for a Consultant to coordinate with MRTCUD in the production of a three-year rolling investment plan for the transport sector. This plan prioritizes the investments for the medium term, incorporating input from the documents mentioned above.

12. The newly established MRTCUD has the responsibility for all transportation sector issues in Mongolia, including the road, railway, aviation, urban transport, and inland waterways subsectors. The Mongolian Civil Aviation Authority (MCAA) and the Mongolian Railway Authority (MRA) are located within MRTCUD and provide oversight of the aviation and railway subsectors, respectively. The MCAA is currently responsible for the management of all airport and civil aviation operations. As the implementing agency for the rail sector in Mongolia, MRA is responsible for implementing the policies that are promulgated in the Railway Law and those developed by the MRTCUD. Also under the purview of MRTCUD is the Mongolian Tumur Zam (MTZ), a state-owned enterprise established in 2008 with ownership by the State Property Committee (SPC), but assigned to MRTCUD for operational oversight. In addition, Ulaanbaatar Tumur Zam Joint Stock Company (UBTZ), currently the only railway operating company in Mongolia, which was established in 1949 as an equal-share partnership by the Governments of the

5 At the request of the GOM, ADB approved the provision of technical assistance to Mongolia for Formulating a Transport Strategy in December 2004. The consultants started services in May 2005, prepared the draft Transport Strategy, and submitted it to the MRTT in December 2005. Following review and comments by the GOM ADB approved three Small Scale TAs in support of the TSS: (i) RSC-C60264 (MON): Refining and Finalizing the Transport Sector Strategy for Mongolia; (ii) S14542 additional services under TA-4785 (MON): Preparing the Western Regional Road Development; and (iii) Contract A16701 RSC-C80839 (MON): Transport Sector Strategy in Mongolia.

4

Former Soviet Union (now the Russian Federation-RF) and Mongolia reports to the MRTCUD on operational matters.

13. The planned investments in each of the subsectors are developed by MRTCUD, which then provides input to the Ministry of Finance (MOF) for inclusion in the NDS before it is submitted to the Parliament for approval. After the planned investments included in the NDS have been approved by the Parliament, MRTCUD becomes the responsible agency for implementation of the components related to transport sector.

14. As directed in Resolution No. 245 dated 10 November 2006, the GOM changed the name of the “National Regulatory Committee of Transit Transportation” to the “National Committee of Trade and Transport Facilitation” (MNTTFC). On 15 January 2007, by Order No. 10 of the Minister of MRTT, the membership in the MNTTFC was established. MNTTFC broadens the activities of the former transit transport committee and represents an attempt to improve trade, transport and logistics within Mongolia and coordinate transport and trade facilitation action plans with the CAREC Secretariat housed in ADB.

15. MNTTFC is made up of 25 individuals representing state Ministries, the private sector (in particular, transport and freight forwarder associations, and the Chamber of Commerce and Industry), and related Government departments such as General Customs Office and the Border Protection Authority. The Minister of MRTCUD is the head of the committee, which is scheduled to meet every 3 months.

16. On 14 May 2008 by Resolution No. 183 the GOM approved “Transit Mongolia” as an attempt to harmonize policy and development strategy within Mongolia related to trade, transport and logistics.

17. A major challenge facing MRTCUD and the GOM is the ability of the senior leadership to effectively manage the implementation of the transport sector-related projects and programs of NDS and the government strategy. As a new ministry organized from various agencies and departments of two former ministries (MRTT and the Ministry of Construction and Urban Development), institutional integration and improvement in capacity at all levels of MRTCUD is a pre-condition for successful implementation. Related to this is the need for capacity to be built to effectively plan for the prioritization of projects, which allows for efficient utilization of scarce resources and their timely implementation. Programs of human resource development, infrastructure management, regulation, administrative capacity, and fund management and budgeting are necessary within MRTCUD. Capacity building programs should also be implemented within the private sector in order to promote their involvement in the transport sector across all modes. These programs and capacity building exercises will be necessary to overcome the existing issues within the transport sector and successfully obtain the desired strategic results particularly in regional intermodal transport.

18. Developing the regulatory system to support investments in the transport sector is a key area where further capacity is needed. The GOM aims to improve standards, norms, and regulations for constructing, repairing and maintaining transport infrastructure and facilities, in addition to revising existing transport sector laws and adopting new regulations as required. Assistance will be needed by both the government and the private sector to help with this process, as well as ensuring that contracts for

5

construction, maintenance, equipment, goods, and services are in line with international conventions and best practices.

2. Intermodalism

19. Transport system integration is about amalgamating the major components of the system; i.e. drawing on the strengths of each mode and making the system work efficiently and effectively as a whole – an intermodal network to connect people, places, goods and services. In order to achieve this outcome, intermodalism also requires efforts by involved transport agencies and policy-makers to make optimum use of the existing system components, to manage transport demand and influence decisions by transport system users (to make more effective and efficient use of existing facilities), to plan for long-term needs, and to provide the requisite policy environment to support the safe, efficient and effective operation of the system in an integrated manner.

20. To this point in Mongolia, each of the transport sub-sectors (road, road transport services, rail, civil aviation, urban transport and waterways) has been administered, regulated, managed and operated generally in isolation, with each mode having developed their individual master-plans with little or no consideration for intermodal transportation. Rail freight and passenger services are effectively integrated by virtue of the need to share the same track, locomotives, communications and train control systems, and operating company, but no consideration has been given to improving the efficiency of intermodal linkages between rail and road, (i.e. providing door-to-door services), which could bring significant benefits and improved efficiencies for freight movement. Freight forwarders have a role to play in helping to promote greater integration of transport services via all available modes.

21. Key objectives within MRTCUD that span all transport subsectors include the development of intermodal/multimodal terminals and logistics centers, as well as to improve the ability of Mongolia’s transport infrastructure to accommodate transit traffic. All modes of transport should be harmonized, thereby promoting the development of intermodal and multimodal transportation.6 These objectives are further expanded upon in the soon-to-be-published National Transport Strategy (NTS). To assist in the accomplishment of these goals, a Transport and Trade Facilitation Committee (MNTTFC) was established in 2007 in order to coordinate all activities related to transport, logistics, and trade on a country-wide basis. The Committee, chaired by the Minister of MRTCUD, is made up of 25 individuals representing relevant Ministries and government agencies, as well as the private sector.

22. On 14 May 2008 the GOM adopted Resolution No. 183 and approved the national program “Transit Mongolia” and its Action Plan for implementation. Transit Mongolia is the first attempt by the GOM to develop a key regional asset (the country’s favorable geographic location) in a coordinated manner with MRTCUD acting as the implementation lead agency. In the Background section of the Transit Mongolia program the GOM acknowledges the following:

“In current times of globalization, using its geographic privileges Mongolia can benefit by becoming a transit country through being part of a integrated network of international trade, transport and logistics,

6 J. Bat-Erdene. 2008. Speech – Transport Sector Working Group. Ulaanbaatar.

6

and thus by implementing certain activities to increase its competitiveness in international trade, transport and logistics markets, accelerating its economic growth and resolving many outstanding economic and social issues.”

23. The core policy of Transit Mongolia is to create conditions for the nation to be become “land-linked” rather than “land-locked”. In the CAREC Ministerial Conference (MC) held in Baku, Azerbaijan on 21 November 2008, the 8 member countries of CAREC7 supported by 6 international organizations8 endorsed the Transport and Trade Facilitation Strategy (TTFS) and Action Plan for the 10-year period from 2009 to 2018. The projects endorsed by the MC for Mongolia are predominantly in multimodal transport and logistics (Table 1.1). There is a confluence of objectives between the GOM and the 8-member CAREC. This confirms the importance afforded to Mongolia’s potential as a transit gateway in the regional community and the high priority given to the development and implementation of regional logistics projects in Mongolia.

Table 1.1: Mongolia Projects Endorsed by the MC of CAREC INVESTMENT PROJECTS MON IP 1: Western Regional Road MON IP 2: Ulaanbaatar-Russian Border Road Rehabilitation MON IP 3: Modernization of the Mongolia Railway MON IP 4: Improvement of Olgiy and Hovel Airports MON IP 5: New International Airport in Ulaanbaatar MON IP 6: Customs Modernization MON IP 7: Establishment of Altanbulag Free Trade Zone MON IP 8: Improvement of Tsaganuur Free Trade Zone MON IP 9: Establishment of Zamyn Uud Free Trade Zone TECHNICAL ASSISTANCE PROJECTS MON TA 1: Rehabilitation of Regional Airports MON TA 2: Ulaanbaatar Intermodal Logistics Park Feasibility Study MON TA 3: Development Plan for Tsaganuur Free Trade Zone MON TA 4: Comprehensive Master Plan for Development of Zamyn Uud MON TA 5: Regional Logistics Development Note: Italics represent intermodal/logistics projects. Source: ADB, CAREC Transport and Trade Facilitation Strategy Action Plan, November 2008.

3. Strategic Concept of the Project

24. Zamyn Uud (ZU) is by far the predominant border point for container transport by rail accounting for 53,894 boxes (94,240 TEU-equivalents) in 2008 or 92.1% of all TEUs handled by UBTZ. This volume is predominantly export and import to/from PRC with transit traffic accounting for only 2.1% of the TEUs handled in Zamyn Uud. The need for capacity expansion to handle anticipated increase in intermodal container traffic at Zamyn Uud is evident. The advantages offered by intermodal transport is illustrated in Figure 1.1. The number of times a commodity is handled from PRC to UB without intermodal operations is substantially higher adding to considerable time and cost of transport and loss or damage to cargo.

7 Afghanistan, Azerbaijan, PRC, Kazakhstan, Kyrgyz Republic, Mongolia, Tajikistan, and Uzbekistan. 8 ADB, World Bank, European Bank for Reconstruction and Development, Islamic Development Bank, United Nations Development Programme, and the International Monetary Fund.

7

25. Due to the incomplete hard surface road connection between Choir and ZU (expected to be completed in 2013), passenger transport between ZU and points in Mongolia is mostly by rail with border crossing between PRC and Mongolia mostly by road. Most freight traffic crossing the border is by rail and UBTZ carries 95-98% of domestic freight to/from ZU.

26. There are about 20 freight-forwarding companies operating in Zamyn Uud. The number of vehicles registered in Zamyn Uud totaled 1,805 in 2009. The average 4+ wheel vehicle ownership of 80.5 per 1,000 people in Zamyn Uud is considerably higher than the national average of 42.4 vehicles. In addition to the 1,805 vehicles registered in Zamyn Uud, about 100 transient vehicles per day operate in Zamyn Uud mainly from Mongolia and few from PRC.

Figure 1.1: Fruits, Vegetables, and Other Goods From PRC or Overseas to UB

Source: Consultant.

27. The border is open 7 days per week except for Mongolian holidays and 3 days for Chinese holidays. Zamyn Uud is the largest border post in Mongolia. During 2008, some 809,100 people arrived in and 809,550 people departed from Mongolia through Zamyn Uud. This volume translates to 135,000 people per month or 5,188 people for each day the border is open. These volumes represent about 53% of the total of both incoming and outbound passengers for the country. Moreover, these volumes represent a 50% increase over 2005 levels and more than 100% increase over 2003. During the busy periods, the ZU border daily traffic volume severely strains the capability of the 4-lane immigration and emigration processing facility at the border.

28. Approximately 80% of the people passing through the border are Mongolians and most of the remaining 20% are Chinese. These travelers are largely regular (repeat) travelers involved in small-scale cross-border trading and truck drivers.

29. About 40% of containers arrive in Erlianhot by truck from Tianjin or other PRC origin points. Sinotrans, the large PRC intermodal transport company, has an 80,000

8

sqm fenced-in bonded facility at the border with a covered space of 10,000 sqm. The facility started operations in October 2002 at an initial cost of CNY 15 million. Cargo is received in containers or loose form at this facility for transshipment by road to the intermodal transport facility in Zamyn Uud for further shipment by rail to the final destination in Mongolia. Cargo received from Zamyn Uud in containers or loose form is packed into containers and either delivered to China Railways’ (CR) railhead in Erlianhot (standard gauge 1,435 mm) or shipped to Tianjin or to the ultimate destination in PRC by truck. Container stuffing and un-stuffing operations are performed at the Sinotrans facility depending on shipper requirements.

30. In summary, movements of freight between Mongolia and PRC involve almost all rail on the Mongolia side and a mixture of rail or road transport on the PRC side. All transit freight movements between Russia and PRC are moved by rail. All-rail movement of a TEU from Tianjin to UB costs about $1,400 including port charges, customs and documentation fees, freight forwarder charges, border crossing fees, and transport cost by rail of CR and UBTZ for the loaded container and empty return. The transit time ranges from 7 to 22 days. The rate for the same type of movement except by road on the PRC side is $1,712 per TEU with similar transit time. The all-truck movement between Tianjin and UB is quoted at $1,450 per TEU. With the completion of the ADB-funded Choir-Zamyn Uud road, all-road container movements between Tianjin and UB will be able to reduce the transit time to 3 days principally due to the elimination of the time trucks wait for railcars in Zamyn Uud. Given the competitive cost and transit time advantage, all-truck movements are expected to increase significantly when the all-hard surface road is completed.

31. The Chinese and Mongolian track gauges are 1,435 mm and 1,520 mm, respectively. Wagons traveling between the two countries must either have their trucks (bogies) changed or the freight trans-loaded. Currently, only the Beijing – Moscow passenger train (which operates once a week) and a limited number of unit trains of crude oil have their trucks changed. Usually when products are shipped to PRC, the transfer takes place on the Chinese side of the border at Erlianhot and freight moving from PRC to Mongolia or Russia is transferred in Zamyn Uud. An international agreement is in place stating that, in the absence of a specific bilateral agreement, freight transfer takes place on the land of the importing railway.

32. Currently in Zamyn Uud there is limited railway transfer activity, with only products imported to Mongolia being transferred in relatively small facilities. The container and general cargo transfer facilities were financed by a JICA loan, which is too small to handle current and projected traffic. By comparison, in Erlianhot there is significant activity, where a large number of freight wagons can be unloaded. Fruits, vegetables, consumer goods, and construction materials are transferred to warehouses in Erlianhot and sold to Mongolian traders. Large and small traders transfer goods to trucks and jeeps that are driven across the border and loaded on UBTZ railway wagons. The primary reason for this pattern of border crossing by road and rail in Mongolia is to take advantage of UBTZ’s low domestic freight tariff, which is 36 percent lower than if the railway wagon crosses the border (import tariff). This saves traders $240 per 65-ton wagon from Zamyn Uud to UB. A small percentage of wagons do cross the border to be trans-loaded directly from CR to UBTZ wagons. All transit timber, Mongolian exports of fluorspar, and small quantities of coal are transferred on the PRC side of the border.

9

33. As noted above, intermodal transport has not developed at Zamyn Uud. This has resulted in transport and logistics costs that amount to about 18-24% of the price of a particular item, which is about double the cost for items with a developed transport and logistics sector. The effects of this are considerable as the ADB Resident Mission Director cited an ADB study in the Kyrgyz Republic in 2004 which showed that reducing transport and logistics costs by half in that country resulted in a doubling of GDP over 10 years and that about 60% of the ensuing benefits were pro-poor.9

34. Importantly, there is little to no use of refrigerated containers in Mongolia and only limited use to/from Erlianhot in PRC. Because of border delays and other practices, there have been reports of considerable spoilage of food items that require refrigeration. While this directly affects costs to consumers, it has a much larger impact on the economy as a whole, and particularly to herders. The proposed Zamyn Uud Logistics Center (ZULC) will include areas for refrigerated containers as well as for cold storage warehouses. These will be key additions to the transport of goods in Mongolia.

35. Agriculture and especially herding are key economic activities in Mongolia. Unfortunately, the level of meat processing and meat exports has remained low despite the considerable size of the herd, and Mongolia’s proximity to large meat importing markets in PRC, Japan, S. Korea, and Russia, as well as the increasing potential markets in southeast Asia (e.g., Thailand). The lack of infrastructure including refrigerated container handling facilities and the failure to develop this added value chain has greatly limited increase in herders’ incomes.

36. The joint UNDP and Ministry of Foreign Affairs publication, Trade Policy and Human Development in Mongolia (Ulaanbaatar, 2008), presents a case study on meat products, the low level of exports, and the low level of processing (e.g., Russia imports about 90% of Mongolian meat exports and almost all in the form of frozen carcasses). The report states that there is considerable potential to increase herder incomes and exports by improving transport and logistics as well as increasing the processing and quality of exported products. This would have a marked impact on poverty reduction. The proposed ZULC will have dedicated refrigerated storage and a number of plugs and other facilities for refrigeration facilities including refrigerated containers. In addition, shippers and freight forwarders will be able to develop cool/cold storage facilities or use refrigerated containers at ZULC.

37. Thus, the proposed ZULC will directly address a number of current needs that have added costs not only to transport and trade but have restricted economic development in the country. Moreover, the proposed facility will serve as a model for the development of similar facilities in other parts of Mongolia such as in Ulaanbaatar and at other border crossing points and major cities.

4. The Project

38. The proposed intermodal or multimodal logistics facility will enhance trade between the two countries and will reduce times for cargo transfers and reduce costs for shipping goods. Collectively, the multimodal facility will benefit consumers that utilize ZU and Ulaanbaatar as distribution points.

9 Adrian Ruthenberg. Consultative Council on Investment Climate and Private Sector Development under the Prime Minister, 2008 Annual Report, Ulaanbaatar, 2008, pp. 36.

10

39. In addition to its own imports and exports, as a “land-linked” country, Mongolia is a transit country between China and the Russian Federation. Figure 1.2 shows the CAREC corridors in Mongolia, and this includes ZU.

Figure 1.2

Source: Consultant.

40. The proposed Project is the construction of an intermodal Logistics Center in Zamyn Uud. It will be located approximately 9 km from the border crossing with China, 5.7 km from Zamyn Uud town, and 5 km from the existing UBTZ freight Terminals 1 and 2. The Project is a 96.1 ha (78.3 ha for the terminal, 11.8 ha for Customs and other facilities, and 6 ha for truck waiting area) site, which will be part of the larger Mongolian Railway Authority (MRA) site of 288 ha that is dedicated as the Intermodal Freight Terminal and Logistics Center (IFTLC. The Project site is 2.2 km from the ADB-funded Regional Road, which is the main north-south road connecting Mongolia with China, and is part of CAREC Corridor 4-b. The Project design includes a road connection with an overpass (bridge) above the UBTZ mainline, providing easy direct connection between the border post and ZULC.

41. The Project site has been carefully selected to ensure that it does not conflict with current and future land uses in the area including the projected rapid growth of the town, and will be able to meet the demands for intermodal transport as Zamyn Uud’s and Mongolia’s economies expand. Cooperation was maintained with the ongoing

11

Zamyn Uud Urban Master Plan study and confirmation was received from the local government that the selected site does not conflict with the Master Plan land use.

42. Site selection is a critical consideration because Mongolia is entering a period when large minerals deposits will be developed and the economy will rapidly increase to double its current size over the next 5 years with a subsequent doubling forecast by 2020. Given that Zamyn Uud is Mongolia’s main gateway to the rest of the world, the implications in terms of transport and trade are obvious: the selected site must meet not only current needs but also those resulting from a much larger and higher income economy.

C. EXTERNAL ASSISTANCE TO THE TRANSPORT SECTOR

43. The ADB is the co-chair of the Transport Sector Working Group (TSWG), a group of international donor organizations and interested foreign government representatives including Russia, Japan, PRC, and Turkey, that meets periodically throughout the year to monitor all sector developments and strategies within Mongolia. The group has been successful in determining a course of action for transportation development within the country and identifying limitations where additional capacity is needed.

44. The majority of ADB assistance to the transport sector in Mongolia has been focused on the road and aviation subsectors. Through ADB loans and grants of $124.7 million, some 1,371 km of road (exclusive of local access roads) has been constructed or upgraded mainly on the North-South axis between the Russian-Mongolian border and Mongolian-PRC border in the central and western regions of the country. This does not include the approximately $40 million assistance package proposed for Phase II construction of the Western Regional Road Corridor (317.2 km). The ADB was also involved in the aviation subsector through $60 million in loans to upgrade infrastructure at Ulaanbaatar Airport and improve safety and operations to reduce air safety concerns by eliminating potential operational and safety shortfalls of air traffic control and air traffic management in Mongolia.

45. A loan of $5 million was also provided to enhance the capacity of Mongolian Customs at the borders and address critical customs infrastructure bottlenecks. It was designed to implement best international practices and enhance governance, thereby facilitating the flow of goods and passengers into and out of the country and increasing revenue.

46. Many of the international development partners are active in the transport sector in Mongolia, though most of the assistance has been, and continues to be in the road subsector. The World Bank has provided financing for the development of segments of the major East-West highway corridor, limited assistance for the upgrading of gravel roads, and along with the Nordic Development Fund, funded the recently completed Road Master Plan. The Kuwait Fund for Arab Economic Development provided partial funding for the construction of the Erdenet-Bulgan-Unt, as well as funding for the Darkhan-Erdenet road projects.

47. The Millennium Challenge Corporation of U.S. is providing grant assistance for the completion of the Choir-Sainshand Road, rehabilitation of UB-Nalaikh road and bridge, and constructing a new bridge in Nalaikh. ADB is providing additional funding for the completion of the Sianshand-Zamyn Uud road including the Regional Road

12

connecting the border. The Japan International Cooperation Agency (JICA) has provided grants and soft loans in support of road construction utilizing bituminous rock and road improvement within UB, and railway rehabilitation and intermodal facility development in Choibalsan and Zamyn Uud. Additionally, technical assistance was provided for a road development master plan in UB and road design in eastern Mongolia. KfW Entwicklungsbank (KfW) of Germany provided approximately $7.7 million (€5 million) to improve regional roads and bridges throughout Mongolia. Finally, PRC has provided grants and soft loans for cross border facilities and road rehabilitation in Zamyn Uud and the southern section of the Western Regional Road Corridor. A PRC Export-Import Bank soft loan has been principally approved and is currently under preparation for equipment for the Zamyn Uud intermodal terminal and procurement of railway rolling stock.

48. In the urban transport sector, JICA provided a grant of $25 million to construct a bridge with a 60 m span in western Ulaanbaatar (UB) to cross the railway tracks. A proposal has also been submitted to KfW for a loan of €8 million to be used to improve access roads north of UB in Tuv Aimag to assist with the delivery of food and agricultural products to the capital.

49. In the aviation subsector, the European Bank for Reconstruction and Development (EBRD) has provided financing for the creation of a Master Plan for the aviation subsector and technical assistance for the management of MIAT, both of which have been completed. The Swedish International Development Cooperation Agency (SIDA) supplied approximately $2 million for a project focusing on human resources development that was completed in 2007. Japan, through JICA, has recently offered a $270 million loan for the construction of a new airport to be located approximately 54 kilometers from UB. The new airport is expected to be operational in 2015. The United States Trade and Development Agency (USTDA), an independent agency of the U.S. government, has provided a grant of $500,000 to Eznis airlines for a comprehensive expansion plan that is ongoing. It is expected that the upgrading of the airports and runways in the Western region will be financed without external assistance.

50. Within the railway subsector and as noted above, JICA invested approximately $21.3 million in the development of the transshipment facility in Zamyn Uud Mongolia-PRC border, as well as the development of a railway business plan. Also as noted, China is providing a loan for the purchase of terminal equipment and rolling stock.

51. The total level of assistance the international donor organizations have provided to the transportation sector of Mongolia is summarized in Table 1.2. In the transportation sector, donor coordination will continue to be critical to accomplishing stated goals and objectives. Through forums such as the TSWG, the donors will be able to discuss key developments in the sector and develop strategies for the most efficient distribution of aid. Continued coordination will ensure that projects do not overlap, but rather are complementary to each other.

52. Through ADB’s involvement in the transport sector, the level of geographic isolation of the rural poor can be decreased, providing access to urban markets, health services, employment opportunities, and social services. Construction of the main state roads and any associated access roads will result in increased employment within the region, along with decreased poverty. Investing in all transport subsectors in Mongolia will serve to promote the key outcomes for the CAREC program including: (i) harmonization of cross border transport procedures; (ii) development and improvement

13

of regional and international transport corridors; (iii) harmonization of transport regulations; and (iv) improvement of sector funding and management.10 It will also advance the desired outcomes of the ADB’s Country Strategy and Program for Mongolia of promoting the improvement of the domestic transport network and providing better integration of domestic and regional markets.11

53. ADB’s areas for intervention in the transport sector have been targeted toward the road subsector. ADB’s operational strategy for roads supports: (i) enhancing Mongolia’s transport links to neighboring countries and promoting regional cooperation and integration in transport to address the country’s landlocked status and remoteness from major developed markets, (ii) promoting and developing a sound sector policy and regulatory framework, (iii) ensuring adequate fund allocations through the government’s road subsector budget, (iv) improving road safety, and (vi) strengthening the institutional and human capacity in the sector.12

Table 1.2: Foreign Donor Assistance to Mongolian Transport Sectora

Organization Amount ($ million)Number of Transportation Sector Projects

ADB 184.7d 5 World Bank 70.7 2 JICA 342.3 4b KfW 7.7 2 EBRD 1.6 2 Kuwait Fund 3.3 2 EDCF 23.9 1 SIDA 2.0 1 PRC 63.0e 2 a Excluding technical assistance projects. b Including proposed new UB airport project. c As part of a $284.98 million grant. d Including Phase II of the Western Regional Road Corridor. e Including Zamyn Uud border facilities (completed) and intermodal terminal improvement and railway equipment. ADB: Asian Development Bank; EBRD: European Bank for Reconstruction and Development; EDCF: Economic Development Cooperation Fund; JICA: Japan International Cooperation Agency; KfW: KfW Entwicklungsbank; MCC: Millennium Challenge Corporation; PRC: People’s Republic of China; SIDA: Swedish International Development Cooperation Agency. Source: MRTCUD and donor agencies.

II. PROJECT FRAMEWORK AND RATIONALE

A. CURRENT CONDITIONS AND CHALLENGES

54. Figure 2.1 summarizes the challenges currently facing Zamyn Uud as Mongolia’s key border crossing point for exports and imports. Mongolia has high transport and trade costs because it is a land-locked country but also because its infrastructure has 10 Asian Development Bank. 2005. Central Asia Regional Cooperation Strategy and Program Update: 2006-2008 – Development Through Cooperation. Manila. 11 Asian Development Bank. 2006. Country Strategy and Program Update: Mongolia 2007-2009. Manila. 12 Asian Development Bank. 2007. Evaluation Assessment Report – Mongolia: Transport Sector. Manila.

14

not been well-developed, the facilities utilized for transport and trade need modernization, and the management structures and systems currently in place are remnants of a previous era. Collectively, these factors have limited economic development, constrained poverty reduction and job creation initiatives, and been a drain on the government’s budget.

55. Policies and programs are now emerging that propose and/or promote transitioning from the handicaps of the past into more relevant and current institutional structures and management systems. However, integrated transport and trade planning is a relatively new practice. Unfortunately, even the best planning is still burdened by limited fiscal resources competing for other projects and programs, and their allocation to other priorities, including management structures in the transport sector which are predominantly owned and operated by the public sector with limited private sector participation.

56. One of the major hurdles to reducing transport and trade costs is developing an intermodal capacity in terms of infrastructure, technology and management. The road network is being upgraded but the main road from Zamyn Uud to Ulaanbaatar remains as unimproved earth tracks through the Gobi, and often with a width that may be hundreds of meters in areas. Paving this link is planned to be completed by 2013, which will greatly alleviate the environmental degradation caused by vehicles and improve accessibility. The railway is an important link for Zamyn Uud but suffers from lack of funding for maintenance and upgrading of infrastructure and rolling stock. Its management is resistant to management improvements as evidenced by UBTZ’s refusal to provide access to an international accounting firm to review accounting and financial systems and recommend improvements13, which resulted in the Government’s rejection of a $188 million grant from the U.S. Government to modernize the railway’s rolling stock, signaling and telecommunications, and track machinery.14

57. There is also a need to upgrade container handling infrastructure including depots, equipment, computer management systems and other technologies in Zamyn Uud as well as elsewhere in the country. Logistics systems, currently non-existent, are needed to support existing economic activity as well as its anticipated growth in the near future. Mongolia is on the verge of having its economy double in size by 2015 and a further doubling by 2020 as a result of the exploitation of the Oyu Tolgoi and Tavan Tolgoi minerals deposits. Even if goods and minerals products from/to these mines are imported or exported through other border crossing points, Zamyn Uud will handle considerably more traffic because it will remain the gateway for most of the rest of Mongolia. The recent Parliamentary approval of the Government’s proposal to build a new railway from Tavan Tolgoi to Sainshand eventually reaching Choibalsan15 will create significant additional traffic through Zamyn Uud to support the Government’s plan to construct minerals based global value chain (GVC) facilities in Sainshand. Thus, reaching the goal of an integrated intermodal transport and trade network centered in Zamyn Uud has to be achieved very quickly.

13 UB Post. 29 January 2009. 14 UB Post. 01 May 2009. 15 UB Post 25 June 2010.

15

EFF

EC

TS

Figure 2.1: Zamyn Uud Logistics Center Project Problem Tree

CA

USES

CO

RE

PR

OB

LEM

S

Limiting Economic Development Prospects

Limiting Poverty ReductionPoor Access to Social

ServicesEnvironmental Degradation

Limited institutional

capabilities for logistics

Limited accession to/ implementation of

international conventions and

national legislation and procedures

Inadequate capital investment and

maintenance budgets for transport

infrastructure and other logistics

facilities

Limited fiscal resources and competing

government priorities

Inadequate national policy support, regulatory and legal framework, development strategy, planning and procedures for transport and trade facilitation

Limited PPP/PSP opportunities for

infrastructure investment and

operation

Unbalanced development of infrastructue,

technonogy and management

Inadequate border crossings,

intermodal facilities, logistic centers, and

inland container depots

Inadequate logistics coordination with PRC and transport/logistics operators

Poor transport infrastructure and outdated technology and sector management

Delays at border crossings; limited intermodal capability; lack of inland container port

Limited managerial capabilities for logistics facilitation, inadequate human resources development, and inconsistent application of regulations

Inefficient coordination among Quarantine,

Customs, Immigration, and Security services

Inefficient border and transit operations

Outdated/ Inadequate

logistics facilities and equipment

Lack of coherent

Urban Master Planning

High Transport and Trade Costs; Congestion at the Border and along Existing Roads; Unsafe Driving Conditions along ZU Roads

Source: Consultant.

16

58. Compounding the existing weaknesses, is the challenge of integrating transport and trade facilities, policies and procedures into efficient trans-border intermodal operations. Developing the Zamyn Uud Logistics Center will be a major step towards this integration. But building the facility will need to be followed up by firm commitments to intermodalism and a seamless border crossing by a range of agencies and other players/stakeholders.

B. DESCRIPTION OF THE PROJECT

59. The proposed Project is the construction of the intermodal Logistics Center in Zamyn Uud (ZULC). It will be located approximately 9 km from the border crossing with China, 5.7 km from Zamyn Uud town, and 5 km from the existing UBTZ freight Terminals 1 and 2. The Project will be a 96.1 ha (78.3 for the terminal, 11.8 ha for Customs and other facilities, 6 ha for truck waiting area) site, which will be part of the larger Mongolian Railway Authority (MRA) site of 288 ha that is planned as the Intermodal Freight Terminal and Logistics Center (IFTLC), which consists of the ZULC for container and general cargo operations and a freight terminal for bulk cargo operations. The Project site is approximately 2.2 km from the ADB-funded Regional Road Project under Loan No. 2087-MON ($37.1 million, approved on 22 July 2004, supplemented by Loan 2621-MON for $8 million and Grant 43170-01 for $16 million approved on 30 March 2010), which is the main north-south road connecting Mongolia with China, and is CAREC Corridor 4-b.

60. The Project site has been carefully selected to ensure that it does not conflict with current and future land uses in the area including the projected rapid growth of the town, and will be able to meet the demands for intermodal transport as Zamyn Uud’s and Mongolia’s economies expand. Site selection is a critical consideration because Mongolia is entering a period when large minerals deposits will be developed and the economy will rapidly increase to double its current size over the next 5 years with a subsequent doubling forecast by 2020. Given that Zamyn Uud is Mongolia’s main gateway to the rest of the world, the implications in terms of transport and trade are obvious: the selected site must meet not only current needs but also those resulting from a much larger and higher income economy.

61. The Logistics Center will include (see Section 4 for more details):

connecting rail lines in Standard (1,435 mm used in China) and Russian (1,520 mm used in Mongolia) gauges;

cargo transfer platforms adjoining the rail lines;

storage areas adjacent to the platforms;

an administration building;

facilities for Customs, Health, and Quarantine inspections and processing;

area for the development of warehouses by private sector shippers and logistics operators;

pre-entrance waiting area for trucks;

17

area for the development of light manufacturing plants (23 ha set aside);

cargo handling equipment (e.g., reach-stackers, gantry cranes, yard chasses and tractors, forklifts, etc);

IT systems and software that enable efficient management of cargoes and operations; and

2.2 km road and overpass bridge connecting the Logistics Center to the Regional Road.

62. The Logistics Center will be owned by the Government of Mongolia, the operator will be a private company selected through international competitive bidding (ICB), and the warehouses and manufacturing plants will be developed by the private sector. As such, the Logistics Center will represent the type of public-private partnerships that are needed to improve efficiencies in the transport and logistics sectors in Mongolia. Equally important is the Project’s envisaged reduction of border congestion which is stifling efficient movement of trucks across the border.

63. The estimated cost of the proposed Project is shown in Table 2.1. Costs include base cost for track, roads, utilities, buildings, and all parts, materials, installation, engineering and construction. The total estimated cost of the Project is $ 71.64 million inclusive of physical and price contingencies, import taxes and duties, and interest during construction (IDC). ADB is preparing the Project with a loan of $40 million and grant of $5 million.

C. PROJECT RATIONALE

64. The rationale for the Project reflects (i) Government policies to promote and develop efficient intermodal/multimodal transport logistics centers, (ii) the critical role of Zamyn Uud in Mongolia’s trade-dependent economy and the current border congestion, (iii) the recognition that Mongolia’s transport and logistics infrastructure must be upgraded to world standards in order for the economy to grow and poverty reduced, and (iv) the need to involve the private sector in the successful upgrading of the transport and logistics sectors.

65. With respect to the above rationale, key MRTCUD objectives that span all transport subsectors include the development of intermodal/multimodal terminals and logistics centers, as well as to improve the ability of Mongolia’s transport infrastructure to accommodate transit traffic. All modes of transport should be harmonized, thereby promoting the development of intermodal and multimodal transportation.16 These objectives are further expanded upon in the soon-to-be-published National Transport Strategy (NTS). To assist in the accomplishment of these goals, a Transport and Trade Facilitation Committee (MNTTFC) was established in 2007 in order to coordinate all activities related to transport, logistics, and trade on a country-wide basis. The Committee, chaired by the Minister of MRTCUD, is made up of 25 individuals representing relevant Ministries and government agencies, as well as the private sector.

16 J. Bat-Erdene. 2008. Speech – Transport Sector Working Group. Ulaanbaatar.

18

Table 2.1: Detailed Cost Estimates by Expenditure Categorya

Foreign Local Total Foreign Local TotalItem Exchange Currency Cost Exchange Currency CostA.

1 Track Materials 5,906.4 656.3 6,562.7 8,753.3 972.6 9,725.9 9.22 Trackwork 1,444.5 963.0 2,407.4 2,140.7 1,427.1 3,567.8 3.4

3 Pavement 8,707.6 2,176.9 10,884.5 12,904.7 3,226.2 16,130.9 15.24 Lighting 476.0 119.0 595.0 705.5 176.4 881.8 0.85 Safety and Security 3,103.0 344.8 3,447.8 4,598.6 511.0 5,109.6 4.86 Buildings 2,414.6 1,609.8 4,024.4 3,578.5 2,385.7 5,964.2 5.67 Facilities 224.5 143.6 368.1 332.8 212.7 545.5 0.58 Sitework, Cleaning, and Earth Works 495.89 1,983.6 2,479.5 734.9 2,939.7 3,674.6 3.59 Site Utilities (Electric, Water, F/O Communication Lines) 1,222.9 305.7 1,528.6 1,812.3 453.1 2,265.4 2.110 Access Road and Bridge 5,353.0 2,294.1 7,647.1 7,933.2 3,399.9 11,333.1 10.711 Terminal Equipment 17,679.2 546.8 18,225.9 26,200.5 810.3 27,010.8 25.412 Environmental Mitigation 126.3 422.7 549.0 187.1 626.5 813.6 0.8

47,153.9 11,566.2 58,720.1 69,882.1 17,141.1 87,023.2 82.0

B. 1,558.2 1,038.8 2,597.0 2,309.2 1,539.5 3,848.7 3.6

C. Contingencies 1 Physicalb 2,646.5 649.1 3,295.6 3,922.0 962.0 4,884.1 4.62 Pricec 3,113.9 2,546.0 5,659.9 4,614.8 3,773.2 8,388.0 7.9

Subtotal (C) 5,760.4 3,195.1 8,955.5 8,536.9 4,735.2 13,272.1 12.5

D.

1 1,366.4 0.0 1,366.4 2,025.0 0.0 2,025.0 1.92 0.0 0.0 0.0 0.0 0.0 0.0 0.03 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtotal (D) 1,366.4 0.0 1,366.4 2,025.0 0.0 2,025.0 # 1.955,838.9 15,800.1 71,639.0 82,753.2 23,415.8 106,169.0 100.0

a

b

c

d

Commitment ChargesFront-end Fees

Total Project Cost (A+B+C+D)

Base costs are in July 2010 market prices and include local taxes, duties, and license fees estimated at $3.595 million.

Source: Consultant.

Physical contingency is estimated at 6% of subcomponents A.1 to A.11

Price contingency for local currency costs based on 10% for 2011-2015. For foreign exchange components based on 3% for 2011-2014.

Interest during implementation is based on ADB ADF rate of 1% during implementation; 0.15% commitment fee; front-end fee is waived.

% of Total Base Cost

Financing Charges During Implementationd

Interest During Implementation

Base Costs

Subtotal (A)Project Management and Consulting Services for Implementation

US$ (thousand) MNT (million)

19

66. On 14 May 2008 the Government adopted Resolution No. 183 and approved the national program “Transit Mongolia” and its Action Plan for implementation (see Appendix 2-A). Transit Mongolia is the first attempt by the Government to develop a key regional asset (the country’s favorable geographic location) in a coordinated manner with MRTCUD acting as the implementation lead agency. In the Background section of the Transit Mongolia program the Government acknowledges the following:

“In current times of globalization, using its geographic privileges Mongolia can benefit by becoming a transit country through being part of an integrated network of international trade, transport and logistics, and thus by implementing certain activities to increase its competitiveness in international trade, transport and logistics markets, accelerating its economic growth and resolving many outstanding economic and social issues.”

67. The core policy of Transit Mongolia is to create conditions for the nation to be become “land-linked” rather than “land-locked”. In the CAREC Ministerial Conference (MC) held in Baku, Azerbaijan on 21 November 2008, the then 8 member countries of CAREC17 supported by 6 international organizations18 endorsed the Transport and Trade Facilitation Strategy (TTFS) and Action Plan for the 10-year period from 2009 to 2018. The projects endorsed by the MC for Mongolia are predominantly in multimodal transport and logistics. Thus, there is a confluence of objectives between the Government and the 8-member CAREC. This confirms the importance afforded to Mongolia’s potential as a transit gateway in the regional community and the high priority given to the development and implementation of regional logistics projects in Mongolia.

68. Mongolia is a landlocked country and as such faces greater transportation challenges than countries with their own seaports. Mongolia relies on its two large neighbors, the Russian Federation and the PRC, for access to seaports. In recent years, trade flows have been reoriented from the Russian Federation and most imports (over 80%) now come from the PRC, through the Zamyn Uud border point in southeast Mongolia. The bulk of Mongolia’s exports also pass through Zamyn Uud en route to Tianjin port, the only port in the PRC available to Mongolia for international trade. Moreover, Zamyn Uud is the only point on its border with the PRC where there are both road and rail connections, which extend north through the capital, Ulaanbaatar, and then on to the Russian Federation.

69. The critical role of Zamyn Uud as Mongolia’s main connecting point with the rest of the world has resulted in marked increases in traffic that have led to considerable congestion at the border and in holding areas on the Mongolian side. For example, prior to the global economic crisis in late 2008, there were a reported approximately 200 large trucks per day waiting in UBTZ Terminal 3 to discharge construction and building materials for destinations beyond Zamyn Uud. From 2003 to 2009, the number of persons passing through the Zamyn Uud border more than doubled to over 1.5 million per year.

17 In November 2010 Pakistan and Turkmenistan have been added to the membership of CAREC. The other 8 members are Afghanistan, Azerbaijan, PRC, Kazakhstan, Kyrgyz Republic, Mongolia, Tajikistan, and Uzbekistan. 18 ADB, World Bank, European Bank for Reconstruction and Development, Islamic Development Bank, United Nations Development Programme, and the International Monetary Fund.

20

70. The Project will greatly alleviate this congestion because all rail and truck (greater than 1 ton) will utilize the Logistics Center for entry into Mongolia. The current border facilities will be used by pick up trucks (less than 1 ton), 4-wheel drive vehicles, passenger cars and foot traffic. This arrangement will reduce congestion and waiting times for all freight and passengers passing through the border, and this will facilitate further trade and job creation in Zamyn Uud. Importantly, the border facilities (Customs, Health, Quarantine) at the Logistics Center will enable the use of the single-window/single facility concept that will reduce waiting and processing times, which will be a further boost to facilitating trade.

71. Moreover, it is especially important that the Logistics Center be designed for the rapid but systematic and thorough processing of goods because of the traffic increases that will result from the economy’s rapid expansion over the next decade based on the exploitation of large minerals deposits. Although some of the minerals products may be exported by routes not passing through Zamyn Uud, the growing economy and rising incomes will result in more goods passing through it.

72. In order to meet this increased demand, the Logistics Center will be based on designs that incorporate global best practices for intermodal logistics including integrated management information systems, cargo handling technologies, and storage (e.g., utilities and plugs for refrigerated containers) in marked contrast to current facilities that are inadequate in terms of size, technologies and operating processes. By utilizing these global best practices, Mongolia will be demonstrating its commitment to upgrade its transport infrastructure and logistics, and working towards its goal to become one of Asia’s most efficient countries for logistics in contrast to its current very low ratings on the World Bank’s logistics performance index. To not take these steps would be a signal to potential investors and businesses that transport costs and logistics inefficiencies will continue to increase, which would come at great cost to the country’s development and poverty reduction.

73. In order to increase efficiencies and provide mechanisms to positively affect transport costs, the private sector has to actively participate in the development and operation of ZULC. Globally, the private sector has clearly demonstrated that it understands logistics and the processes required to move goods efficiently. This track record is unchallenged. The private sector’s expertise will be brought into the Logistics Center through terminal management contracts and through the privately-financed development of associated warehouses and other facilities. This will be essential for establishing the ZULC as a modern competitive operation that enables sustainable, cost-effective, and efficient movement of cargo into, out of, and through Mongolia.

74. Once established as Mongolia’s leading logistics operation, the ZULC will serve as a model for the future development of logistics centers in Ulaanbaatar, Altanbulag, and other locations in the country. Thus, the future development of logistics in Mongolia is directly linked to the successful establishment of world class operation in Zamyn Uud.

D. DESIGN AND MONITORING FRAMEWORK

75. The primary goal of the Project is to create the conditions that will (i) enable improvements in the efficiencies and handling of multimodal cargoes, thereby positively impacting transport costs and travel times, (ii) reduce bottlenecks at the border, thereby facilitating trade and reducing transaction cost, (iii) generate sustainable employment in

21

Zamyn Uud that will lead to rising incomes and poverty reduction, and (iv) serve as a model for future development of logistics centers in other areas in Mongolia. The ZULC is an integral part of the Mongolia Regional Logistics Strategy. The close similarity between current conditions in Zamyn Uud (Figure 2.1) and Mongolia with respect to logistics challenges and opportunities is evident. The ZULC as an integral part of the Regional Logistics Strategy is focused on addressing the same issues as the national framework in Zamyn Uud.

76. Table 2.2 presents the Design and Monitoring Framework for the Project. It provides the basic design of the Project in terms of its intended macro and micro impacts, outcomes, outputs and activities (or inputs). The framework clearly identifies the goals and purposes of the Project. It also allocates measurable and/or tangible performance indicators. The framework also identifies the outputs of the Project and the necessary activities that will enable achievement of the proposed immediate purpose, which in turn lead to longer-term objectives or goals.

Table 2.2: Design and Monitoring Framework of ZULC Project

Design Summary

Performance Targets and Indicators

Data Sources and Reporting

Mechanisms Assumptions and

Risks Impact An efficient and competitive regional transport is developed in Mongolia

MON international trade is forecast to increase by 100% in 2020 compared with 2009. PRC-MON trade is forecast to increase from its 2009 level to 120% in 2020

MRTCUD statistics and operating data before and after the project Post-evaluation surveys and reports from MRTCUD.

Assumptions Traffic forecasts

realized Associated

facilities and infrastructure are developed.

Outcome An efficient, competitive and reliable multimodal transport network developed and operated in Zamyn Uud.

Freight traffic handled at Zamyn Uud is increased by 80% by 2018 compared with 2009 Container traffic volume is increased by 100% by 2018 compared with 2009. Waiting time at Zamyn Uud reduced by 50% in 2018 compared with 2009.

MRTCUD statistics Post evaluation surveys and reports from MRTCUD

Assumptions Traffic forecast for

Zamyn Uud are realized

Shippers and freight operators realize the benefit of using the facility

Outputs 1. A multimodal facility complete with facilities for road to road, road to rail, and rail to rail transshipment is

Multimodal facility starts operation by December 2015

Project administration missions and project completion report

Assumptions Funds are

provided in a timely manner by the Government

.

22

developed at Zamyn Uud.

2. Terminal equipment and management systems are procured and installed. 3. Strengthened institutional capacity.

Procurement and installation is completed by June 2015 Capacity development support for project implementation and management contract is completed by June 2015

Progress reports and PCR Consultants reports and progress reports

Activities with Milestones

1. Civil works and buildings; contract awarded by December 2012 and completed by December 2014.

2. Materials and equipment procured by December 2014.

3. Track laying completed by December 2014.

4. Equipment and communication facilities completed by June 2015.

5. Consulting services completed by June 2015.

6. Management Contract: started by July 2015.

Inputs

- ADB: $45 million

- Government: $26.6 million

III. TRAFFIC PROJECTIONS

A. TRADE CLEARED THROUGH ZAMYN UUD CUSTOMS

77. The primary objective of the proposed ZULC is to improve logistics performance and reduce congestion at the Mongolia-PRC border crossing in Zamyn Uud. As such, the traffic forecast through the ZULC is based on the cross border trade in Zamyn Uud. In this respect, two types of trade flows are relevant for forecasting traffic volume through the ZULC:

Trade flows which are cleared through the Customs Office in Zamyn Uud. These flows are mainly cargo passing through the border facilities by road. Imports are cleared for final entry into Mongolia through the Customs Office in Zamyn Uud. Also exports to PRC are cleared by the same office.

Trade flows which pass through the Customs Office in Zamyn Uud and move to ultimate destination under bonded transport. The national rail carrier, UBTZ is entitled to move inbound freight from PRC under Customs bond for final clearance in Ulaanbaatar (UB) or any other city in Mongolia where there is a local Customs office. Also exports by rail to PRC can complete export clearance formalities in UB and move by UBTZ under bond to PRC. The goods in this type of bonded transport are not subject to

23

final clearance (export or import) in Zamyn Uud and therefore, do not involve physical handling (loading, unloading) other than intergauge transfer. Under interline agreements between UBTZ and China Railways (CR) export freight in wagons pass through the border into China in Russian gauge for inter-gauge transfer to Chinese standard gauge at CR’s facilities in Erenhot. The reverse is true for imports from PRC by rail where the gauge change is done at UBTZ facilities in Zamyn Uud. Since most of this cargo in either direction does not leave the custody of UBTZ, wagons move under bond to PRC or UB. Only a small fraction of cross-border rail movements are subject to customs clearance in Zamyn Uud and can be a traffic potential for the ZULC.

78. In this Section, trade cleared through Customs in Zamyn Uud will be analyzed first, followed by freight moved by rail under bond.

79. Trade statistics obtained from the Mongolian Customs Authority (MCA) for the years 2006 to 2009 were analyzed with respect to the type of commodity, transport mode, and trade direction. Table 3.1 shows a summary of the records by trade direction and mode of arrival. As shown in the table, trade movements by rail which are captured by the Customs records in Zamyn Uud are relatively small compared to movements by truck.

2006 2007 2008 2009

Arrival by truck 1,001 946 2,423 1,187Arrival by Rail 88 237 535 246Containers (arrival by truck) 86 371 696 371

Sub-total 1,175 1,554 3,654 1,804

Arrival by truck 236 151 343 218Arrival by Rail 45 53 69 59Containers (arrival by truck) 30 20 19 26

Sub-total 311 224 431 303Total Records 1,486 1,778 4,085 2,107

Table 3.1: Number of Foreign Trade Records of Commodities Cleared Through Customs in Zamyn Uud

Imports:

Exports:

Source: Compiled by Consultant from Mongolian Customs Authority data in Supplementary Volume II, Appendixes 3-A to 3-D.

80. It should be noted that the foreign trade records do not provide an indication of the number of transactions. A record typically represents a crude classification of commodities by type. More frequently traded commodities may be summarized in more than one record. The number of commodities actually traded is somewhat less than the number of records due to this duplication.

81. Table 3.2 provides a summary of the foreign trade records included in Supplementary Volume II, Appendixes 3-A to 3-D. It should be emphasized that the data in Appendixes 3-A to 3-D and summarized in Table 3.2 only represent the trade volume cleared through customs for import or export in Zamyn Uud. UBTZ as the national railway provides customs-bonded rail transport between Zamyn Uud and Ulaanbaatar and most of the foreign trade by rail pass through Zamyn Uud without customs clearance. Therefore, the trade statistics reported by the Zamyn Uud Customs do not capture most railway traffic by UBTZ which are cleared in Ulaanbaatar or move in transit

24

between PRC and RF. This trade will be covered separately in the traffic forecast for ZULC.

82. With respect to foreign trade moving across the border by rail, Table 3.2 shows only goods cleared for import or export in Zamyn Uud. Therefore, it is substantially lower than the actual railway traffic moving across the border. This is also true for the summary number of records shown in Table 3.1 above, since truck-related records are substantially higher than rail-related records and container-related data rarely includes arrivals by rail. For example, of the 371 records of imports in containers cleared in Zamyn Uud in 2009 reported in Table 3.1, all arrived by truck and none involved onward shipment by rail. In the same year, of the 26 records of exports in Table 3.1, which arrived in Zamyn Uud Customs for clearance, only one (with net weight of 1.5 tons or 0.35%) involved onward shipment by rail. With respect to foreign trade moving across the border by truck, however, the Zamyn Uud Customs statistics summarized in Table 3.2 represent an accurate picture of actual trade volumes.

83. From Table 3.2, the following general observations can be made:

Trade handled through Zamyn Uud Customs is highly imbalanced. In terms of weight, the ratio of imports to exports was 23:1 in 2006 and 2008; 10:1 in 2007; and 9:1 in 2009.

In terms of value, the ratio ranges from 5:1 to 8:1, resulting in a higher value per ton for exports compared to imports. In fact, the average value per ton of exports is higher than imports by a range from 17% (in 2009) to 301% (in 2006). Considering that Mongolian exports are mostly raw materials, animal products, and scrap metals compared to imports of mostly consumer goods and finished products, the higher average value per ton for exports is unexpected.

With respect to trade in containers, trade imbalance is much more pronounced: In terms of weight it ranged from 4:1 in 2006 to 935:1 in 2009. The principal reason for this unusual trend is the extraordinary surge in imports of commodities in containers in 2008 (at 884 thousand tons, 11 times more than the previous year), which was somewhat decreased in 2009 to 399 thousand tons, but has still remained considerably higher than the 2006 and 2007 volumes of 18,641 and 75,149 tons, respectively. The 2008 surge of imports in containers was principally due to construction materials with cement (492 thousand tons accounting for 56% of imports in containers) taking the lead. The high proportion of cement imports in containers continued into 2009 with 211 thousand tons accounting for 53% of imports in containers in that year.

In terms of value, the general observation made above for the total trade is also more pronounced in trade in containers where the ratio ranges from 1:1 in 2006 to 148:1 in 2009. As a result, the average value of exports in containers is higher than imports by a range from 66% in 2007 to 683% in 2008. Considering that most exports in containers are coal, animal products, and waste materials (plastic, paper, scrap metal, etc) with garments only appearing in 2009, the higher average value per ton for exports in containers is also unexpected.

25

2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009

By truck 408,043 263,165 330,485 230,382 145,534 166,155 287,536 177,412 356.66 631.37 870.04 770.08By rail 34,787 22,647 45,051 79,436 8,031 13,832 42,096 26,877 230.86 610.75 934.42 338.35Containers 18,641 75,149 883,960 399,083 3,050 40,139 152,203 76,882 163.61 534.12 172.18 192.65Total Imports 461,471 360,961 1,259,496 708,901 156,615 220,126 481,836 281,171 339.38 609.83 382.56 396.63

By truck 6,957 3,781 4,752 6,020 12,308 14,926 17,746 2,056 1,769.14 3,947.95 3,734.25 341.56By rail 8,567 26,653 47,859 71,582 11,664 24,922 42,284 33,550 1,361.47 935.04 883.51 468.69Containers 4,272 4,394 1,085 427 2,953 3,892 1,463 519 691.30 885.82 1,348.15 1,217.03Total Exports 19,796 34,828 53,697 78,028 26,925 43,740 61,493 36,125 1,360.10 1,255.90 1,145.20 462.97

By truck 415,000 266,946 335,237 236,401 157,842 181,082 305,282 179,468 380.34 678.35 910.65 759.17By rail 43,354 49,300 92,910 151,018 19,695 38,753 84,381 60,427 454.28 786.07 908.20 400.13Containers 22,913 79,543 885,045 399,510 6,003 44,031 153,666 77,401 262.00 553.55 173.63 193.74Total 481,267 395,789 1,313,192 786,929 183,540 263,866 543,329 317,296 381.37 666.68 413.75 403.21

Imports:

Source: Compiled by Consultant from Appendixes 3-A to 3-D.

Net Tons Value (US$, Thousand) Average Value Per Ton (US$)

Total Trade:

Exports:

Table 3.2: Foreign Trade Cleared Through Zamyn Uud Customs, 2006-2009

All Commodities:

26

The surge of imports of construction materials in containers in 2008 and 2009 occurred at a time when the global economy was experiencing a crisis. During this time period Mongolian constant GDP increased by 7.3% (growth of 8.9% in 2008, followed by a contraction of 1.6% in 2009). In 2008 construction increased by 30%. Based on the expected increase in mining as a result of the signing of the Oyu Tolgoi Mining Agreement in September 2009 and the more recent changes in the mining legislation, construction sector is expected to continue growing in the future. This trend will result in imports of more construction materials through Zamyn Uud.

84. A detailed analysis was made of the trade records included in Appendixes 3-A to 3-D with respect to estimating the potential container volume from the actual trade data. For each commodity a determination was made as to whether it is or can be unitized into packages and pallets so that it can be stowed into containers to achieve more efficiency and reduced cost in transport. Bulk cargo such as coal and minerals although currently shipped in containers in small volumes were not included in this selection. Table 3.3 shows the number of records found to be “containerizable” commodities.

85. From comparison of the number of records between Table 3.1 and 3.3, it is evident that most commodities included in Appendixes 3-A to 3-D, which did not move in containers could indeed be containerized. Based on this analysis, the total 2006-2009 trade handled by Zamyn Uud Customs that could have been in containers has been estimated as shown in Table 3.4. It should be emphasized that the table shows the maximum container potential of the trade data detailed in Appendixes 3-A to 3-D. In reality only a portion of this potential is expected to be achieved because the particular characteristics of each trade transaction such as shipment size and weight, delivery commitment, etc. would dictate whether containerization is possible.

2006 2007 2008 2009

Arrival by truck 895 840 2,075 999Arrival by rail 71 203 464 243

Sub-total 966 1,043 2,539 1,242

Arrival by truck 201 112 296 179Arrival by rail 36 52 56 47

Sub-total 237 164 352 226Total Records 1,203 1,207 2,891 1,468Source: Compiled by Consultant from Appendixes 3-A to 3-D.

Table 3.3: Number of Foreign Trade Records of Commodities which can be Handled in Containers

Imports:

Exports:

86. Table 3.4 shows containerizable trade for dry and refrigerated commodities separately. Trade in fresh fruit and vegetables and meat products through Zamyn Uud have been increasing, averaging 100 tons per day in 2009. This is a large enough volume justifying investment in a cold storage and consolidation facility at the ZULC to assure product quality until it reaches the consumer at final destination.

27

Dry Cargo

Refrigerated Cargo

TotalDry

CargoRefrigerated

CargoTotal Dry Cargo

Refrigerated Cargo

TotalDry

CargoRefrigerated

CargoTotal

By truck 340,727 27,599 368,326 192,601 20,159 212,759 220,034 32,620 252,654 153,950 33,128 187,078By rail 32,592 24 32,617 17,420 149 17,569 4,630 566 5,195 38,359 970 39,329Containers 18,641 75,149 883,960 399,083Total Imports 373,320 27,623 419,584 210,020 20,308 305,477 224,664 33,185 1,141,809 192,309 34,098 625,490

By truck 4,694 153 4,847 772 35 808 1,082 149 1,231 1,166 44 1,209By rail 7,556 182 7,738 25,812 782 26,595 33,778 1,423 35,202 21,901 1,519 23,420Containers 4,272 4,394 1,085 427Total Exports 12,250 335 16,857 26,585 818 31,796 34,860 1,573 37,518 23,067 1,563 25,057

By truck 345,421 27,752 373,173 193,373 20,194 213,567 221,116 32,769 253,885 155,115 33,172 188,288By rail 40,148 206 40,354 43,232 931 44,163 38,408 1,989 40,397 60,261 2,489 62,749Containers 22,913 79,543 885,045 399,510Total 385,569 27,958 436,441 236,605 21,125 337,273 259,524 34,758 1,179,327 215,376 35,661 650,547

Table 3.4: Potential Trade in Containers for Commodities Cleared Through Zamyn Uud Customs, 2006-2009 (Net Tons)

Source: Compiled by Consultant from Appendixes 3-A to 3-D.

2006 2007 2008Containerizable Commodities:

2009

Total Trade:

Exports:

Imports:

28

87. With respect to dry cargo, the Table shows that in addition to 399,510 tons of goods handled at Zamyn Uud Customs in containers in 2009, a potential exists for an additional 215,376 tons of goods in containers.

1. Normal Traffic

88. The volatility of container cross-border trade by road during the last 4 years make it difficult to make growth assumptions for future years. One general trend, however is that trade in containers has been increasing. Annually this increase averaged about 400% from 2006 to 2009. However, the decrease of 55% in 2009 from 2008 does not conclusively establish a solidly rising trend. The surge in 2008 could be regarded as an anomaly in the long-term trend caused by a huge increase in imports of construction materials. However, in the near future with the increase in mining sector investments, particularly in the South Gobi region, a similar growth experience could be expected.

89. Table 3.5 presents the container trade projections passing through the border by truck. The operating conditions described in detail in Section 4 of this report show that trucks arriving from PRC with containers will be directed to the ZULC for clearance and any logistics arrangements for onward transport to final destination in Mongolia. In the same manner, trucks carrying containers for export to PRC will clear Customs at the ZULC and move to the border for passage to China. To accomplish this operational improvement, thereby reducing congestion at the border and improving processing time, the Mongolian Customs Authority (MCA) indicated that the section of the Regional Road between the ZULC and the border will be designated as a Customs Road. Appropriate check points along this road will be implemented by MCA in coordination with other agencies to assure compliance to Mongolian Laws and avoid driver error in exiting at the wrong ramps.

90. The projections included in Table 3.5 comprise normal traffic since they represent existing imports and exports in containers passing by road through the ZU border. The operational improvements represented in the Project’s design described in Section 4 would shift the Customs and quarantine transactions for these containers away from the currently congested border post area to the new ZULC.

91. The projections in Table 3.5 assume the import volume in the base year (2010) at the same level as 2009. This level is less than one-half of the 2008 imports of containers by road (see Table 3.4 above). In fact under the growth rates assumed, it will take 7 years to the year 2020 to reach the 2008 container volume. Also the export projections in containers are estimated conservatively, beginning with 10,000 tons in the base year, reaching 14,600 tons in 2014, growing to 27,600 tons in 2020. At the end of the evaluation period (2033) import and export of containers by road for normal traffic is projected to reach 2.48 million tons and 102.5 thousand tons, respectively. The import:export trade ratio for normal traffic will slightly improve from 40:1 in 2010 to 24:1 in 2033. This, however, still represents a significant imbalance.

29

Import Export Total Import Export TotalBase year 2010

400.0 10.0 410.0 31.3 0.8 32.0

2014 544.2 14.6 558.8 42.5 1.1 43.72015 593.2 16.3 609.4 46.3 1.3 47.62016 646.6 18.0 664.6 50.5 1.4 51.92017 704.7 20.0 724.8 55.1 1.6 56.62018 768.2 22.2 790.4 60.0 1.7 61.82019 837.3 24.7 862.0 65.4 1.9 67.32020 921.0 27.6 948.7 72.0 2.2 74.12021 1,013.1 30.9 1,044.1 79.2 2.4 81.62022 1,114.5 34.7 1,149.1 87.1 2.7 89.82023 1,225.9 38.8 1,264.7 95.8 3.0 98.82024 1,348.5 43.5 1,392.0 105.4 3.4 108.72025 1,442.9 47.8 1,490.7 112.7 3.7 116.52026 1,543.9 52.6 1,596.5 120.6 4.1 124.72027 1,652.0 57.9 1,709.8 129.1 4.5 133.62028 1,767.6 63.7 1,831.3 138.1 5.0 143.12029 1,891.3 70.0 1,961.4 147.8 5.5 153.22030 2,023.7 77.0 2,100.8 158.1 6.0 164.12031 2,165.4 84.7 2,250.1 169.2 6.6 175.82032 2,317.0 93.2 2,410.2 181.0 7.3 188.32033 2,479.2 102.5 2,581.7 193.7 8.0 201.7

Table 3.5: Normal Traffic, Containers by RoadTons (Thousand) TEUs (Thousand)

Year

Source: Consultant

2. Diverted Traffic

92. Diverted traffic is represented by the volume of containerizable freight which would use containers, i.e. change from its general loose cargo packaging to ISO containers. Containerization is rapidly growing in the world with growth rates more than 9% annually. There are numerous advantages for use of containers with main reasons frequently cited as reduced handling and insurance cost, and reduction in cargo loss and damage. With the increasing awareness of shippers of the advantages offered by the ZULC (such as faster clearance of containers), it is expected that many commodities which are currently shipped as break bulk general cargo will shift to containers. The ZULC terminal operations contractor described in Section 4 will facilitate this shift since marketing and promoting ZULC will be included as an important responsibility under its contract with performance-based payment provisions. This shift will not be overnight, however. Many shippers do not ship in container loads and logistics companies which offer consolidation of multiple shipments in a single container are not yet widely established in Mongolia. ZULC’s design is directly dealing with this deficiency by encouraging establishment of logistics companies in the ZULC.

93. The diversion rates shown in Table 3.6 represent that portion of the containerizable traffic which can be captured as containerized freight. It is assumed that diversion will start at a modest level of 10% containerization in 2014 with annual increases of 2 percentage points, reaching 48% by 2033.

30

94. Based on these assumptions, Table 3.6 shows the annual diverted traffic estimates for cargo by truck passing through the ZU border post. The base year (2010) estimates for import and export containerizable traffic are based on the analysis described above and summarized in Table 3.4. The import:export trade imbalance reflected in the normal traffic (traffic already moving in containers) is also assumed for diverted traffic. The analysis of containerizable traffic shows that this traffic is roughly one-half of the existing containerized traffic.

Import Export Total Import Export Total Import Export TotalBase year 2010

200.0 5.0 205.0 N.A.

2014 272.1 7.3 279.4 10% 27.2 0.7 27.9 2.1 0.1 2.22015 296.6 8.1 304.7 12% 35.6 1.0 36.6 2.8 0.1 2.92016 323.3 9.0 332.3 14% 45.3 1.3 46.5 3.5 0.1 3.62017 352.4 10.0 362.4 16% 56.4 1.6 58.0 4.4 0.1 4.52018 384.1 11.1 395.2 18% 69.1 2.0 71.1 5.4 0.2 5.62019 418.7 12.3 431.0 20% 83.7 2.5 86.2 6.5 0.2 6.72020 460.5 13.8 474.3 22% 101.3 3.0 104.4 7.9 0.2 8.22021 506.6 15.5 522.0 24% 121.6 3.7 125.3 9.5 0.3 9.82022 557.2 17.3 574.6 26% 144.9 4.5 149.4 11.3 0.4 11.72023 613.0 19.4 632.4 28% 171.6 5.4 177.1 13.4 0.4 13.82024 674.2 21.7 696.0 30% 202.3 6.5 208.8 15.8 0.5 16.32025 721.4 23.9 745.4 32% 230.9 7.7 238.5 18.0 0.6 18.62026 771.9 26.3 798.3 34% 262.5 8.9 271.4 20.5 0.7 21.22027 826.0 28.9 854.9 36% 297.4 10.4 307.8 23.2 0.8 24.02028 883.8 31.8 915.6 38% 335.8 12.1 347.9 26.2 0.9 27.22029 945.7 35.0 980.7 40% 378.3 14.0 392.3 29.6 1.1 30.62030 1,011.9 38.5 1,050.4 42% 425.0 16.2 441.2 33.2 1.3 34.52031 1,082.7 42.4 1,125.1 44% 476.4 18.6 495.0 37.2 1.5 38.72032 1,158.5 46.6 1,205.1 46% 532.9 21.4 554.3 41.6 1.7 43.32033 1,239.6 51.3 1,290.8 48% 595.0 24.6 619.6 46.5 1.9 48.4

Source: Consultant

Table 3.6: Diverted Traffic, Containers by Road

Year Containerizable Tons (Thousand)Containerized (Diverted) Traffic TEUs (Thousand)

Containerized (Diverted) Traffic (Thousand Tons)

Diversion Rate (%)

3. Generated Traffic

95. The design of ZULC described in Section 4 incorporates a comprehensive development strategy to encourage establishment of logistics companies as well as value added light manufacturing operations. Sufficient space has been reserved for private sector entities to lease land and build and operate their own facilities within the ZULC and the adjacent area designated for development. Table 3.7 summarizes the areas reserved for light manufacturing and logistics development by the private sector. The total land area reserved for this development is 48.26 ha, excluding the container yards, truck parking areas, equipment maintenance workshop, waste water treatment plant, auto parking areas, terminal building, road and rail infrastructure, and other facilities within the ZULC which add up to 53.05 ha and the adjacent Customs and Quarantine Center of 11.8 ha.

31

Phase 1 Phase 2 Phase 3

2014-2016 2017-2019 2020-2022

A. Inside the Terminal:

1. Container Yard and Platform Area

3 buildings East of Platform Tracks

28,350 24,750 28,350 81,450Repacking, repackaging, labeling, consolidation, freight forwarding, cold storage

2. Container Yard and Platform Area

3 buildings West of Platform Tracks

31,500 23,100 27,600 82,200Repacking, repackaging, labeling, consolidation, freight forwarding, cold storage

3. East Side of Terminal RoadReserved area for warehouses

22,950 22,950 45,900Repacking, repackaging, labeling, consolidation, freight forwarding, cold storage, light assembly

4. West Side of Terminal RoadReserved area for warehouses

21,500 21,500 43,000Repacking, repackaging, labeling, consolidation, freight forwarding, cold storage, light assembly

B. Adjacent to Terminal

1. West of ZULC fence, South of Pre-entrance Parking Area

Reserved Area for Light Manufacturing and Logistics Development

50,000 80,000 100,000 230,000

Light manufacturing and assembly, ZULC support services (hotel, restaurant, customs brokerage, insurance, banking, cargo inspection & certification, equipment sales and service, etc.)

Total 132,800 172,300 177,450 482,550Source: Consultant.

Table 3.7: Light Manufacturing and Logistics Development Areas in ZULC for Private Sector Investment

Total Area (sqm)

DescriptionLocation Primary Suitability

96. Pending the results of bidding for space by potential private sector investors/operators, it is not possible to accurately estimate the area which would be used for light assembly and manufacturing. However, the design has targeted one-half of the space primarily suitable for light assembly and manufacturing (locations A.3, A.4, and B.1 in Table 3.7) would be used by these establishments. The area used for this purpose is, therefore, estimated at 160,000 sqm.

97. Cargo volume intensity per sqm widely varies by the type of industry, type of technology (labor intensive vs automated operations), and other factors. Garment manufacturers average 3-5 tons per year per gross sqm, food canning 8-12 tons, and electronic assembly operations 5-8 tons. Assuming an average of 7 tons. The annual output would then be 1.12 million tons with the same volume as inbound inputs since none of these are weight-gaining (e.g. soft drink bottlers) or weight-losing (e.g. steel mills) industries.

98. Based on the above assumptions the generated traffic projections are summarized in Table 3.8 with the three-phase development planned for these facilities. It should be noted that the generated traffic estimates include both rail and road transport. Some manufacturers would prefer shipping by rail, while others would opt for road, and other would chose both depending on the nature of the cargo, shipment volume, delivery requirements, etc. Table 3.8 shows both total generated traffic and containerized generated traffic assuming a containerization rate of 30% in 2014 increasing to 49% by 2033.

B. TRADE THROUGH ZAMYN UUD UNDER BONDED TRANSPORT

99. Trade which moves through Zamyn Uud without Customs clearance in Zamyn Uud is by rail. This is because (i) the Regional Road connecting Zamyn Uud to UB is not yet completed resulting in very few road transport of cargo through the existing unimproved earth tracks; and (b) as a result of the first reason, all road transport companies currently operating in Zamyn Uud are small entities, which do not have

32

neither the financial capability nor sufficient road transport business between Zamyn Uud and UB to place a bond with the Mongolian Customs Authority (MCA).

Inbound Outbound Total Inbound Outbound Total Inbound Outbound TotalBase year 2010

N.A.

2014 182.4 182.4 364.8 30% 54.7 54.7 109.4 4.3 4.3 8.52015 273.6 273.6 547.1 31% 84.8 84.8 169.6 6.6 6.6 13.32016 364.8 364.8 729.5 32% 116.7 116.7 233.4 9.1 9.1 18.22017 493.5 493.5 987.0 33% 162.9 162.9 325.7 12.7 12.7 25.42018 740.3 740.3 1,480.5 34% 251.7 251.7 503.4 19.7 19.7 39.32019 987.0 987.0 1,974.0 35% 345.5 345.5 690.9 27.0 27.0 54.02020 797.3 797.3 1,594.5 36% 287.0 287.0 574.0 22.4 22.4 44.82021 1,195.9 1,195.9 2,391.8 37% 442.5 442.5 884.9 34.6 34.6 69.12022 1,594.5 1,594.5 3,189.0 38% 605.9 605.9 1211.8 47.3 47.3 94.72023 1,674.2 1,674.2 3,348.5 39% 652.9 652.9 1305.9 51.0 51.0 102.02024 1,757.9 1,757.9 3,515.9 40% 703.2 703.2 1406.3 54.9 54.9 109.92025 1,845.8 1,845.8 3,691.7 41% 756.8 756.8 1513.6 59.1 59.1 118.22026 1,938.1 1,938.1 3,876.2 42% 814.0 814.0 1628.0 63.6 63.6 127.22027 2,035.0 2,035.0 4,070.1 43% 875.1 875.1 1750.1 68.4 68.4 136.72028 2,136.8 2,136.8 4,273.6 44% 940.2 940.2 1880.4 73.5 73.5 146.92029 2,243.6 2,243.6 4,487.2 45% 1009.6 1009.6 2019.3 78.9 78.9 157.82030 2,355.8 2,355.8 4,711.6 46% 1083.7 1083.7 2167.3 84.7 84.7 169.32031 2,473.6 2,473.6 4,947.2 47% 1162.6 1162.6 2325.2 90.8 90.8 181.72032 2,597.3 2,597.3 5,194.5 48% 1246.7 1246.7 2493.4 97.4 97.4 194.82033 2,727.1 2,727.1 5,454.3 49% 1336.3 1336.3 2672.6 104.4 104.4 208.8

Source: Consultant

Table 3.8: Generated Traffic, Containers by Road and Rail

Year Generated (Thousand)Containerization

Rate (%)

Containerized Generated Traffic (Thousand Tons)

Containerized Generated Traffic TEUs (Thousand)

100. Traffic handled in Zamyn Uud by UBTZ from 2006 to 2009 is summarized in Table 3.9. The table provides the traffic statistics by type of freight and direction. Imports from PRC arriving by rail as well as imports arriving by road transloaded to rail have been steadily increasing. In particular, road to rail transloading is the largest share of UBTZ’s operations in Zamyn Uud accounting for almost 40% of UBTZ’s historical business since 2003. The reason for this high share is the lack of a hard surface road between Zamyn Uud and UB. The road to rail transloading is the only method for importers crossing the border by road to ship their goods domestically, principally to UB.

Table 3.9: Traffic Handled by UBTZ in Zamyn Uud

Type of freight

Unit Year

2003 2004 2005 2006 2007 2008 2009

Imported goods arriving by rail

No of Wagons 11,253 11,673 9,964 14,076 19,878 30,437

Thousand Tons 262.5 313.1 235.0 374.5 456.6 651.0

Containers (Boxes)

9,544 8,891 7,711 11,130 16,804 26,993

Imported goods arriving by road transloaded to rail

No of Wagons 10,635 14,904 18,596 21,354 24,566 25,842

Thousand Tons 350.2 423.3 557.7 638.0 771.9 1,035.3

Containers (Boxes)

6,492 10,552 13,230 14,893 15,517 12,531

33

Exported goods by rail

No of Wagons 206 264 544 1,325 983

Thousand Tons 2.6 4.2 8.4 26.5 17.1

Containers (Boxes)

226 172 177 378 153

Exported goods transloaded from rail to truck

No of Wagons

Thousand Tons 3.9 52.0 62.1 75.8 57.4 45.8

Containers (Boxes)

888 6,736 8,676 9,916 7,796 5,227

Transit freight

No of Wagons 3,374 3,055 6,454 8,309 9,864 7,250

Thousand Tons 191.2 178.2 360.3 461.7 516.6 381.2

Containers (Boxes)

570 283 639 365

Other freight

No of Wagons 5,471 9,142 9,226 11,080 10,463 7,030

Thousand Tons 160.5 192.1 222.7 277.6 267.5 211.5

Containers (Boxes)

14,696 17,750 21,930 25,524 25,485 18,080

Total

No of Wagons 30,733 38,980 44,504 55,363 66,096 71,542

Thousand Tons 968.3 1161.3 1442.0 1836.0 2096.5 2341.9

Containers (Boxes)

31,620 44,155 52,289 61,923 66,619 63,349

Source: Consultant from data provided by UBTZ.

101. The facilities used by UBTZ (Terminal 1 in Zamyn Uud) are old and all operations are manual. There has been no significant investment by UBTZ to improve cargo handling, and provide faster service to importers. Wagon availability is chronically low, with frequent waits of 5-7 days to load wagons for dispatch to UB. Despite frequent complaints from shippers and importers, UBTZ has not made any improvements in its facilities to accommodate user needs.

102. With the anticipated completion of the ADB-funded Regional Road between Sainshand and Zamyn Uud in 2013 and the Choir-Sainshand Road funded by a grant from the U.S. Millennium Challenge Corporation in the same year (2013) and given the inability of UBTZ to effectively respond to market conditions and shipper needs, it is certain that substantial freight now moving by rail will divert to road transport. When the rehabilitated road from Altanbulag to UB was completed in 2000, the railway experienced a loss of 32% in southbound traffic and 40% in northbound traffic within two years. Without adequate and efficiently managed logistics facilities in Zamyn Uud such as ZULC, which effectively respond to market needs, the history is certain to repeat along the rail corridor between Zamyn Uud and UB.

103. An interesting fact revealed by Table 3.9 is that cargo transloaded from rail to truck in Zamyn Uud, thus passing through customs by road to Erlian (39,240 boxes from 2003 to 2008), constitutes more than 53% of the cargo which arrive by road from Erlian and transloaded to rail (73,215 boxes). It can, therefore, be concluded that there is an

34

established intermodal transfer of cargo between rail and road in Zamyn Uud. In fact, the table reveals that 41% of UBTZ business in tons from 2003 to 2008 in Zamyn Uud was intermodal transfer between rail and road.

104. The table also reveals that containers are not typically used in transit trade between PRC and RF. Most transit trade is in bulk commodities not suitable for containerization. The trade imbalance between imports and exports by rail is also evident as in the case of road transport. In the case of rail the Import:Export ratio has been 39:1 during the 2003-2008 period.

105. A more detailed analysis was conducted of the data summarized in Table 3.9 to better understand the distribution of UBTZ’s business operations with respect to arrival/departure mode, type of freight, and the specific site where the rail-to-rail and rail-to-truck interface took place. Supplementary Volume I, Section 3, Figures 3.4 to 3.7 schematically depict the breakdown of total annual tons handled by UBTZ in Zamyn Uud for 2006 to 2009.

106. The following patterns can be observed from these figures:

Terminal 1, where rail-to-truck and truck-to-rail interface takes place for general cargo generally in box cars and transit bulk and non-bulk cargo is about one-half of the total freight volume handled by UBTZ in Zamyn Uud.

Transit volume through Terminal 1 is much larger than transit volume in Terminal 2 where containers are handled. Roughly for every one ton of transit freight handled in Terminal 2, Terminal 1 handles 6 tons. This shows that transit freight uses relatively few containers; it is mainly in box cars and bulk carriers. The gauge change from standard (Chinese) to broad (Mongolian) gauge of transit freight in Terminal 1 consists of manual unloading of cargo from Chinese wagons and loading in Russian wagons. This is a time consuming, tedious process prone to damage.

Exports arriving by rail dispatched to PRC by truck are 2 to 9 times higher than those dispatched to PRC by rail. This shows the preference of shippers to pass through the border by road than by rail due to delays in rail-to-rail transfer.

“Heavy freight” is defined by UBTZ as oversized and/or overweight cargo, which uses the crane to load/unload. However, the average weight per wagon for heavy freight ranges from 34 to 48 tons, which is lower than the average weight for domestic (43 to 46 tons) or transit (56 to 58 tons) wagons.

Freight handled in Terminal 2, where rail-to-rail and truck-to-rail (termed as “sorted out” by UBTZ) transfer of mainly containers take place, comprises the other half of UBTZ’s operations in Zamyn Uud.

The new Terminal 3 which has been active since 2008 for domestic shipments has a relatively small share of UBTZ freight operations in ZU. Whereas Terminals 1 and 2 have direct access to both standard and broad gauge tracks, Terminal 3 is on the UBTZ mainline and is primarily designed for domestic freight. Its utility for international freight operations is, therefore, limited.

35

In Terminal 2 domestic trade in box cars (rail-to-rail transfer of imports from China) is relatively small accounting for approximately 10% of Terminal 2’s volume.

Transit trade of containers (rail-to-rail transloading from standard to broad gauge from Chinese-owned to Russian-owned flat cars) also comprises a small share of Terminal 2’s operations, accounting for 4% to 7% of the annual freight handled in Terminal 2.

13% to 20% of Terminal 2 freight consists of cargo arriving by truck from PRC transloaded to rail boxcars or containers for shipment domestically principally to UB. This road-to-rail transfer in Terminal 2 is an inefficient utilization of Terminal 2’s layout, which consists of a narrow platform with the standard gauge track on one side and the broad gauge track on the other. The platform and the track configuration of Terminal 2 was intended for rail-to-rail transfer of containers by reach stackers. The narrow platform does not have sufficient space for road-to-rail transfer and if used for this purpose the congested space would interfere with efficient operations of rail-to-rail transfer of containers.

65% to 70% of Terminal 2 freight is containers (rail-to-rail, road-to-rail, and rail-to-road). It has handled 53 thousand to 56 thousand boxes.

In 2007 and 2008 a box represented a mixture of 31% 20-foot equivalent units (TEU) and 69% 40-foot equivalent units (FEU). Based on this mixture, the number of containers handled in Terminals 1 and 2 totaled 111,506 TEUs. The corresponding TEUs in 2008 were 106,403. The average cargo weight per TEU in 2007 was 6.7 tons and in 2008 it was 7.3 tons, considerably less than the worldwide average weight of 12.8 tons per TEU. The reason for this low weight is that the number of boxes reported in UBTZ statistics include empty containers being returned to China and international shipping lines/customers. UBTZ reported that in 2007, about 48% of boxes were empty containers. In 2008 this figure was 43%.

1. Normal Traffic

107. Table 3.10 presents the normal traffic projections in Zamyn Uud for containers by rail. The base year (2010) estimate is based on the average container trade volume handled by UBTZ during the last 4 years. The 2014 estimate assumes an annual growth of the base year volume of 8% in imports and 10% in exports. Imports are assumed to increase by 9% per year from 2015 to 2019; 10% from 2020 to 2024; and 7%, thereafter. The corresponding annual growth rates for exports are 11%, 12%, and 10%, respectively. The higher growth rates until 2024 assume the accelerated development of the Tavan Tolgoi and Oyu Tolgoi area, and development of Sainshand as an integrated industrial center, all of which will cause an increase in freight transport by rail to support construction and operation of new mines and industrial plants.

108. The normal traffic projections include only container transport. The TEU estimates are based on an average cargo weight of 12.8 tons. Therefore, TEUs in the table represent only loaded containers. Empty container volumes will be accounted for in the financial evaluation of the Project.

36

Import Export Total Import Export Total

Base year 2010

855.0 45.0 900.0 66.8 3.5 70.3

2014 1,163.2 65.9 1,229.1 90.9 5.1 96.0

2015 1,267.9 73.1 1,341.0 99.1 5.7 104.8

2016 1,382.0 81.2 1,463.2 108.0 6.3 114.3

2017 1,506.4 90.1 1,596.5 117.7 7.0 124.7

2018 1,642.0 100.0 1,742.0 128.3 7.8 136.1

2019 1,789.8 111.0 1,900.8 139.8 8.7 148.5

2020 1,968.7 124.3 2,093.1 153.8 9.7 163.5

2021 2,165.6 139.3 2,304.9 169.2 10.9 180.1

2022 2,382.2 156.0 2,538.1 186.1 12.2 198.3

2023 2,620.4 174.7 2,795.1 204.7 13.6 218.4

2024 2,882.4 195.7 3,078.1 225.2 15.3 240.5

2025 3,084.2 215.2 3,299.4 241.0 16.8 257.8

2026 3,300.1 236.7 3,536.8 257.8 18.5 276.3

2027 3,531.1 260.4 3,791.5 275.9 20.3 296.2

2028 3,778.3 286.5 4,064.7 295.2 22.4 317.6

2029 4,042.7 315.1 4,357.8 315.8 24.6 340.5

2030 4,325.7 346.6 4,672.3 337.9 27.1 365.0

2031 4,628.5 381.3 5,009.8 361.6 29.8 391.4

2032 4,952.5 419.4 5,371.9 386.9 32.8 419.7

2033 5,299.2 461.3 5,760.6 414.0 36.0 450.0

Tons (Thousand) TEUs Loaded (Thousand)

Source: Consultant

Table 3.10: Normal Traffic, Containers by Rail

Year

2. Diverted Traffic

109. The diverted traffic projections shown in Table 3.11 represent a portion of the general cargo currently handled in box cars at Zamyn Uud in domestic shipments of exports to and imports from PRC. For example, in 2008 Terminal 1 handled 592.4 thousand tons in box cars and Terminal 2 handled 98.3 thousand tons. In addition, one-half of “sorted out” cargo, or 105.4 thousand tons, was loaded from trucks to rail box cars for shipment to domestic destinations. This type of freight is containerizable in light of the shortage of box cars and abundance of empty containers. It is assumed that initially 10% of this traffic would divert to containers. The diversion rate is assumed to increase at the rate of 2 percentage points reaching 48% by 2033.

110. The annual growth rates of containerizable freight are assumed at the same rate as normal traffic because diverted freight by definition represents diversion from the normal traffic. As was done for the projections of normal traffic, the TEU estimates are based on an average cargo weight of 12.8 tons, thus representing loaded TEUs. Empty container volumes will be accounted for in the financial evaluation of the Project.

37

Import Export Total Import Export Total Import Export Total

Base year 2010

760.0 40.0 800.0

2014 1,034.0 58.6 1,092.5 10% 103.4 5.9 109.3 8.1 0.5 8.5

2015 1,127.0 65.0 1,192.0 12% 135.2 7.8 143.0 10.6 0.6 11.2

2016 1,228.5 72.2 1,300.6 14% 172.0 10.1 182.1 13.4 0.8 14.2

2017 1,339.0 80.1 1,419.1 16% 214.2 12.8 227.1 16.7 1.0 17.7

2018 1,459.5 88.9 1,548.4 18% 262.7 16.0 278.7 20.5 1.3 21.8

2019 1,590.9 98.7 1,689.6 20% 318.2 19.7 337.9 24.9 1.5 26.4

2020 1,750.0 110.5 1,860.5 22% 385.0 24.3 409.3 30.1 1.9 32.0

2021 1,925.0 123.8 2,048.8 24% 462.0 29.7 491.7 36.1 2.3 38.4

2022 2,117.5 138.6 2,256.1 26% 550.5 36.0 586.6 43.0 2.8 45.8

2023 2,329.2 155.3 2,484.5 28% 652.2 43.5 695.7 51.0 3.4 54.3

2024 2,562.1 173.9 2,736.1 30% 768.6 52.2 820.8 60.1 4.1 64.1

2025 2,741.5 191.3 2,932.8 32% 877.3 61.2 938.5 68.5 4.8 73.3

2026 2,933.4 210.4 3,143.8 34% 997.4 71.5 1,068.9 77.9 5.6 83.5

2027 3,138.7 231.5 3,370.2 36% 1,129.9 83.3 1,213.3 88.3 6.5 94.8

2028 3,358.5 254.6 3,613.1 38% 1,276.2 96.8 1,373.0 99.7 7.6 107.3

2029 3,593.5 280.1 3,873.6 40% 1,437.4 112.0 1,549.5 112.3 8.8 121.1

2030 3,845.1 308.1 4,153.2 42% 1,614.9 129.4 1,744.3 126.2 10.1 136.3

2031 4,114.3 338.9 4,453.2 44% 1,810.3 149.1 1,959.4 141.4 11.7 153.1

2032 4,402.3 372.8 4,775.1 46% 2,025.0 171.5 2,196.5 158.2 13.4 171.6

2033 4,710.4 410.1 5,120.5 48% 2,261.0 196.8 2,457.8 176.6 15.4 192.0

Table 3.11: Diverted Traffic, Containers by Rail

YearContainerizable Tons (Thousand) Diversion

Rate (%)

Containerized (Diverted) Traffic (Thousand Tons)

Containerized (Diverted) Traffic TEUs (Thousand)

Source: Consultant

3. Generated Traffic

111. The generated traffic is that traffic, which will materialize as a result of commercial and industrial development planned for the ZULC. The generated traffic projections provided above include both rail and road traffic. Therefore, a separate projection of generated traffic for rail is not made.

C. SUMMARY TRAFFIC PROJECTIONS

112. Table 3.12 presents the summary traffic projections expressed in TEUs for normal, diverted and generated traffic. The TEUs represent loaded containers only. Empty containers are 45% of total containers shipped. Therefore, Table 3.12 represents only 55% of the total for loaded and empty TEUs.

113. It should be noted that the projections summarized in Table 3.12 do not indicate the volume of business for the ZULC. Undoubtedly, some freight will continue to be handled directly by UBTZ without involvement of the ZULC. However, UBTZ facilities are limited and the chronic shortage of its financial resources make it possible that trucks currently using UBTZ Terminals 1 and 2 will increasingly opt for ZULC’s modern and more efficient facilities. Also, the two reach stackers in Terminal 2 for loading/unloading of containers to/from rail cars are not operating due to lack of funds to repair them. The rail-to-rail transfer of containers from standard gauge to broad gauge is not currently possible in Terminal 2. Given the congestion at and inefficient operations of UBTZ terminals, the facilities and management of ZULC offer a clear advantage to shippers. In the financial and economic analysis we will provide detailed traffic estimates for ZULC by type of operation and mode of arrival and departure.

38

Road Rail Total Road Rail Total

Base year 2010

32.0 70.3 102.3 102.3

2014 43.7 96.0 139.7 2.2 8.5 10.7 8.5 158.9

2015 47.6 104.8 152.4 2.9 11.2 14.0 13.3 179.7

2016 51.9 114.3 166.2 3.6 14.2 17.9 18.2 202.3

2017 56.6 124.7 181.3 4.5 17.7 22.3 25.4 229.1

2018 61.8 136.1 197.8 5.6 21.8 27.3 39.3 264.5

2019 67.3 148.5 215.8 6.7 26.4 33.1 54.0 303.0

2020 74.1 163.5 237.6 8.2 32.0 40.1 44.8 322.6

2021 81.6 180.1 261.6 9.8 38.4 48.2 69.1 379.0

2022 89.8 198.3 288.1 11.7 45.8 57.5 94.7 440.2

2023 98.8 218.4 317.2 13.8 54.3 68.2 102.0 487.4

2024 108.7 240.5 349.2 16.3 64.1 80.4 109.9 539.5

2025 116.5 257.8 374.2 18.6 73.3 92.0 118.2 584.4

2026 124.7 276.3 401.0 21.2 83.5 104.7 127.2 632.9

2027 133.6 296.2 429.8 24.0 94.8 118.8 136.7 685.4

2028 143.1 317.6 460.6 27.2 107.3 134.4 146.9 742.0

2029 153.2 340.5 493.7 30.6 121.1 151.7 157.8 803.1

2030 164.1 365.0 529.1 34.5 136.3 170.7 169.3 869.2

2031 175.8 391.4 567.2 38.7 153.1 191.8 181.7 940.6

2032 188.3 419.7 608.0 43.3 171.6 214.9 194.8 1017.7

2033 201.7 450.0 651.7 48.4 192.0 240.4 208.8 1101.0

YearNormal Traffic Diverted Traffic Generated

TrafficTotal

Traffic

Table 3.12: Summary Traffic Projections of Containers (Thousand TEUs)

Source: Consultant

Figure 3.1: ZU Container Traffic

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Thousand TEU

s

Normal  Traffic Diverted Traffic Generated Traffic

39

IV. TECHNICAL CHARACTERISTICS

A. INTRODUCTION

116. In order to identify and evaluate alternative sites for ZULC, it was first necessary to identify general characteristics which must be met by the facility. After meetings with the EA and the Logistics Strategy Study Steering Committee, the following general characteristics were identified as benchmarks against which alternative sites should be evaluated:

The logistics center must have a large enough area to allow Customs clearance and Quarantine operations;

It must have sufficient space to locate logistics-related activities including, customs clearance, freight forwarding, warehousing, packing, packaging, labeling, sorting and grading of products as well as intermodal container operations (container handling, stuffing/unstuffing);

It must have sufficient space inside or adjacent to the facility for development of value added light manufacturing such as assembly and/or repackaging of electronic goods, garments, meat products, etc.

It must be suitable for designation as a bonded facility with appropriate fencing and security;

It must be as near to the border area as possible;

Its location must not conflict with the Zamyn Uud Master Plan under development;

It must have road and rail access providing for both broad gauge (Mongolian) and standard gauge (Chinese) rail access;

It must have available land area for future development; and

It must not have serious (unmitigatable) environmental impacts and minimum land acquisition and resettlement.

B. ALTERNATIVES ANALYSIS

117. Based on the above desirable general characteristics for the ZULC, a preliminary evaluation and identification was conducted in consultation with the local government for alternative sites. Four site alternatives and the “No Action” alternative we evaluated.

1. “No Action” Alternative

118. The “No Action” alternative addressed the likely consequences of not undertaking the proposed Project. Failure to build the ZULC would result in increasing impediments to transport agricultural produce and manufactured goods from PRC.

40

Therefore, it would impede economic development and add to the obstacles to economic stability and growth in Mongolia. In addition, it will present a substantial constraint to future improvements in the economy of local communities. Accordingly, it has been determined that the “No Action Alternative” is neither a reasonable nor prudent course of action.

2. Site Location Alternatives

119. Four location alternatives for the ZULC have been examined. The four sites are shown in Figure 4-1. Three of four alternatives are located to the right side of Zamyn Uud – Ulaanbaatar railway. The Site Alternative 1 is located between UBTZ’s Terminal 1 and Terminal 2; Site Alternative 2-A is located at a distance of about 4 km to the north-east of Zamyn Uud; Site Alternative 2-B is localized between Terminal 2 and UBTZ rail tracks serving the oil terminal; and Site Alternative 3 is located to the left side of railway about 3.5 km from Zamyn Uud to the north-west.

120. Comparison of the location alternatives is given in Table 4-1. Site Alternative 1 has advantages in that a lot of the existing infrastructure between UBTZ Terminal 1 and 2 can be incorporated into the terminal, considerably reducing the capital expenditure required. It also makes optimum use of the existing structure, and provides for a seamless transition from the existing operation to the expanded one. Its proximity to Terminal 1 provides for separate further development of this asset, which will add to the overall benefit of the proposed facility. However, the preliminary layout and facility configuration plan indicates that the major disadvantages of this alternative are: (i) the limited space (60 ha) available for further development of multimodal facilities; (ii) conflict with UBTZ’s plans to extend existing track to Terminal 2; (iii) conflict with existing water supply pipeline for Zamyn Uud, which will be under the ZULC infrastructure.

41

Figure 4.1: Location of Alternative Sites for ZULC

Source: Consultant.

121. Site Alternative 2-B is very constrained by existing tracks with total available area of 43 ha. It has no development potential.

Table 4-1: Comparison of Alternative Sites for ZULC Parameter Alternative 1 Alternative 2-B Alternative 2-A Alternative 3

Customs clearance and Quarantine area

Can be accomplished, but space is limited

Can be accomplished, but space is even more limited than Alternative 1

Can be accomplished; no space limitation.

Can be accomplished; no space limitation.

Distance from the border

Nearest site to border crossing (3.5 km); adjacent to the existing Terminal 1, allowing improvement of Terminal 1.

Not as convenient as Alternative 1, but can use same road access that bypasses the town. Distance from the border is 4.5 km

Distance from the border is 8.5 km; accessible from the Regional Road that will connect Zamyn Uud with Ulaanbaatar.

About 8 km from the border and on the same side as the town; accessible from the Regional Road that will connect Zamyn Uud with Ulaanbaatar.

42

Non-transport Infrastructure

Conflict with only water supply pipeline for Zamyn Uud

No conflict No conflict No conflict

Development of Zamyn Uud Town

No conflict with ZU Master Plan and Land Use

No conflict with ZU Master Plan and Land Use

No conflict with ZU Master Plan and Land Use

Limits development of Zamyn Uud town; conflict with ZU Master Plan and Land Use

Road and Rail Access

There are marshalling yards for both track gauges beside this site, with congestion in rail operations. It can also be accessed directly from the border crossing via a bridge proposed to cross over the main railway track.

The same road access will be possible as Alternative 1, but not as convenient. The use of the existing tracks will also be possible.

The site will require access road and overbridge from the Regional Road. Standard gauge and broad gauge rail access will be extended from fuel depot.

This site would not require a road overbridge as Alternative 2-A, but would need an access road leading from the proposed Regional Road. The major restraint is the absence of standard gauge rail access. The standard gauge would need to cross the main tracks, creating a potentially dangerous, difficult, and costly intersection.

Truck Access

Currently this traffic cuts through the town and across a railway crossing. It is possible to provide alternative access via an overbridge that leads from the intersection of the Regional road and the border crossing road. This will take all truck traffic (other than local goods) off the suburban streets.

Same as Alternative 1, but more costly due to longer access road.

Truck traffic will be directed through an overbridge linking the Regional Road to the site.

This site is on the same side as the town. It is accessible from the border by driving through the main street of Zamyn Uud. A bypass route via the Regional Road and a spur road feeding the site will be needed, but may not avoid having truck traffic through the town unless strictly controlled.

43

Existing infrastructure

There are adequate shunting and storage tracks available in both gauges at this site. Additionally there are existing services available.

This site can access the same facilities as Alternative 1, but is less practical as it is bisected by the standard gauge yard tracks.

There are no existing infrastructure on the site

Several short ramp tracks have been constructed at this site. They are broad gauge only, and provision of standard gauge access would be expensive even if it is practical.

Capacity for expansion

This site is constrained by existing rail tracks on all sides. However there is sufficient room to establish a facility that will serve in the medium term. A second facility would need to be planned for to cater for possible further growth. The site allows for the incorporation of the existing Terminal 2 facilities

The site is very constrained by existing tracks. Total available area is 43 ha. It is also cut into segments by existing tracks. Design and operation of a facility is difficult.

About 300 ha available for development and future expansion. Further expansion is possible by re-locating the border 1st tier fence (which is 5 km from the Mongolia-PRC boundary).

Available 400 ha with further expansion possible.

Geotechnical All sites have similar favorable characteristics

Environmental Impact

All sites have similar favorable characteristics. Conflict of Alternative 1 to existing fresh water pipeline system is a serious factor.

Land Acquisition and Resettlement

Relocation of some UBTZ tracks will be

required

Relocation of some UBTZ tracks

will be required. Also land occupied by two businesses must be acquired

No LAR No LAR

Servicing and staffing

Currently the population and service industries are situated closest to this option.

This site has similar access as Alternative 1 to local services.

4-5 km further away from Alternative 1 and 2-B. Does not conflict with city traffic or land use plan.

3.5-4.5 km further away from Alternative 1 and 2-B. Conflicts with city traffic or land use plan.

122. Site Alternative 2-A is lacking those advantages of Site Alternative 1 related to proximity to the border. However, from the point of space requirements the Site Alternative 2-A is more beneficial as there is more room for its expansion and has adequate space to build the facility. Although Site Alternative 2-A is not as spacious as Site Alternatives 3, it has adequate land.

44

123. Although Site Alternative 3 has potential for expansion to the north-west, it requires very costly standard gauge rail access, which is a significant drawback. Besides, it conflicts with the Zamyn Uud Master Plan by limiting the city’s potential for expansion.

124. Although Site Alternative 2-A location is further away from Site Alternative 1 by 5 km, it offers several advantages over other alternatives. Specifically, it does not conflict with development plans of Zamyn Uud (as Site Alternative 3) or with non-transport infrastructure (as Site Alternative 1), and can be expanded to the north-west (in contrast to Site Alternative 1 or 2-B, which have no potential for expansion). After close inspection of this Alternative by many stakeholders including local and national government agencies, Logistics Strategy Study Steering Committee members, private companies, and transport operators, this site was selected and was officially proposed to ADB as the site for the Project by the Ministry of Finance.

3. Access Road Alternatives

125. In general, there are 3 different options of access roads for the Site Alternatives. Option 1 includes crossing the railway near Customs X-ray facilities to south-east of Zamyn Uud and passing in parallel to the border net. Option 2 is passing through Zamyn Uud and crossing the railway from the planned Regional Road linking Zamyn Uud and Ulaanbaatar. And finally, Option 3 is a modification of Option 2, where Zamyn Uud is bypassed from south-east. Table 4-2 shows comparison of alternatives for access roads.

126. It is necessary to note that strong disadvantage of the access road passing through Zamyn Uud town (Option 2) is the impact of heavy trucks to the area environment including noise, air pollution, and road safety. This issue is of much concern to the local community as was determined during public consultations. That is why access roads bypassing Zamyn Uud seem more attractive even though they also suffer from a number of drawbacks. Based on environmental and traffic safety concern Option 2 has been discarded.

127. The major issue related to Option 1 is limited number of variants for crossing the railroads. Crossing should be located as far from Zamyn Uud as possible to avoid multiple tracks, but behind border and customs facilities. The only feasible option has been identified during the field trip – it should be located right after X-ray facilities. The cost of overpass and underpass in this location can be very high due to limited space for crossing railroad tracks and requirements to road gradients and curvature for heavy trucks. From this point railway grade crossing is of much lower cost, however it can pose a problem of road safety and create congestion at railroad crossing. Therefore, it is reasonable to suppose that Option 1 is difficult to implement.

128. As Option 3 bypasses Zamyn Uud town in accordance with the Master Plan of Zamyn Uud and uses the alignment of the Regional Road Zamyn Uud – Ulaanbaatar, it is most preferable. Besides, it is not limited by existing infrastructure and facilities as in the case of Option 1 and does not have environmental and traffic safety disadvantages as Option 1.

129. Therefore, based on engineering, socio-economic, and environmental considerations it can be concluded that Site Alternative 2-A, in combination with access road Option 3 will present the most optimal solution.

45

Table 4-2: Comparison of Alternatives for Access Roads Option 1 Option 2 Option 3

Distance from the X-ray facilities

8 km 8 km, very circuitous 10.5 km

Engineering conditions for

crossing railway

Limited space for construction (about 180 meters from the nearest

track), necessity to cross 3 tracks

No limitations No limitations

Track crossing from south-east of Zamyn-

Uud from north-west of

Zamyn-Uud from north-west of

Zamyn-Uud

Road safety Lower risk of road

accidents

Higher risk of road accidents in Zamyn

Uud

Lower risk of road accidents

Environmental Impacts

Low impact Medium/High impacts Low impact

Source: Consultant.

C. GENERAL CHARACTERISTICS OF THE SELECTED SITE

130. Figure 4-2 shows the general location of the ZULC site. The Logistics Center is part of the Intermodal Freight Terminal and Logistics Center (IFTLC) in Zamyn Uud being developed by the Mongolian Railway Authority (MRA). At the request of MRTCUD and MRA, the ZU Soum Government and the Dornogovi Province allocated a land area of 288 ha (3,200m X 900m) for the development of the IFTLC. ZULC is a 78.3 ha (1,300m X 602m) area within the IFTLC. Next to the ZULC in the north-west direction is Customs and Quarantine (C&Q) Center, which consists of 11.8 ha (196m X 602m). Directly south-west of the ZULC and C&Q Center is a 23 ha (230m X 1,000m) area reserved for light manufacturing and logistics development, and a 6 ha (240m X 250m) area for parking of trucks before they can proceed to the entrance gates. The remaining 169 ha area of IFTLC is reserved for bulk cargo freight terminal separately to be developed by MRA with funding assistance from the PRC.

131. The boundaries of IFTLC site include in the south-east land allocated to Shunkhlai Oil Company on 1 September 2007 for private use and Zamyn Uud solid waste disposal site; in the east the 1st tier of the border fence; in the north-west by a 20-meter deep ravine, the old dried lake bed; and in the west by the right-of-way of the mainline track of UBTZ. Under the right-of-way requirements stipulated in the 1949 Agreement between the Former Soviet Union (FSU) and the Mongolian People’s Republic establishing UBTZ, 200 meters on each side of the track centerline is defined as the area reserved for UBTZ right-of-way.

46

Figure 4-2: General Location of ZULC

47

132. The existing site is the nearest largest land area available for development which does not conflict with the Zamyn Uud Master Plan under development. The site was selected in coordination with the Master Plan study team and its conformity confirmed by the local and national governments. Further expansion of the site is only possible through substantial land fill of the ravine in the north-west or re-location of the border fence in the east. This relocation could be possible since two more fences exist until the Mongolia-PRC boundary is reached 5 km away.

133. The location of the access road and bridge does not infringe on the boundary of UBTZ’s Terminal 3. However, since the road and bridge utilizes the UBTZ right-of-way, an appropriate easement is needed and should be recorded in the official land records. No other land acquisition or easement are needed for the ZULC since the land is completely owned by the government and use of no part thereof has been allocated to private companies or citizens. Official recordation of the assignment of the 288 ha to MRA in the land records is necessary, however, for legal access to land to commence construction.

D. PHYSICAL CHARACTERISTICS

1. Topography and Soils

134. Geologic and soil tests was conducted by Tavan Undes Co., in the Project Area under the TA. The Project site is located in the eastern part of Gobi Desert, which is typically classified as semi-desert. The landscapes of the Eastern Gobi are represented by deserts with fescue shrubs on semi-desert brown soils.

135. The topography of the Project Area is predominantly flat (Figure 4-3) with altitudes around 960 meters above sea level (msl). Geomorphologically, the Project Area is located at pediment and undulated, dissected and hillocky plain. The landscape of the Project Area is mostly Fescue – Caragana desert.

136. The dominant soils in the Project Area are little stony brown soil of desert steppe and brown soil of desert steppe. Rainwater penetrates the soil at a depth of only 20-25 cm. Soils in the Project Area are seasonally frozen with depth of the active layer ranging from 2 to 4.1 m. Average annual soil temperature is 1.6°C warmer compared with air temperature. From November to March the soil temperature is below 0°C and from April temperature rises to 5–9°C and it reaches 15-18°C in May as can be seen in Figure 4-4.

137. Comprehensive engineering and geological survey of soils in the Project Area (including alternatives) was conducted in the frame of this study as reflected in the Geotechnical Report in Supplementary Volume II, Appendix 4-A. The topsoil thickness is around 0.3 – 0.4 m. The topsoil overlays silt or gravel sand and clay layers.

48

Figure 4-3: Project Area

Source: Consultant.

Figure 4-4: Soil Temperature in Zamyn Uud area

Source: Regional Master Plan for the Prevention and Control of Dust and Sandstorms in Northeast Asia. Appendix 4. ADB (2005).

49

138. Wind erosion of soil is a dynamic process of soil degradation in which the share stress applied on the ground surface by wind exceeds the ability of the soil particles to resist separation and transportation. The wind erosion depends on the climatic factors, soil properties, landscape characteristics and availability of vegetation. In the Zamyn Uud area the increasing population and infrastructure building activities put increasing anthropogenic load to land and cause intensification of soil degradation. The area around Zamyn Uud town is subject to intense erosion.

139. The National Plan of Action to Combat Desertification in Mongolia (1997) proposed a pilot project aimed at stabilization of sandy soil grazing land to protect Zamyn Uud border railway station and town. The long-term (10 years) program has been implemented by the local administration together with the Geo-Ecological Institute on combating desertification reduction of sand movement. In the frame of the program, 240 ha of pastures have been fenced off, 66 thousand trees have been planted, and 1 well dug out.

2. Climate and Air Quality

140. The climate of the Gobi Desert is extremely continental and dry. Winters are severe, springs are dry and cold, and summers are warm. The annual temperatures vary from −40°C in mid-winter to +45 °C – in mid-summer. The rainfall is mostly in summer. Depending on the location, the annual total precipitation ranges from less than 50 mm in the south of the Mongolian Gobi to more than 200 mm in the north-east. The dominant wind directions are west and north-west. There is no permanent snow cover during winter. Strong winds occur frequently in the area.

141. In general, the air quality is good with the exception of cases when dust is generated by sandstorms. Air pollution caused by anthropogenic factors is typically low in magnitude as compared with natural factors and easily dispersed in the atmosphere.

142. The influence of the orography on the climate is rather weak. It is reported that winter’s average temperatures range from -14.0 to -18.4 C and summer average temperatures - from 20.6 to 23.2C as can be seen in Figure 4-5 and annual average temperature is 3.9°C. Inter-annual variations of average temperatures are dependent on the specific year.

Figure 4-5: Annual Average Temperature in Zamyn Uud

Source: Regional Master Plan for the Prevention and Control of Dust and Sandstorms in Northeast Asia. Appendix 4. ADB (2005)

50

143. The average annual precipitation in Zamyn Uud is 123.5 mm. Of this, winter monthly precipitation varies from 2.3 to 2.6 mm (in total 7.8 mm), which is around 6% of the total precipitation (Table 4-3). In the summer monthly precipitation ranges from 17.3 to 33.9 mm (in total 84.9 mm), which is about 69% of the total precipitation. Therefore, the summer precipitation is of comparatively greater intensity than winter, and the evaporation is higher due to hot soil surface as well.

144. The annual average speed of wind is 2.9 m/s; in spring its magnitude reaches up to 4.2 m/s. Prevailing wind directions are west and northwest with 50% of frequency. Calm conditions can be observed in 43% of the total wind occurrence during the year (Table 4-4). The wind rose for Zamyn Uud area is shown in Figure 4-6.

145. The frequency of the dust and sandstorms (DSS) in the Project Area is the highest in Mongolia and amount to 31 per year with the maximum in April and May, and days with drifting sand 47.5. Typically DSS occur in the afternoon and rarely in the night-time. It is reported that the duration of the sandstorms in Gobi desert is 1.5 – 6 hours. The DSS substantially limit visibility, cause air pollution, and pose a problem of drifting sand.

Table 4-3: Average climate variability of Zamyn Uud Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec AnnualTemperature, °C -18.4 -14.0 -4.1 6.5 14.7 20.6 23.2 21.1 14.1 4.8 -6.5 -15.7 3.9 Precipitation, mm 1.6 1.1 1.6 3.9 8.5 17.3 33.9 33.7 12.0 6.0 2.3 1.5 123.5 Wind speed, m/c 2.3 2.6 3.2 4.2 3.9 3.0 2.5 2.3 2.6 2.7 2.7 2.4 2.9

Source: Zamyn Uud Meteorological Station, 1961-2006.

Table 4-4: Wind direction frequency of Zamyn –Uud Wind direction N NE E SE S SW W NW Calm Frequency, % 7 6 11 6 6 14 23 27 43

Source: Zamyn Uud Meteorological Station, 1961-2006.

Figure 4-6: Wind Rose for Zamyn Uud

0

5

10

15

20

25

30N

NE

E

SE

S

SW

W

NW

3. Hydrology

146. The resources of surface water in South Gobi are very limited and there is only a few perennial water bodies in the area located in depressions, which fill with water only during rainy days. Therefore, the major element of the hydrology is groundwater. Although the extent of groundwater resources in South Mongolia is not known with any

51

precision19 it seems that it will be sufficient to support demand growth until at least 2020. However, rapid development of the mining industry in the South Gobi raises an issue of alternative sources of water. Two projects aimed at long-distance water transportation from Central Mongolia have been proposed: Herlen – Gobi Pipeline project (with a branch pipeline to Zamyn Uud) and Orhon – Gobi Project.

147. The hydrogeology of the South Gobi is characterized by limited recharge to the upper aquifers and the presence of deeper discontinuous (local) aquifers of different depth, size, lithology and productivity, mainly containing fossil water with frequently water of poor quality. The estimate of the groundwater resources in Dornogovi Aimag is shown in Table 4-5.

Table 4-5: Estimated Groundwater resources in Dornogovi Aimag Aquifer classification Productivity (lit/sec)

per km2 Estimated groundwater resources (Mm3/year)

High productive >1 19 Moderate to locally high productive 0.1-1.0 71 Low to moderate productive 0.03-0.1 19 Low productive 0.003-0.03 4 Essentially no groundwater <0.003 0 Total 119 Source: Groundwater Assessment of the Southern Mongolia. Preliminary Conclusions. World Bank. September 2008.

148. A perennial water body – Sevhuuliyn Toyrom is located to the north-east of the Project Area in the depression behind the border protection net. It fills with water only during rains in summer and remains dry the rest of the year.

149. Groundwater resources in the Project Area are located in rocks with local, limited groundwater resources. The water supply for Zamyn Uud is from 8 wells directly north east of UBTZ Terminal 2 (with depth ranging from 110 to 120 m). The town’s water consumption currently ranges from 30,000 to 37,000 m3 per month. The water is delivered to Zamyn Uud through 2 pipelines with a diameter of 150 mm. Another pipeline with a diameter of 100 mm supply water to the Customs. Water is supplied to the pipeline network without any additional treatment. Due to high mineralization of water, pipelines are subject to corrosion and clogging. Therefore, any facility constructed between Terminal 1 and 2 should not interfere with convenient and prompt municipal access to the pipeline for emergency repairs and regular maintenance.

4. Solid Waste

150. Domestic waste is generally generated by Zamyn Uud town and construction waste by new developments in proximity to Zamyn Uud. There is a landfill site located in the vicinity of the Project Area. According to the local government, the landfill is used for dumping all types of solid waste including domestic, and construction. Due to prevailing north-west and west winds the area adjacent to the landfill site, including the Project site is covered by litter. Before commencement of construction for the Project, it is necessary

19 Southern Mongolia Infrastructure Strategy. Discussion Draft April 2009. World Bank.

52

to open a new landfill site away from the Project Area and cover the existing landfill will soil. It is also necessary to clear the area from any debris from the landfill.

5. Suitability of the Project Area for Road Construction

151. The easy terrain, dry climate and the virtual absence of any obstruction due to human land use combine to make the Project Area generally favorable for construction activities. Fill material sources are plentiful nearby and there are sufficient potential stone quarries, but the situation is less favorable for gravel and sand sources. The long and cold winter, making the construction season short (5-6 months) and the lack of any surface water source for human or construction use constitute somewhat adverse factors for construction, which will require good construction planning and coordination on part of both the Implementing Agency for the Project and the contractor.

E. TERMINAL OPERATIONS AS DESIGN CONSIDERATIONS

152. Terminal operations by type of cargo and movement define the design and layout of intermodal terminals. In the case of ZULC the design has a further factor to incorporate, which is arising from rail gauge change operations that are not typical in intermodal terminals around the world. Despite this added factor, however, if operational scope is clearly defined at the outset, design can effectively render the operational requirements into an efficient terminal layout with appropriate technology, management, and equipment mix.

153. After careful consideration and discussion with the EA and stakeholders, the terminal operational requirements were delineated as follows:

The terminal will be able to handle International Standard Organization (ISO) Standard 668 (1995) containers of 20-feet length and 40-feet length, as well as high cube containers of up to 8.5 feet height and longer units of up to 45-feet;

The terminal will be able to handle general cargo arriving in unitized loads packed in pallets, drums, crates, boxes, bales, packages, etc.

The terminal will be able to undertake rail-to-rail, rail-to-truck, truck-to-rail, and truck-to-truck transfer of containers and general cargo;

The terminal will function as a bonded facility. Therefore, it will include Customs and Quarantine inspection and processing.

154. Based on the above requirements, Table 4-6 summarizes proposed terminal operations by type of cargo, trade direction, and type of intermodal transfer. As the table shows, the container handling equipment selected for operations consists of gantry cranes, reach stackers, yard tractors, and yard chasses. There are other types of container handling equipment such as straddle carriers, mast stackers, forklifts, etc. However, for medium to large size terminals the container handling equipment selected for ZULC is suitable due to their relatively higher productivity.

53

RAIL TO RAIL TRUCK TO RAIL RAIL TO TRUCK TRUCK TO TRUCK

Import

On the platform transfer from standard to broad gauge using gantry cranes for direct transfer or reach stackers and yard chasses for transfer to yard, store, and bring to railside when the train arrives.

If Mongolian train is at the platform, direct transfer from truck to rail by use of gantry cranes. If not, truck unloads at yard using reach stackers for loading to train when it arrives.

Unload from Chinese flat car to yard chassis for storage at container yard or direct loading to truck.

Transfer from truck to truck at the container yard using reach stackers.

ExportNo gauge transfer here. Broad gauge flats move into China for gauge change in Erlian.

If Chinese train is at the platform, direct transfer from truck to rail by use of reach stackers. If not, truck unloads at yard using reach stackers for loading to train when it arrives.

Unload from broad gauge flat car to yard chassis for storage at yard or direct loading to truck.

Transfer from truck to truck at the container yard using reach stackers.

Transit arriving from China

Same as ISO Container Import above.

Same as ISO Container Import above.

Same as ISO Container Import above.

Same as ISO Container Import above.

Transit arriving from Russia

Same as ISO Container Export above.

Same as ISO Container Export above.

Same as ISO Container Export above.

Same as ISO Container Export above.

Import

Chinese boxcars unloaded on to pallet flats for delivery to warehouse; consolidation into ISOs in warehouse; ISOs loaded on yard chassis for movement to Mongolian flat cars loaded by gantry cranes.

Truck unloads at the warehouse by use of forklift; consolidation into ISOs in warehouse; ISOs loaded on yard chassis for movement to Mongolian flat cars loaded by gantry cranes.

Chinese boxcars unloaded by forklift on to pallet flats for delivery to warehouse; consolidation into ISOs in warehouse or loading of pallets into truck.

Transfer from truck to truck at the warehouse with some storage and some containerized.

ExportNo gauge transfer here. Russian gauge boxcars move into China for gauge change in Erlian.

Truck unloads at the warehouse by use of forklift; consolidation into ISOs in warehouse; ISOs loaded on straddle carriers for movement to Chinese flat cars loaded by reach stackers.

Mongolian boxcars unloaded by forklift on to pallet flats for delivery to warehouse; consolidation into ISOs in warehouse or loading of pallets into truck.

Transfer from truck to truck at the warehouse with some storage and some containerization at the warehouse dock.

Transit arriving from China

Same as GC Import above. Same as GC Import above. Same as GC Import above.Same as GC Import above.

Transit arriving from Russia

Same as GC Export above. Same as GC Export above. Same as GC Export above.Same as GC Export above.

Source: Consultant.

Table 4-6: ZU Logistics Terminal Operations

TYPE OF TRANSFERTYPE OF CARGO

TYPE OF TRADE

ISO

Co

nta

iner

sG

ener

al C

arg

o (

GC

)

54

155. In a comprehensive feasibility study conducted by the Consultant for China Railway Container Transport Corp (CRCTC) in 200520, six types of operating schemes representing different configurations of terminal equipment were evaluated for three sizes of terminals: Small with a capacity of 150,000 lifts per year; medium with 270,000 lifts/year; and large with 540,000 lifts/year. For each of the 6 schemes and 3 terminal sizes infrastructure investment, equipment, annual fixed and variable operating costs were estimated for an evaluation period of 20 years. The average full operating cost (including depreciation) per TEU under each operating scheme and terminal size is summarized in Table 4-7. Each scheme involves a different configuration of equipment and operation and all schemes are used in container terminals in N. America and W. Europe depending on the operational requirements incorporated in the design of the terminal. Although there are many other alternative schemes in practice, the 6 selected schemes are representative of most terminal operations in N. America and W. Europe.

156. The table shows the comparative costs/TEU under different terminal sizes. The cost estimates are provided for comparative purposes only among the schemes and terminal sizes. They are not intended for use in the financial and economic evaluation of the ZULC.The 3-phase development plan envisioned for ZULC represents roughly the annual lifts for small, medium, and large terminal sizes included in Table 4-7. Also included in the table is an assessment of the suitability of the scheme to the conditions in Mongolia. Among the three suitable schemes, the one selected for ZULC (Scheme D) is the least cost alternative.

F. ZULC LAYOUT AND COMPONENTS

157. Detailed layout for the overall plan of ZULC including the C&Q Center and the pre-entrance truck parking area are provided in Supplementary Volume I, Section 4, Figures 4-9 to 4-13. All these are Project components and are described below.

1. Terminal Access Road and Bridge

158. ZULC’s road access is provided by connecting the entrance of the terminal to the ADB-funded Regional Road, which is currently under implementation with expected completion by 2013. Through this connection, the ZULC will be directly connected to the border. The Mongolian Customs Authority (MCA) decided that the access road to be funded under the contemplated Project and the section of the Regional Road connecting to the security gate leading to the border will be designated as customs road under MCA oversight. This designation will allow MCA to direct all trucks with cargo capacity of more than 1 ton arriving from PRC to the C&Q Center at the terminal. Appropriate controls to monitor each truck’s movement from the border to C&Q Center entrance include magnetic smart card with a portable transmitter provided to each driver when he arrives at the border. The vehicle’s travel will be monitored electronically by MCA to assure that it does not exit at unauthorized exit points and follow the customs road to the pre-entrance parking area where the smart card and transmitter will be received and a terminal entry card is issued to the driver. Both the smart card and the terminal entry card will have a picture of the driver for appropriate identification and other data related to the vehicle and cargo.

20 TERA International Group, Inc. Feasibility Study for Railway Intermodal Container Transport Project. Ministry of Railway, China Railway Container Transport Co., Ltd. Final Report. Beijing: 1 February 2005.

55

Small (150k lifts/year)

Medium (270k lifts/year)

Large (540k lifts/year

A 57.71 51.91 49.67Not suitable to ZULC: RSs cannot reach both rail tracks from one side.

B 61.18 53.25 51.07Suitable to ZULC: RMG-based operations are more costly than RTG-based operations.

C 58.60 55.61 51.78Suitable to ZULC: RMG-based operations are more costly than RTG-based operations.

D 54.69 51.85 47.71

Suitable to ZULC: Lower cost than RMG-based same operation in Scheme C. Lowest cost of suitable schemes.

E 46.09 38.33 36.05

Not suitable to ZULC: Requires a large area for container storage on chassis in the yard. Containers not stacked. Large investment in yard chasses.

F 36.25 29.98 27.64

Lowest cost scheme due to one lift/container. Not suitable to ZULC: Uses yard chasses as road vehicle (not possible in Mongolia). Requires large investment in chasses.

Source: Consultant.

Rubber Tyred Gantry (RTG) with Chassis Shuttle and Storate (CS&S) RTG Cranes transfer con

Reach Stackers (RS) All container handling performed by Reach Stackers. This inc

Rail Mounted Gantry (RMG) with Reach Stackers (RS) as backup All container handling perform

Rail Mounted Gantry (RMG) with Reach Stackers (RS) and Chassis Shuttle (CS) RMG Cranes

Remarks/Suitability to ZULC

Table 4-7: Alternative Terminal Operating Schemes

Rubber Tyred Gantry (RTG) with Reach Stackers (RS) and Chassis Shuttle (CS) RTG

Rubber Tyred Gantry (RTG) with Chassis Shuttle and Storate (CS&S) and Fixed Gantry Crane (FGC)

Total Operating Cost/TEU by Terminal Size ($)

Operation DescriptionScheme

56

159. After the exit and entrance lanes to the access road, until 200.36m the road is level. The grade gradually increases from this point until the 100m long transition section is reached.

160. The ramps on both sides of the bridge are different from those connecting the access road to the Regional Road and the terminal zone. Therefore, there are 3 distinct structures in the design for access road and bridge: (i) access road at grade; (ii) ramps on both side of the bridge; and (iii) the bridge. The design for all three structures is based on existing standards, including “Highway design” Construction Normative and Ruler - 32.01.07, “Bridge and culvert design” Construction Normative and Ruler - 32.02.03 and other related documents.

161. The ramps at both sides of bridge and access road at grade have 2 traffic lanes with total width of carriageway at 7.0 m. The height of ramp is 9.0 m where ramp and bridge connects. A 2.5 m berm is included 6.0 m of embankment. At embankment height lower than 6.0 m, no berm is included, just a uniform slope. The width of shoulder is minimum 2.5 m. On the ramps steps for pedestrians with safety barriers are included.

162. Based on the 10-year projected vehicle traffic, the design assumes the access road and bridge will only serve ZULC. Therefore, the road is a Class IV complying with all requirements of above standards with respect to vertical and horizontal elements.

163. The superstructure of the bridge is cast-in-situ pre-stressed concrete continuous box girder which is comprised of three spans: one 42m central span with 34m side span at both sides. Typical deck of the bride is designed for 2.0m pedestrian way +8.0m carriageway +0.6m crash barrier. Therefore, the total width is 12.2m. Typical deck of transition section is designed for 0.6m crash barrier +7m carriageway +0.6m crash barrier with total width of 8.2m.

164. Main materials include the following:

(1) Concrete: C50 concrete (cast-in-situ): main girder C40 concrete (cast-in-situ): pier column and crash barrier C40 steel fiber concrete (cast-in-situ): expansion joint C35 concrete (prefabricated): eaves-hung fascia C30 concrete (cast-in-situ): abutment and bearing platform C25 concrete (cast-in-situ): transition slab C25 concrete (cast-in-situ) underwater: bored pile

(2) Asphalt concrete (Deck pavement):

modified stone matrix asphalt (SBS) SMA-13 4 cm medium granular asphalt concrete (AC-20(C)) 5 cm

(3) Steel: Common steel of R235 and HRB335 is adopted in the design, which must comply with related regulations of China Standard (GB13013-91 and GB1499-98). Pre-stress wire of low relaxation and high intensity that complies with regulations of “Wire for Pre-stressed Concrete” (GB/T 5224-2007) is adopted, with nominal diameter of φs15.2mm, normal intensity

57

fpk=1860Mpa and modulus of elasticity of Ep=1.95×105Mpa and relaxation ratio less than 2.5%. Steel plate: all crash barriers and steel structural members of auxiliary structures are made of Q235B steel which shall comply with regulations of “Structural Carbon Steel” (GB 700-88).

165. In order to meet the requirement of structural durability, maximum content of chlorine ion in reinforced concrete structure shall not be higher than 0.15% and maximum content of alkali shall be not higher than 3kg/m3; maximum content of chlorine ion in pre-stressed concrete structure shall not be higher than 0.06%.

166. Concrete for abutment and pier will meet: freeze-thaw index, F250; impermeability index, W8.Concrete for eaves-hung fascia and flush curb will meet: freeze-thaw index, F250; impermeability index, W8.

2. Pre-Entrance Parking Area and Processing Facility

167. The pre-entrance parking area (240m X 250m) and processing facilities (total 20m X 200 m) constitute a significant space in the overall plan. As a general rule, no loaded truck will be allowed to enter through the gates without an appointment number. Appointment numbers will be provided through one of the following three methods:

Internet access to MCA web site. MCA has decided to allow Internet log-in as early as 24 hours and as late as 2 hours before arrival at the gate;

Telephone access to MCA dedicated phone line during the same time window as Internet access;

At the Terminal Smart Card Booth in the Pre-entrance Parking Area.

168. IT applications at MCA has evolved from ASYCUDA (1993-2002), to internally developed GAMAS (2003-2010) and the recent introduction of CAIS (Customs Automated Information System) through funding from ADB. In order to properly meet requirements and demand of shippers and importers in modern foreign trade, the MCA is carrying out a number of reforms. Within this framework IT reform is being implemented including introduction of new systems and software and using Web access technology. The new system consists of the following groups of software:

CAIS (Customs Administration Information System);

CEPS (Customs External Portal System);

RM (Risk Management), and

DW (Data Warehouse).

169. CAIS is used by customs employees; CEPS can be used by customs brokers, freight forwarders, transporters and guaranteed warehouse and control area operators. RM is risk management software with restricted use; and DW is used for preparing customs statistical information and reports.

170. Through these modern IT packages and further improvements to increase web-based applications, MCA is now in a position to implement the web-based appointment system for ZULC. The user will need to enter identification information on the goods (preferably a copy of the manifest), the vehicle, and the driver. The host (MCA) would

58

then provide an appointment number for the date the applicant has planned to arrive in ZULC. During the time between the applicant’s web entry and actual arrival of the vehicle, MCA’s RM experts can make a risk assessment for preliminary decision on whether documentary or physical inspection will be needed based on the risk parameters included in the confidential RM database.

171. Many vehicles arriving for clearance may have limited Internet access. For these users of the facility, MCA would allow application by telephone. In this instance the same information as web-based application would be provided to the MCA official on the phone, except digital data which can be transmitted electronically. There will still be users of the terminal who can only obtain an appointment number after arrival at the pre-entrance parking area. For these vehicles, the Customs official at the Terminal Smart Card Booth (20m X 20m) would receive the same information from the driver and issue an appointment number for entry. All drivers of loaded trucks must report to the Customs Official at the Terminal Smart Card Booth to receive their smart card which shows the appointment number, among other data. Empty trucks which do not have to go through Customs must also obtain a smart card from the same place without an appointment number. The smart card will include the driver’s picture, driver ID number, vehicle-specific information, and other key data needed for Customs and security purposes. Those vehicles arriving from the border will also turn in the smart card issued at the border and the transmitter given to them to the Customs official at the Terminal Smart Card Booth.

172. For regular entrants to the C&Q Center and the terminal such as employees, at the option of MCA and the ZULC Security Office smart cards can be issued on a monthly basis. These drivers and their vehicles will still go through the security check at the entrance and exit gates where there will be a check to match the driver with the vehicle as included in the smart card and physical security inspection of the vehicle. Holders of monthly cards entering in passenger vehicles can by-pass the Customs booth and enter through the designated lane at the gate without an appointment number.

173. A driver waiting area and canteen (20m X 100m) is included in the design. At the parking area and driver waiting area there will be large electronic signs showing the appointment numbers being processed at the security gates. This information will allow the drivers to queue in a timely manner. Before queuing, however, the driver has to go through a quick temperature check at the Medical Health Check Booth (20m X 20m) similar to the process used for passengers in airports.

174. Another facility included in the design for pre-entrance parking area is booths (total 20m X 60m) for use by the employees of customs brokers and logistics firms who are operating in the terminal for the driver to contact and make arrangements for delivery of his cargo. In this manner the companies will have advance knowledge of the pending arrival of the driver to load/unload cargo at the firm’s warehouse.

3. Security Gates

175. Figure 4-7 shows the security gate area for entrance and exit of vehicles. There will be 3 entry and 3 exit security booths of 2m X 6m. All vehicles entering the terminal will go through medical disinfection spray as they drive towards the security booths. There will be a specific lane for passenger vehicles and empty trucks to go through

59

security and C&Q checks. Loaded trucks entering the terminal will use two lanes and go through a two-stage security check (Figure 4-8):

Matching of driver ID with picture through the smart card data and cameras. At this stage the appointment number magnetically recorded in the smart card will also be checked to establish that the vehicle is entitled to enter.

Physical inspection of the vehicle for explosives or other security threats.

176. The vehicle will be weighed at 150-ton truck scales and cameras will screen the undercarriage, vehicle license plate, etc. Vehicles which are refused entry for any reason will be ordered to make a U-turn and exit the terminal. Vehicles which clear the security will be allowed to proceed to the C&Q pre-screening booths.

177. Trucks with goods exiting the terminal will go through driver vs smart card matching check and driver vs vehicle matching check. They will return the smart card after these checks and those proceeding to the border will be issued a new smart card and transmitter before they exit. These will be returned to the Customs officials at the border.

4. C&Q Center

178. Figure 4-9 shows the layout of the C&Q Center. Vehicles which pass through the security checks will proceed to the C&Q Booths for document control where the officers on duty will decide whether the vehicle and the goods will go through physical inspection or through documentary clearance. There will be 3 C&O Booths at entry and 3 at exit each measuring 2m X 6m. The officers on duty will be guided in their decision with the information from Risk Management system assessment appearing on their computer screen and the documents submitted by the driver.

179. Those vehicles which will go through documentary clearance will be directed to proceed to the pre-clearance parking area (100m X 100m) and complete their clearance procedures in the C&Q Building (2 floors of 50m X 75m).

180. Those vehicles which will go through physical inspection will be directed to proceed to the holding area (150m X 150m) where appropriate C&Q inspection and tests will be performed. Goods confiscated for customs violations will be moved to the Impoundment Yard (75 m X 42 m) from where they will be disposed of through auction in the Auction Area (75m X 42m) or properly disposed.

181. A dog kennel of 20m X 40m will be constructed at the west end of the Holding Area to house the sniffing dogs used by Customs. Quarantine checks will be performed at a separate isolated facility in the holding area. Laboratory tests for contamination will be performed at the laboratory (20m X 10m) in the C&Q Building with its own separate access. Contaminated goods will be disposed by acceptable methods in a secure manner so that spread of disease will be minimized.

60

Figure 4-7: Zamyn Uud Logistics Center: Security Gate Plan

Figure 4-8: Two-Stage Gate Control System

61

Figure 4-9: Zamyn Uud Logistics Center Customs And Quarantine Area Plan

62

Goods cleared through customs and quarantine will have one of two options to proceed to the next stage:

Exit the terminal, i.e. bypass the ZULC for logistics-related functions. Some imports arriving from PRC by truck would only go through C&Q clearance and proceed to the ultimate destination by road without entering the ZULC. Particularly after opening of the UB-Zamyn Uud road as an all-weather hard surface connection, trucks arriving for C&Q clearance will have an alternative to continue by road. The extent of this practice will largely depend on how cost effective and efficient the truck-to-rail transfer will be performed at the ZULC, success of marketing efforts by the ZULC Management Contractor and the private sector logistics companies operating in the terminal, the cost and service competitiveness of rail transport, and the needs of value added light manufacturing companies operating in the terminal.

Enter the ZULC for further processing or handling of the cargo. Trucks will proceed to the terminal gate and enter the terminal.

5. ZULC

182. The terminal is designed to efficiently perform intermodal operations and the four types of transfers for which it is designed. Principal components of ZULC and their functions include the following:

A. Standard and Broad Gauge Platform Tracks. Broad gauge and standard gauge rail tracks bifurcate the terminal lengthwise. The length of each track is 1,277m, considerably longer than the current train size of 46 wagons, which is limited by the length of UBTZ mainline passing loops (850 m). There are plans to increase the length of passing loops to 1,050m as UBTZ track is rehabilitated and new and higher horsepower locomotives are added to the fleet. The longer platform tracks are included in the design which will be able to accommodate the full length of future trains. The alternative of building a shorter platform with expensive replacement in the future will seriously disrupt ZULC’s operations.

The Chinese standard gauge platform track and the Mongolian broad gauge platform track are placed next to each other with a centerline separation of 5.4m. The rail-to-rail transfer of containers takes place in this area by use of two Rubber Tyred Gantry (RTG) cranes with an average speed of 2 cycles per minute (i.e. one box every 30 seconds). Direct transfer of all boxes from one train of 46-wagon consist to another of the same configuration will take 35 minutes of one RTG assuming equal split between TEUs and FEUs (i.e. each train will have 23 FEUs and 46 TEUs, or 69 boxes. In terms of TEUs each train’s capacity is 92 TEUs). Adding a factor of 1.5 for RTG travel time and idle time for operational safety and other reasons, each train can be serviced in approximately 90 minutes.

Rail-to-truck transfer at the standard and broad gauge tracks and truck-to-rail transfer at the broad gauge track also take place in the platform tracks. The

63

RTGs are 24.4m wide allowing yard chasses or road trailers drive alongside wagons under the gantry for hoisting to/from the wagon.

It should be noted that the rail-to-rail transfer at the ZULC is only from standard to broad gauge. Under international operating conventions the standard gauge trains would not be sent back to China loaded because Chinese Railways is not authorized to originate trains in Mongolia, a foreign territory. The reverse is true for Mongolian broad gauge trains arriving from China empty. Therefore, the average service time of 90 minutes per train should not be doubled to account for loading time of a standard gauge train which is unloaded. The same is true for truck-to-rail transfer on the standard gauge track. Containers exported from Mongolia should be loaded on Mongolian gauge trains. Allowing an additional 60 minutes per train to position in the platform and dispatch from the platform, the standard track can handle one train every 2.5 hours. In a two-shift operation, the daily number of standard gauge trains that can be unloaded is 6. Since broad gauge track is used for rail-to-rail (for import), truck-to-rail (for import or export), and rail-to-truck (for import or export) transfer, it should be able to handle more trains per day. This can be accomplished by use of the second RTG crane, thereby reducing service time at broad gauge platform from 90 to 45 minutes. Therefore, each broad gauge train will take 1 hour 45 minutes to arrive, unload/load, and depart from the platform or 9 trains per 2-shift day.

In terms of annual TEU capacity (assuming 330 terminal work days in a year), the standard gauge platform track operating 2 shifts per day can handle 182,000 TEUs all loaded containers arriving from PRC. The capacity of the broad gauge platform track operating 2 shifts per day can handle 273,000 TEUs, with approximately 100,000 (40%) loaded and 173,000 (60%) empty TEUs.

In order to reduce maintenance time and minimize work stoppage, the platform tracks are designed as ballastless tracks on C60 concrete slab of 190mm thickness on 250mm C40 concrete base with 50mm concrete-emulsified asphalt (CA) mortar adjust layer in between (Figure 4-21 which is for standard gauge). The design assumes maximum axle load of 23 tons, with average wagon weight of 80 tons and average cargo weight of 57 tons. UIC60 rail with Type III reinforced concrete sleepers of 2400 mm with elastic fasteners will be used spaced at the rate of 1,667 sleepers per kilometer (600 mm center to center sleeper spacing). The cushioning pad under rails shall be rubber type (10 mm thick) with static stiffness of 50~80 KN/mm.

Rail will be joined with Grade 10.9 high-strength joining bolts and Grade 10 high-strength nuts and plain washers at rail joints. Insulated joints will be of the cementing type; the rail on each side of the joint shall be the same type and made with the same steel, meeting the requirements in PRC“Technical Specification of Cementing Insulating Joint Steel Rail” (TB/T2975).

B. Loaded Container Yard. On both sides of the platform tracks, the design allows for a container yard for loaded containers. The nearest stack of containers is 30m from the closer platform track allowing sufficient space for the RTGs to operate while the Reach Stackers (RS) handle containers in the

64

yard. Container movement between the yard and the platform will be accomplished by yard tractors pulling chasses. RSs will stack containers in 2-deep, 3-high configuration for 2 rows of containers on each side of platform tracks. Only loaded containers which interface with rail transport (either all-rail or truck-rail) will be placed in the container yard. Storage and handling of empty containers will be accomplished out-side the terminal road. Also loaded containers which use truck in and truck out will be handled at the truck docks of warehouses facing the terminal road. In this manner congestion at the platform will be minimized.

108 plugs will be installed to supply power the self-cooling refrigerated containers. The container yard has a capacity to stack 3,600 TEUs. Assuming an average dwell time of 3 days per TEU, the annual capacity of the container yard is 438,000 loaded TEUs. The 3 day average dwell time is considerably higher than the terminals in the U.S. where the average is about 2 days, with specialized container terminals operating shuttle train service, such as the Florida Gulf Coast Railway averaging 6 hours. Compared to the annual capacity of platform tracks, the yard capacity is higher allowing an additional margin for less congested yard operations until the terminal matures with experienced staff.

Transport of containers in the yard from one side of the platform to the other side will be accomplished through three level crossings of the platform. Crossings will be used only by yard tractors (YT) pulling yard chasses (YC).

The container yard will be serviced by a fleet of 6 RSs, 20 YTs, and 200 YCs. Each RT has a speed of 2 cycles per minute between the YC and the container stack. For containers at the top of the stack the number of cycles per minute is higher, and for containers stacked at the bottom the cycles are lower. The average of 2 cycles, however, represents a relatively inefficient operation. As experience is gained it is expected that the average RS cycles will increase. Allowing for 100% idle time for actual operating conditions, the 6 RSs will be able to handle 6 containers per minute or 180 containers per hour, 2,900 TEUs per day of 2-shifts. Considering that the yard will operate at a capacity of 1,200 TEUs per day (3,600 TEUs of stacking capacity with 3 days of average dwell time), RSs have considerably larger capacity. This extra capacity is needed because RSs in most intermodal terminals support RTGs and other hoists around the terminal when other equipment is idle for repair or maintenance.

C. ZULC Terminal Road. The total length of terminal road is 3,239m. The two-lane road surrounds the platform tracks, container yard, and warehouse complexes which will be built and operated by private sector companies. Figure 4-22 shows the typical cross section of the terminal road with 8m carriageway and 1m shoulders on both sides. The road will be 100mm C30 concrete surface on 250mm crushed aggregate base. Typical leveling course is 480mm after 150mm top soil removal.

D. Truck Parking and Truck-to-Truck Transfer Areas. Three truck parking and truck-to-truck transfer areas will be constructed: (i) 225m X 100m on the north-east corner of the terminal; (ii) 100m X 200m on the south-east corner

65

of the terminal; and (iii) 100m X 200m on the south-west corner of the terminal. All of these areas with be surfaced by double bitumen surface treatment.

E. Empty Container Yards. There will be two unsealed graded yards for storage of empty containers: (i) 150m X 100m east of the terminal road; and (ii) 220m X 100m on the west of the terminal road. One forklift with high mast 6-ton lifting capacity will be assigned to each area for double stacking and loading/unloading of empties to/from chasses and trailers.

F. Equipment Maintenance Workshop. The equipment maintenance workshop of 100m X 200m will be built east of the terminal road for repair and maintenance of terminal equipment. The workshop will have a mezzanine floor of 4,000 sqm for office and storage of light materials. The floor of the workshop will be C8 concrete. A diesel fuel storage & distribution facility for lift equipment and service vehicles will be placed in the workshop.

G. Terminal Administration Building. The terminal administration building consisting of 2 floors of 50m X 100m will be built at the north-west corner of the terminal. Te building will house the administrative and management staff of the ZULC Authority and ZULC Management Contractor. An emergency medical treatment facility will be established inside the building with a separate entrance to provide emergency treatment for victims of accidents in ZULC and C&Q Center.

H. Terminal Lighting. Terminal lighting will be provided by high mast poles with 4 directional halogen lamps. The masts will be placed in approximately 100m intervals throughout the terminal. The base of the mast will have barriers at the base for protection against moving equipment.

I. Lead and Storage Tracks. As shown in Figure 4-2 above, lead tracks will be constructed to connect the ZULC with the Chinese standard gauge and Mongolia broad gauge tracks. Connections to both gauge tracks will be from the end point of tracks near the existing oil terminal. The length of standard gauge lead track is 2,715m and for broad gauge 2,375m.

In addition, storage tracks will be built inside the ZULC for both gauges as shown in Figure 4-9. Length of standard gauge storage tracks is 2,471m and for broad gauge tracks 2,065m.

Both storage and lead tracks will be single track with 7 turnouts and ballasted. The design assumes maximum axle load of 23 tons, with average wagon weight of 80 tons and average cargo weight of 57 tons. UIC60 rail with Type III reinforced concrete sleepers of 2400 mm with elastic fasteners will be used spaced at the rate of 1,667 sleepers per kilometer (600 mm center to center sleeper spacing). The cushioning pad under rails shall be rubber type (10 mm thick) with static stiffness of 50~80 KN/mm.

Rail will be joined with Grade 10.9 high-strength joining bolts and Grade 10 high-strength nuts and plain washers at rail joints. Insulated joints will be of the cementing type; the rail on each side of the joint shall be the same type

66

and made with the same steel, meeting the requirements in PRC“Technical Specification of Cementing Insulating Joint Steel Rail” (TB/T2975).

The Consultant was advised by UBTZ that direct rail access between UBTZ’s mainline track and ZULC will not be allowed. All trains ready for dispatch will need to be turned over to UBTZ. UBTZ will then move the train to its marshalling yard in ZU where it will be “readied” for dispatch. It was confirmed by UBTZ that this marshalling time is necessary even for full train loads delivered to UBTZ. Because of this restriction direct access tracks from the ZULC to UBTZ mainline have not been included in the design. This is a potential problem because of the additional time it will take for the trains to move to the marshalling yard and the additional cost associated with the 4-km back-tracking of the trains to Zamyn Uud before they can get on the mainline.

J. Safety and Security System. The safety and security system of the ZULC includes the following sub components: (i) Main Gate Checkpoint Booths (6 each 2mX6m) and Canopy; (ii) Main gate truck weigh scales (150 ton capacity); (iii) Main Gate IT system (driver ID, computers & printers, weigh scale readout, scanners, etc. including software); (iv) CCTV Surveillance System with 80 cameras, 100 heat/smoke detectors, 50 motion detectors, Public Address and alarm system; (v) Central security monitoring and control room equipment; (vi) 1 fire truck, 1 ambulance, portable fire extinguishers, 2 security vehicles; (vii) accidental spill of hazardous materials recovery emergency response equipment; (viii) Truck entrance parking, terminal perimeter and C&Q Center security fence (2.5m height with 8-strand concertina barbed wire); (ix) Emergency generators for lighting and security 100KW each.

K. C&Q Center Equipment. Testing and inspection equipment for the C&Q Center include the following: (i) truck mounted container scanner, weigh scales, countertop scanners and testing instruments; (ii) forklift for use in the holding area; (iii) Quarantine laboratory equipment and testing instruments.

L. Site utilities and Facilities. Sub-components of this group include the following: (i) Platform Track Air Station with Duplex Compressor System; (ii) Ramp Track Compressed Air Piping System with Shutoff and Isolation Valves; (iii) Collection & Treatment Facility for Industrial Waste Water (100 CM/day); (iv) Site utilities (electric, water, fiber optic communication lines); and (v) Power distribution for site lighting electrical (9,000m) including trenching, PVC, and cable.

M. Logistics Center Management System (LCMS). Components of this system include (i) terminal operations control system; (ii) yard planning and control module; (iii) gate operations module; (iv) accounting and invoicing module; and (v) intermodal yard operations module.

N. Traction Equipment. Two diesel powered switch engines (shunters) of 800 Hp each are included in the Project design, one for each gauge. The shunters will be used to move the trains between the platform tracks and storage tracks.

67

V. ENVIRONMENTAL ASSESSMENT

A. INTRODUCTION

183. This Section summarizes the Initial Environmental Examination (IEE) for the Logistics Center at Zamyn Uud. The IEE was prepared in accordance with ADB’s Safeguard Policy Statement (2009) and ADB’s Environmental Assessment Guidelines (2003).

B. DESCRIPTION OF ISSUES

184. The topography of the Project Area is predominantly flat with altitudes around 960 meters. Geomorphologically, the Project Area is located in an undulated, dissected and hilly plain. The dominant soils are stony brown of the desert steppe.

185. The Zamyn Uud area belongs to the dry continental climatic zone. Winters are severe, springs are dry and cold, and summers are warm. The annual temperatures vary from −40°C in mid-winter to +45 °C in mid-summer. Annual precipitation is comparatively low (on average, 123.5 mm) and there is no permanent snow cover during winter. Strong winds occur frequently in the area. The frequency of dust and sandstorms in the Project Area is the highest in Mongolia, and average about 31 per year, mostly in April and May. Groundwater resources are located in rocks and limited. The water supply is from 8 wells (with depth ranging from 110 to 120 m) located to the east of Zamyn Uud.

186. In general, the area has sparse vegetation desert and desert steppe. Desertification has been an issue, and there is an active re-vegetation program operating. There are no protected areas of local or national significance in the impact area or in proximity to it.

187. There is no large-scale industry. There are no tourism, cultural or historical sites in the area. However, Zamyn Uud is the largest border crossing point in Mongolia, and is heavily dependent on cross border trade and traffic. The population of Zamyn Uud totals about 12,823 (2009).

188. Failure to build the Logistics Center would result in continued and increasingly high transport and trade costs. Therefore, it has been determined that the “No Action Alternative” is neither a reasonable nor prudent course of action.

189. Four location alternatives for the multimodal facilities have been proposed and examined. Three of four alternatives are located to the eastern side of Zamyn-Uud – Ulaanbaatar railway, and one on the western side.

190. Although Site Alternative 2A location for the Logistics Center is the most remote (from the town and current cargo handling facilities) of all the options, it offers several advantages over other alternatives. Specifically, it does not come into a conflict with development plans for Zamyn-Uud, which Site Alternative 3 does, or with non-transport infrastructure as does Site Alternative 1. Moreover, it can be expanded to the northwest, and Site Alternative 2 has only limited potential for expansion. After close inspection of the alternatives by many stakeholders including the Zamyn Uud Soum administration, Alternative 2A was officially proposed by the Ministry of Finance.

68

191. Impacts on the area topography will likely occur during construction with respect to dust generation. These will be mitigated through avoidance and mitigation strategies such as installation of emission controls, spraying access road surfaces, etc.

192. The groundwater aquifers are located deep and no water intake points are within the proposed construction zone. After treatment, wastewater from the construction site will be used for irrigation of vegetation in windbreaks and sandbreaks that will be established in areas near the Logistics Center.

193. During the operations phase, vehicular emissions are expected to increase due to more intense traffic. However, this is unlikely to contribute considerably to air quality deterioration. As the frequency of dust storms is the highest in Mongolia, it is anticipated that dust pollution will be the major determining factor for air quality. Moreover, the air quality in the town will improve as the traffic will be diverted away from it. Mitigation measures include vegetation and tree planting (windbreaks and sandbreaks) based on wastewater reuse. No significant impacts on surface or groundwater are anticipated.

194. Noise and vibration impacts will occur due to heavy truck traffic and railway operations. However, it should be stressed that the selected site is some distance from the town and there are no residential or commercial areas close to the site. In fact, it is quite likely that noise and vibration impacts for the town area will be reduced because cargo handling will be shifted away from current areas that are in or near the town, and trucks will by-pass the town on the new regional road.

195. It is anticipated that the Project will have insignificant direct impacts on habitats. The Project Area is a semi-desert ecosystem with comparatively low biodiversity. The vegetation planting program will be started during the construction phase and continued during the operation phase. There is already a large-scale vegetation program to combat desertification in and around the town area.

196. The development of the Logistics Center is anticipated to have positive impacts on international trade relations between Mongolia and People’s Republic of China (PRC). The Logistics Center will enhance import/export opportunities for industries and reduce delays.

197. A number of consultations with stakeholders were organized in Ulaanbaatar and Zamyn-Uud in March and April 2009, and April 2010. They were organized in the format of formal consultative workshops and informal meetings with the general public. Among issues raised during the public consultations were risks of noise, air pollution, current levels of vehicle accidents on the road that passes through the town area, and creation of new jobs for the local population. People have favorable views of the Project because it is thought that it will help spur economic growth, and will (in conjunction with the new regional road that by-passes the town) reduce noise, dust and the risk of vehicle accidents.

198. The Environmental Management Plan and Environmental Monitoring Plan are presented as Tables 5.1 and 5.2, respectively. As discussed, the Project will have no significant impacts and in fact should benefit the people living in and using the Zamyn Uud town area because current traffic will be rerouted outside of the built up area.

69

Table 5.1: Environmental Management Plan

Environmental Issue

Mitigation Measures Estimated Cost, $US

Location Time Frame Responsibility

Implementation Supervision

I. Detailed Design Phase

1. Designing Wind- and Sand-breaks

Drifting sand Soil

degradation Wastewater re-

use Planting wind-

and sandbreaks

Select locations for wind- and sand-breaks

Design of an irrigation system to collect and distribute sanitary wastewater and storm-water for tree watering

Select drought resistant species of trees and identify tree nurseries

Prepare “Wind- and Sand-break Plan” with detailed description of locations for wind- and sand-breaks, species to be planted (if introduced species are proposed correspondent assessment should be made), period of planting, irrigation equipment and scheme, etc.

15,000 in the detailed design

budget

Proposed locations include windward site of the Logistics Center, and access rail tracks

Detailed Design

Organization responsible for detailed design will hire a consultant with experience in planting trees in arid areas.

PIU

2. Detailed Environmental Impact Assessment

Detailed Environmental Impact Assessment

Detailed Environmental Impact Assessment should be completed by Mongolian company authorized by MNE

15,000 Project Area Detailed design

Mongolian company authorized by MNE

MNE

70

II. Construction Phase

1. Soil and topography

Soil Erosion

The areas of soil clearance should be minimized.

Separation of topsoil from subsoil during the excavation works; reuse of topsoil as a superficial layer (where possible).

Stabilization of embankment slopes and road cuts by re-vegetation with grazing resistant plant species.

Included in the civil works cost

Logistics Center and access roads

Construction Period

Contractor

PIU / CSC

Soil Contamination Contractor shall develop and

implement a Spill Management Plan.

PIU / CSC, local environmental authorities (oil spill management)

2. Air Quality

Generation of Dust

All vehicles hauling materials shall be covered to avoid spills and dust.

Material storage sites should be 300 m away from residential areas

Water will be sprayed on the construction sites and major feeder roads twice per day during the dry season

60,000 Construction sites Construction phase

Contractor PIU

71

Emissions from Construction Vehicles, Equipment, and Machinery

All vehicles, equipment, and machinery used for construction shall be regularly maintained and correctly operated (including the use of dust filters or hoods) throughout the Project corridor.

Construction sites Construction phase

Contractor PIU

3. Hydrology

Wastewater

Establishment of irrigation system for wind- and sand-breaks

20,000 Construction sites Construction phase

Contractor PIU

Wastewater treatment system 300,000 Main construction site

Construction phase

4. Flora

Drifting Sand Soil Erosion

Procurement of seedlings and planting them in sand- and windbreaks

21,675

North and west side of the Logistics Center, locations along access roads

Construction and operation phases

Contractor is recommended to hire a sub-contractor that has experience in planting trees in arid areas

CSC PIU

5. Noise and Vibration

Noise from Construction Equipment, and Trucks

Plants and equipment used in construction shall strictly conform to local noise standards.

Within 200 m of the nearest habitation, construction works such as crushing, concrete mixing and batching, mechanical compaction, etc., will be stopped between 22:00 and 06:00 hours.

Included in the civil works cost

Construction sites Construction phase

Contractor PIU

72

6. Paleontological and Archaeological Resources

Encountered during Construction

If paleontological or archaeological findings are encountered during construction in the Project Area, all activities will halt (notification of local administration, Institute of Paleontology and local police). Works will recommence only after appropriate measures have been taken as requested by the appropriate authority, and confirmation has been received from them that work may resume.

Project Area Construction phase

Contractor

Local administration, and police, Institute of Paleontology

7. Construction Camp Contamination

related to lubricants, fuel storage and fuelling operations.

Sewerage related contamination

Waste management

Proper construction camp management in compliance with Construction Camp Management Plan that will include management of waste and spills.

Included in the civil works cost

Construction camp

Construction phase

Contractor CSC PIU

8. Waste Management Used oil and lubricants Recycling of used oil 10,000 Construction site

Construction and Operation

Contractor PIU / CSC

73

9. Health and Safety

Occupational Health and Safety

Occupational health and safety in the construction industry

Included in road safety budget

Construction site

Design, Construction, and Operation phases

Contractor, Local Police

PIU

Operation Phase 1. Desertification and Drifting Sand

Dust and sandstorm control

Support of vegetation in wind- and sand-breaks (watering with sanitary wastewater and stormwater, and re-planting) Regular and sufficient irrigation of vegetation Control of survivability of trees and replanting

Operation budget of the Logistic Center

Along windward side of access roads and multimodal facilities

Operation phase

Logistic Center operator

2. Health and Safety

Occupational Health and Safety Occupational health and safety

Included in occupational health safety budget

Logistics Center Design, and Operation phases

Logistic Center operator

PIU

PIU - Project Implementation Unit; CSC - Construction Supervision Consultant. List of proposals/method statements to be required from the Construction Contractor for approval through the PIU for the Construction Camp Management Plan, Windbreak/Sandbreak Management Plan, and Traffic Management Plans. Source: Consultant from Initial Environmental Examination Report.

74

Table 5.2: Environmental Monitoring Plan Monitoring Parameters

Location and Frequency of Parameter Measurement

Location Time Frame Responsibility

1. Air Quality

A. Construction Phase Monitoring parameter: TSP Monitoring frequency: 1 time/day Monitoring points: Construction sites and transportation roads B. Operation Phase Monitoring parameter: TSP, CO, NOx, SO2 Monitoring frequency: 3 times/day Monitoring points: Bag No.2 C. Monitoring Standard Standard:

Construction sites, settlements Operation: Zamyn Uud town

Construction and Operation phases

Construction phase – CSC; Operation phase –

2. Flora: survivability

A. Monitoring Frequency Construction Phase: 2 times/year Operation Phase: 2 times / year B. Monitoring Points Construction phase: Wind/Sandbreaks Operation phase: Wind/Sandbreaks

Wind/Sandbreaks near Logistics Center

Construction and Operation phases

Construction: Contractor (Sub-Contractor responsible for planting and supporting trees) Operation: Logistics Center Operator

PIU - Project Implementation Unit; CO – Carbon monoxide; NOx – Nitrogen Oxides; SO2 – Sulfur Dioxide; TSP – Total Suspended Particulates.

Source: Consultant from Initial Environmental Examination Report.

75

199. The area will also benefit from the proposed vegetation program, which will further and be in support of existing anti-desertification programs in and around Zamyn Uud.

200. The IEE findings indicate that the Project will have socioeconomic benefits and, if the prescribed mitigation and management measures are fully implemented, it is unlikely to have significant adverse environmental impacts. Environmental management and environmental monitoring plans have been prepared and the responsibilities for implementation assigned. A full Environmental Impact Assessment (EIA) under ADB's SPP (2009) is not required.

VI. SOCIAL AND POVERTY ANALYSIS

A. INTRODUCTION

201. In order to optimize direct and induced benefits, the Social and Poverty Analysis (SPA) plays an important role in the project cycle. Specifically, the SPA defines populations or clientele groups, which will be able to capture benefits through their direct, indirect or induced participation in or utilization of project inputs and outputs. The SPA also identifies assistance that may be required for these clientele groups to optimize their benefits. The specific purpose of the SPA is to develop profiles of the populations in the Project Impact Area (PIA) to:

Determine current transportation services available, their cost and affordability for low-income groups and the potential impact of the Project.

Identify key client groups for the Project and stakeholders.

Determine the extent and reasons for poverty, confirmation of the poverty classification of the Project, and recommendations for targeting benefits to the poor and insuring that these benefits are realized.

Define the socio-economic characteristics of the region in order to develop a plan for optimizing Project benefits to the PIA and to form a baseline for monitoring of Project impacts during and after construction as well as during Project operations.

Identify special issues faced by ethnic minorities, women and other vulnerable groups in the PIA.

Assess the social risks inherent in the implementation of the Project, and address these risks through the preparation of a Social Development Action Plan (SDAP), as well to evaluate the need for the development of specific social protection plans for affected populations, including but not limited to an Ethnic Minorities Development Plan (EMDP), if needed.

Estimate the number and characteristics of Project beneficiaries, the number of adversely affected people by type of impact, and the poverty impact ratio.

76

B. LAND ACQUISITION AND RESETTLEMENT

202. A component in the Terms of Reference is to assess land acquisition and resettlement impacts associated with the development of the Logistics Center in Zamyn Uud and to prepare a Resettlement Plan, if needed. The site selected for the Logistics Center as well as the proposed alignment for rail and road access have been evaluated and there will be no land acquisition or resettlement impacts: there has been no development or other land use of the site area or on the proposed alignment, no structures exist, and all land is government owned land and not leased to or used by individuals or companies. Thus, no Resettlement Plan has been prepared.

C. MAIN CHARACTERISTICS OF THE PROJECT IMPACT AREA

203. Zamyn Uud is a soum (district) in Dornogovi Aimag (province) bordering China and is Mongolia’s main border crossing point. As such, it is heavily dependent on cross border traffic and trade. There are about 12,823 people living in the soum, nearly all of whom live in the built up Zamyn Uud town area.

204. Mongolia is a country where agriculture and particularly livestock herding are of key importance for employment. With a national population of about 2.6 million, the livestock herd totals roughly 40.3 million, or 15.5 head per person. By contrast, Zamyn Uud has only 1.1 head of livestock per person.

205. This reflects the fact that Zamyn Uud is an urban area and its economy is based on government administration including Mongolia’s primary border crossing, electricity production and distribution, and the railway terminus, as well as transshipment, trading, small scale producers of food item such as bakeries and clothing, hotels, and small shops. Moreover and unlike many other areas in Mongolia, Zamyn Uud soum does not have mineral resources or tourism sites. Thus, Zamyn Uud is highly dependent on public administration and trade. There are currently no major industrial enterprises in the area.

206. As an example of its trade dependence, it was reported by Zamyn Uud officials that about 200 trucks per day carrying construction materials were parked waiting to unload for rail transport to Ulaanbaatar and other locations at railway Terminals 1 and 3 in early 2008. Mongolia was then experiencing a construction boom especially in Ulaanbaatar. As a result of the global economic crisis from the last half of 2008, the building boom collapsed. When the Consultant visited Terminal 3 in April 2009 and again in May 2010, there were no trucks waiting to unload, although Terminal 1 still had many trucks carrying goods imported by day-traders waiting for wagon assignment. The downturn in construction obviously impacted the Zamyn Uud economy and indicates its vulnerability to broader macroeconomic effects.

207. Reflecting the above data, unemployment increased by 25.3% from 2007 to the end of 2008/early 2009. However, employment (number of jobs) increased by 15.0% for the same period mainly because of construction of upgraded freight forwarding facilities by private companies.

208. There is an on-going project that is preparing the Master Plan for Zamyn Uud Soum, which reflects accelerating development based on rapid expansion of the nation’s mining sector and the resulting transport and trade implications to the soum as the country’s main gateway to the outside world. In addition, Zamyn Uud has established a

77

Free Economic Zone for manufacturing and processing that will be developed during the Master Plan period. Based on the assumptions that there will be rapid growth in the soum (and the Master Plan must include this scenario for physical, infrastructure and other planning purposes), the Master Plan project is using population totals of 31,000 in 2015; 52,000 in 2020; and 122,000 in 2030. While these projections may seem far too high, they are indicative of the type of growth that is targeted for the soum as Mongolia’s economy expands. It should be noted that the national economy is forecast to double in size based on the development of the Oyu Tolgoi copper/gold deposit over the next 5 years. Similar growth is forecast as a result of the development of the Tavan Tolgoi coal deposit to 2020. There are other mineral deposits that are likely to be developed during the next 10 years. Thus, the economy could conceivably quadruple (or more) over the next 10 years, and Zamyn Uud is likely to experience rapid growth as a result.

209. Topography and climate are key determinants of economic development in Mongolia, with the high mountains and dry steppe and desert areas limiting the range of agricultural activities to seasonal grazing with some crops grown for personal consumption or sale in local markets. The typically cold dry weather means that the average crop growing season lasts about 100 days.

210. Zamyn Uud soum with a land area of 48,600 ha is located in the eastern part of the Gobi Desert, which is typically classified as semi-desert. The landscapes of the eastern Gobi are represented by deserts with fescue shrubs on semi-desert brown soils. The topography of the Project Area is predominantly flat with elevation around 950 meters msl.

211. The area around Zamyn Uud town experiences some of the most intense soil erosion in the country. The National Plan of Action to Combat Desertification in Mongolia (1997) proposed a pilot project aimed at stabilization of sandy soil grazing land to protect Zamyn Uud border area, railway station and town. The long-term (10-year) program has been implemented by the local administration together with the Geo-Ecological Institute to combat desertification and reduce sand movement. Under the program, 240 ha of pastures have been fenced off, 66,000 trees have been planted, and 1 well opened for watering of trees.

D. BENEFICIARY GROUPS

212. The development of the Zamyn Uud Logistics Center will assist shippers and transport operators to improve the efficiency of their operations and by so doing, affect the quality and price of goods coming into or exported from Mongolia. The Logistics Center will generate new jobs in Zamyn Uud in transportation and trade facilitation. In addition, the Logistics Center will encourage expansion of light manufacturing in the Zamyn Uud area. In sum, the Logistics Center will provide a number of opportunities for a range of beneficiaries, including:

Residents of the PIA that will benefit from the improved transport and logistics services.

Shippers of goods into and out of the PIA. Transport costs and transit time will be reduced.

Business people seeking new markets in or goods from the PIA.

78

Potential investors assessing opportunities in the PIA.

Mongolian consumers and producers benefiting from improved efficiencies and lower costs.

Shippers in other regions and countries whose goods are transiting the PIA.

213. In addition to the development of the Logistics Center, the new ADB-funded Regional Road will by-pass the Zamyn Uud town area in its connection to the border crossing with China. In consultative meetings with Zamyn Uud officials and residents during 2009 and 2010, all raised concern over issues relating to vehicle traffic including increasing dust, the risk of accidents, and increasing noise. With the Logistics Center located some distance from the town, and use of the new Regional Road as access to the terminal, many of these concerns will be addressed.

214. The 450 household and 90 business surveys indicate widespread support for the Project and a belief that it will result in positive benefits to the local community. From the consultative meetings, it is also clear that officials and residents view the Project as providing a major boost to the local economy and providing more job opportunities.

E. POVERTY ANALYSIS AND VULNERABLE GROUPS

215. The National Statistical Office has conducted surveys that provide data on poverty including the 2007-2008 Household Socio-Economic Survey (HSES)21, the 2002-2003 Household Income and Expenditure Survey (HIES) and Living Standards Measurement Survey (LSMS), and the 1998 LSMS. Key characteristics of poverty from the 2007-2008 HSES include:

The incidence of poverty is lower in the central aimags (including Dornogobi), where about 30 percent are poor, whereas in the more remote eastern, western and highlands aimags, about 47 percent are poor. Overall, about 47 percent of rural residents are poor, whereas about 27 percent of urban residents are poor.

Larger families in rural areas tend to have a higher incidence of poverty and less access to key social services.

Household heads with higher levels of education have lower incidences of poverty.

Employment in livestock or agriculture is highly correlated with poverty, whereas those employed in the service sectors were least likely to be poor. Employment with public and state companies was associated with better living standards.

Households with property generally have lower incidences of poverty. The main asset owned by the population in Mongolia is livestock. The number of livestock owned by the poor was on average less than half of

21 National Statistics Office. Poverty Profile in Mongolia; Main Report of the “Household Socio-Economic Survey” 2007-2008. National Statistics Office. Ulaanbaatar. 2009.

79

that of the non-poor households. In rural areas, households with livestock experienced lower poverty incidence than those without any livestock.

The type of housing was highly associated with poverty status in urban areas. Those living in apartments were least likely to be poor; while those living in gers were most likely to be poor. In rural areas, those who live in houses were poorer than those living in gers. In urban areas, the poor had significantly less access to water sources, sanitation facilities and electricity; while in rural areas the poor and non-poor had no significant differences in access to these services.

216. According to the Zamyn Uud’s Governor’s Office, there were 222 poor households, or about 8% of the total households in the soum. This is far lower than the national average of 35%. It is also well below the 28.9% rate for households identified as poor in the Consultant’s survey, and the 50.4% with incomes at or below the national poverty rate.

217. Of the 130 poverty households in the Consultant’s survey, 50% included unemployed household members, 5% included a disabled member, and 9% included a retired member of the household. These figures are hardly surprising as they indicate that the poor household has adult members that either are not working or cannot work. As discussed with respect to the Zamyn Uud economy and the border crossing, there was a considerable increase in border traffic between 2003 and 2008, which reflected growth in the broader Mongolian economy and this included the effects of a construction boom in Ulaanbaatar and other towns and cities. With the global economic crisis, credit dried up and the construction boom collapsed. This greatly reduced the flow of goods coming into Zamyn Uud and must have resulted in job layoffs and reduced revenues for small businesses, with increased unemployment as the net effect.

F. THE POTENTIAL IMPACT ON POVERTY

218. As previously described, Zamyn Uud includes few herders and the average number of animals per household is just over 1. In other words, people in Zamyn Uud are dependent on jobs for income and agriculture and herding are not viable short-term options. Thus, households with adult members not working including the unemployed, have few options when jobs are lost. A benefit of the ZU Logistics Center Project is that additional jobs will be created during construction. In addition, demand for imported goods including construction materials is beginning to increase in the rest of the country, meaning that more jobs will be generated in Zamyn Uud to meet the increased demand. Finally, the development of Oyu Tolgoi in the near term and Tavan Tolgoi during this decade will lead to considerable expansion of the national economy, which will lead to increased employment opportunities in Zamyn Uud.

219. While these projections indicate promise for job creation and thus poverty reduction, the events of the last several years and especially the effects of the 2008-2009 global economic crisis clearly indicate that Zamyn Uud as a trade dependent urban area, is vulnerable to macroeconomic effects that are far beyond its control. The prospect of developing its Free Economic Zone and adding light manufacturing in the Project Area may increase employment opportunities but it will also increase vulnerabilities to these macroeconomic effects.

80

220. About 250 total jobs would be created for the Logistics Center during construction. Of these, about 150 jobs would be for unskilled workers. Utilizing contract clauses that require hiring 90 percent of the unskilled from poor households, 135 unskilled jobs would be available. There may well be skilled and semi-skilled workers from poor households that would qualify for positions as well. However, for this analysis, only those jobs that fall under contract provisions will be utilized.

221. The increase in employees over the 3 phases of ZULC development is based on traffic increasing with resulting expansion and development of the full Logistics Center site. About half of the jobs during Phase 1 will involve transfers from the existing cargo handling facilities, while about half will be new positions, and 150 of these jobs will be unskilled positions.

222. The 500 additional jobs during Phase 2 and a further 500 jobs during Phase 3, will be new positions, with about 65% of these for unskilled positions. The unskilled positions range from cleaners, basic security personnel, people involved in shifting cargoes from one mode to another, and other manual work within the Logistics Center. However, there will also be skilled positions such as heavy equipment operators, computer systems operators, and mechanics for maintenance, etc.

223. Thus, over the next 12 years, it may be possible for nearly all poor households in the soum to gain employment through the construction and development of the Logistics Center.

G. MONITORING AND EVALUATION

224. The objective of monitoring and evaluation is two-fold. The first is to set concrete goals and then to monitor progress in achieving them during the implementation to ensure that the maximum positive impact is achieved for the many potential beneficiaries. One year after the Project is completed, it is equally important to see whether the goals were achieved or not. This then becomes input for future projects. It may be that unrealistic goals are set and they need to be modified for future projects. Alternatively, problems may be a result of an approach and methods used rather than the goals. Should this be the case, recommendations need to be made for implementation of future projects.

225. The second objective is to ensure that the Project does not inadvertently bring harm to those affected by it. As a result, a series of social protections are planned and implemented. The success in avoiding harms must also be monitored and evaluated.

226. Many of the targeted outputs are jobs created for local residents and workers from poor households. First, this data should be collected from the construction contractors on an annual basis to monitor whether targets are being met and to make corrective measures as necessary. Secondly, the soum government should be asked to record the number, size, turnover and tax revenue from businesses formed to serve the construction work camp and company staff. They should also describe the extent of informal income-generating activities serving the workers and physical assets the construction contractors have provided to local communities. This information should also be contained in a report submitted to the EA on an annual basis.

81

227. To monitor the social protection objectives, the soum government should submit a brief annual report certifying that the work camp inspections have been made and noting any problems detected and corrected. They should also provide a report of public awareness, testing and counseling programs related to HIV/AIDS and other communicable diseases conducted at the work camps and in what manner condoms have been made available to workers and to local residents in the vicinity of the work camp. These reports will be reviewed to determine if any corrective measures are needed to insure the health of workers and local communities. This should be undertaken under TA 7175-MON: HIV/AIDS Prevention in ADB Infrastructure Projects and the Mining Sector.

228. About one to two years after the completion of construction, a second survey should be carried out in Zamyn Uud.. The results should be reviewed to determine the economic, social and poverty impacts of the Project. The survey should be accompanied by a participatory review of impact with villagers, local officials, local businesses and passengers

229. Using the records of the soum will provide an initial evaluation of whether infrastructure construction projects can have a sustainable impact on raising households above the poverty threshold. About one to two years after the completion of construction, there will be baseline data on a group of workers, records of several social and economic interventions to address factors leading to poverty, records of training and counseling provided regarding planning for future employment or business activity, issues encountered in the transition period and implementing the long-term plan, success achieved in the first year of new employment or other type of economic/business activity. Some of the data will be quantified and some will be subjective, but it will provide a useful view of the capacity of infrastructure projects to lift and sustain households out of poverty. It will provide a useful pilot that can be applied by interested provinces and districts for future infrastructure projects. It will also provide useful input for the EA and for ADB on how to structure projects for maximum sustainable poverty alleviation impact.

VII: LEGAL AND REGULATORY FRAMEWORK

230. This section discusses the legal and regulatory framework for logistics in Mongolia. The Section covers two relevant and interdependent areas which impact upon the development of a successful logistics sector:

(i) Mongolia’s general legal structure relating to state-owned enterprises as well as private companies. This is important because the Zamyn Uud Logistics Center (ZULC) will be government-owned but operated by a private management contractor and private companies will be invited to invest and operate their own logistics and light manufacturing enterprises as tenant of land.

(ii) Legal issues relating to the railway sector. This is important because rail transport particularly in international and national transport over long distances is an important component of intermodal transport. By definition, intermodalism involves more than one mode of transport. Given its importance in Mongolia relative to freight transport by air and waterway, rail is the only available mode to partner with road transport

82

in a logistics environment offering seamless door-to-door service to shippers.

A. GENERAL LEGAL AND REGULATORY ISSUES

231. The applicable laws of a general nature that have an impact on the Logistics Center include and are summarized below:

the Constitution of Mongolia, 1992;

the Land Law of Mongolia, 2004;

the Civil Code of Mongolia, 2002, amended in 2005 (CC);

the Foreign Investment Law of Mongolia (FILOM) and other laws relating to foreign investment;

the Unfair Competition Law of Mongolia;

the Company Law of Mongolia (CLOM);

the Law on State and Local Property of Mongolia 1996 (LOSALP), and Resolution No. 134 made pursuant to it;

the Privatization Law of Mongolia 1991 (PLM);

the Public Procurement Law of Mongolia, which entered into force 2006);

Import and Export Regulations and Procedures, including the Customs Law of Mongolia; and

the Law on Financial Leasing 2006 (LOFL) and amendments to the Taxation Laws relating to the enactment of this Law.

1. The Constitution of Mongolia, 1992

232. This law prevails over any law of Mongolia (Article 70) and over any international treaty or other international instrument (Article 10). It is of particular importance in establishing the current or any future regulatory framework for the logistics sector in Mongolia and will be relied on and referred to often in this analysis. The Constitution:

Sets out general rights and principles respecting citizens and non-citizens (Article 1);

Declares Mongolia an independent and sovereign republic based on democratic principles (Article 1);

Declares Mongolia a unitary state, divided into administrative units only (Article 2);

Affirms an economy based on different forms of property that takes into account universal trends of world economic development and national conditions (Article 5);

Recognizes all forms of public and private property and the protection of the rights of the owner by law (Article 5);

83

Declares that the State regulates the economy with a view to ensuring the Nation’s economic security, the development of all modes of production and the social development of the population (Article 5);

Recognizes international law (Article 10);

Sets out roles of Government (implements laws), Parliament (makes laws), President, Prime Minister and the Judiciary (Article 47);

States that the President has a right of veto a law passed by the Parliament, but the veto is overruled by two-thirds vote of the Parliament (Article 33);

Provides that the President acts by decree which must be in conformity with Law; if incompatible, the decree is invalid (Article 34);

Provides that the Government of Mongolia (GOM) is headed by the Prime Minister, its chief executive, who acts by resolution and ordinances (Article 45);

Provides that laws prevail over GOM resolutions and ordinances (Article 45);

Divides Mongolia into administrative and territorial units (Article 57); and

Provides for special rules for amendment to the Constitution (Article 68).

2. The Land Law of Mongolia (Land Law)

233. The Land Law regulates possession and use of state-owned land, just as the Civil Code (see Subsection 7.2.3) regulates possession and use of privately-owned land.

234. There is no provision in the Land Law stating that an international treaty prevails over its provisions. In this case, it is clear from the Constitution that this omission is by design. One of the principles set out in the Constitution is that land is either owned by the State or by Mongolian citizens; the Land Law reiterates and confirms this principle (Article 5).

235. Under the Land Law, state-owned land can be transferred for possession, use, or both, to a citizen, organization or a corporation, either domestic or foreign (Article 6).

236. The terms “possession of land” and “use of land” are defined in Article 3.1.4 as follows:

To possess land means to be in legitimate control of land in accordance with the purpose of its use and terms and conditions specified in respective contracts; and

To use land means to undertake a legitimate and concrete activity to make use of some of the land’s characteristics in

84

accordance with contracts made with owners and possessors of land.

237. Transfer for use or possession is affected through a license for possession (Article 28) or use (Article 44). A license for possession also requires the applicant to enter into a contract with the state. A license for possession includes use, if the use is set out in the contract (Article 35.1.1). The duration of both kinds of licenses is 15-60 years, extendable up to 40 more years.

238. Application requirements are set out in Articles 31 and 32, the granting of the license by the GOM or local government is set out in Article 33, and the requirements for the contract for land possession is set out in Article 34. There are no statutory requirements with respect to contracts involving a license for use.

3. The Civil Code of Mongolia (2002, amended in 2005) (CC)

239. The CC contains a wide variety of rules regarding contractual arrangements that would be relevant to a leasing company. For example, it sets out requirements:

As to capacity of individuals (Article 14) and companies (Article 26);

Relating to legal persons (Articles 25 – 32), companies (Article 34), partnerships (Article 35), and associations (Article 36);

Regarding all types of transactions (Arts. 39-61); and

Governing all commercial transactions, such as sale and purchase (Articles 243-273), pledge (Articles 153-161), leasing of property (Articles 287-301 and 318-326), financial leasing (Articles 317-326), franchising (Articles 333-338), and mortgaging (Article 165).

240. As noted above, the CC governs civil (private) transactions, i.e., those not involving state land. The Constitution, the Land Law and the CC all prohibit the sale of land to anyone other than Mongolian citizens, through Article 6 of the Constitution, Article 5 of the Land Law and Article 102 of the CC. Therefore, land transfers under the CC would be, according to its applicable provisions, by lease or other special mechanism that apply to immovable property. Specifically, these special mechanisms would be the transfer of land accompanying a construction of a building, known in Civil Law jurisdictions as an emphyteutic lease (Article 150) and a usufruct, or the transfer of the use and enjoyment of an immovable for a set period of time, found in Article 152.

241. The general legal principle regarding a piece of legislation such as a Civil Code is that it will apply unless specific legislation relates to the subject matter and that provision can be derogated from or waived by agreement, if they are not of public order. For example, the Law on Financial Leasing (LOFL) described in Subsection 7.2.11 below, explicitly states that it does not prevail over the CC, but adds to it in certain specific areas, including in provisions dealing with the rights and duties of lessors, lessees and third parties (Articles 9, 10 and 11) and termination and cancellation of the contract (Article 16).

85

4. Foreign Investment Law of Mongolia (FILOM) and other Laws having an Impact on Foreign Investment in Mongolia

242. The purpose of the FILOM is to encourage foreign investment, protect the rights and property of foreign investors in Mongolia, and regulate matters relating to foreign investment. The law is broad in scope, allowing for foreign investment without an upper limit on ownership of Mongolian enterprises by foreign individuals and companies. It does, however, provide for a minimum investment level of 25 percent foreign ownership. It includes joint ventures between foreigners and Mongolian investors and relates to all property, movable and immovable, tangible and intangible.

243. There are currently no tax incentives in FILOM offered to business entities with foreign investment, such as exemptions from VAT (10%) and import duties (5%). Specific incentives in the form of waivers are included, however, in agreements approved by the Parliament for large investment projects such as the Oyu Tolgoi Copper Project Investment Agreement. Earlier, these incentives existed for certain technological equipment and machinery brought into Mongolia as part of the capital of a foreign invested company involved in export-oriented production or to a foreign invested company involved in certain named priority sectors.

244. While the FILOM is seemingly very liberal in scope, the State has far-reaching powers to approve or disapprove the establishment of a business entity with foreign investment or a branch of a foreign legal entity and to temporarily or completely terminate the activities of a business entity with a foreign investment or a branch of a foreign legal entity.

245. Other rules that relate to foreign investment in Mongolia include the following:

Foreigners can own privatized state property (article 4, Privatization Law);

Foreigners can own the subsoil (Constitution);

Foreign citizens and persons can possess and use state owned land and lease privately held land for a specified period (Constitution, Land Law, Civil Code); on this point, the FILOM uses the word “lease” and “leasehold” but the Land Law, passed subsequent to the FILOM, would apply and the foreign entity would need a permit for use and possession of state owned land, rather than a lease;

Foreigners can obtain and hold mineral licenses (Minerals Law of Mongolia, 1997, Article 10); and

Foreigners can own natural wealth in Mongolia (Law Of Mongolia On Environment Protection, 1995, Article 6).

5. The Unfair Competition Law of Mongolia

246. The Unfair Competition Law applies to all legal entities participating in market competition as well as state and local administrative institutions (Article 3.1). It, therefore, applies to any company operating in conjunction with the Logistics Center.

86

247. There are provisions included that are applicable to monopolies, which UBTZ and the recently-established fully state-owned Mongolia Temur Zam (Mongolia Railway, MTZ) may be considered to be. As such, railway rates and tariffs are subject to the supervisory and regulatory authority created under the Law (Article 12.1 and 16).

6. The Company Law of Mongolia (CLOM)

248. The CLOM sets out the rules governing the establishment of companies in Mongolia. The Law has specific rules applying to state enterprises that are privatized and to the situation where state or local authorities are shareholders. In particular, sub-articles 2.3, 2.4 and 2.5 provide that:

Activities of companies established as a result of the privatization of state-owned enterprises shall be governed by this Law, but matters with respect to the establishment of such companies shall be governed by the Law on State and Local Property (LOSALP, see Subsection 72.7 below).

Matters pertaining to the representation of state and local authorities as a shareholder of a company shall be governed by the LOSALP.

Activities of companies established as a result of the reorganization of state-owned enterprises into state-owned companies shall be governed by this Law. In such cases, the state shall be the sole shareholder and shall exercise its rights through the state administrative organizations authorized by the Government to act as shareholders.

249. Subarticle 2.4 is important. The relevant article in the LOSALP is Article 21, which refers to a business entity with state ownership participation. In it, the State Property Committee (SPC) appoints the representative of state ownership to the shareholders’ meeting and the Board of Directors. The article also sets out the powers of the state representatives. This is directly relevant to the establishment and operations of the Zamyn Uud Logistics Center Authority (see Section 10 of this Report for further discussion).

7. The Law on State and Local Property of Mongolia, 1996 (LOSALP)

250. This Law governs all State-owned property and property owned by local governments. If any land or other State property is intended to be acquired, this law will apply to the transfer of such property and the State Property Committee (“SPC”) will be involved.

251. The LOSALP is a useful Law in that it provides an already existing and adequate framework for a 100 percent government-owned enterprise, with regard to its establishment and regulation. SPC will be involved in this enterprise in some capacity, either in its role as regulator of all State-owned enterprises or in its role as protector of state property.

252. The Government Resolution #134 (June 19, 2001) is equivalent to a regulation and is made pursuant to Article 28 of the LOSALP. It sets out the procedure to be

87

followed when leasing state property. In the Consultant’s opinion this resolution does not apply to land, rather that the Land Law governs any transfer involving land, based on the Constitutional provisions on state owned land. Additionally, according to article 45 of the Constitution, a regulation is subordinate to a Law.

8. The Privatization Law of Mongolia, 1991 (Privatization Law)

253. The majority of this Law has been replaced by the LOSALP (see Subsection 7.2.7 above), but it has not been repealed. It still applies to some companies privatized before LOSALP came into force and some provisions are still in effect.

9. The Public Procurement Law of Mongolia

254. This Law was passed in December 2005 and came into force in February 2006. It applies to the procurement of goods, works and services funded by foreign grants or loans (Article 3).

10. Import and Export Regulations and Procedures, including the Customs Law of Mongolia

255. As there is no universally applicable law governing international sales/purchase contracts, obligations of importers or exporters may be governed by the domestic law of Mongolia, or by bilateral trade agreements, legal standards derived from international agreements and rules such as those of the United Nations, World Trade Organization, International Chamber of Commerce, or by prevailing commercial practices and customs.

256. Thus, Mongolia’s domestic legislation that regulates external trade transactions includes the Customs Law and Customs Tariff Law of Mongolia, various laws on income taxes, decrees determining the list of goods subject to prohibition and licensing with respect to their import into and/or export from Mongolia, Chamber of Commerce and Industry Law, the FILOM, and the CLOM.

257. As in most developing countries, external trade is performed on the basis of traditional commercial practices. Exports are mainly made on a “free on board” (FOB) basis and imports on a “cost, insurance and freight” (CIF) basis. These terms must be defined in the sale/purchase contract between the buyer and seller. When negotiating a sale/purchase contract, importers/exporters agree on, among other things, how to share the responsibilities for arranging for the legal and physical transfer of goods, who will cover the specific costs associated with goods movement, and risk of damage or loss.

258. When Mongolia signed the WTO Agreement in 1997, it accepted, as a condition of membership accession, all of the previously agreed upon agreements of the General Agreement on Trade and Tariff (GATT). One requirement for members of the WTO is that the domestic legislation, which puts into effect the terms of those agreements, be provided to the WTO Secretary General. Therefore, measures have been undertaken by the GOM to that end, for example, with respect to the Agreement of Customs Valuation.

259. Since external trade in Mongolia was liberalized relatively recently, many producers lack the knowledge, awareness, and orientation to become successful exporters. The Mongolian Chamber of Commerce and Industry (MCCI), founded in 1960

88

as the Mongolian Chamber of Commerce, plays an important role in this regard. Its main objective is to promote the country’s trade and economic cooperation with foreign countries and to become a major consultative and mediator center, providing practical assistance and services to both Mongolian and foreign businesses. According to the Law on MCCI enacted in October 1995, MCCI exercises some specific powers, such as the issuance of the certificates of origin for export goods, force majeure Certificates and operations of the Foreign Trade Arbitration Court.

260. The provisions of the Customs Law of Mongolia govern all import and export transactions. All goods and means of transport crossing the Mongolian border are subject to customs clearance. Article 10 of the Customs Law states that the principal document for customs clearance of goods shall be the customs declaration form. Customs declarations may be made using the form approved and printed by the customs central state administrative body, either in writing or via electronic information exchange networks.

261. As provided by this Article, the customs authority may, in addition to the customs declaration form, require the declarant to submit supporting documents such as a foreign trade contract, invoice, shipment document, packing list, certificate of origin, customs duties and other tax payment slips, bank security, and licenses or like documents issued by competent authorities.

262. A declarant shall prepare customs documents in the Mongolian language. All goods and means of transport should be accompanied by a shipment document, which is the main supporting document for the customs declaration form.

263. Multiple customs tariffs, which were in place prior to 1991, did not provide for Most-Favored Nation rates. Therefore, Parliament approved the original uniform tariff rate of 15 percent in 1991. The GOM was delegated the authority to reduce the tariff rates on certain basic consumer goods by up to 100 percent, and on industrial and technical goods by up to 50 percent.

264. After its accession to the WTO, Mongolia began introducing general and Most-Favored Nation tariff rates. The end result of this was the enactment by the Parliament of the new Customs Law in 1996.

265. Currently, the VAT tax stands at 10 percent and customs duties at 5 percent, with no exemptions that would apply to acquisition of railway and logistics equipment.

11. The Law on Financial Leasing, 2006 (LOFL)

266. This Law, along with the Civil Code, sets out the requirements for a financial lease and the remedies available to the parties under the lease agreement. The Law on Financial Leasing (LOFL) provides adequate remedies to the lessor, lessees and third parties with respect to financial leasing. Financial leasing is now widely used in Mongolia where a wide variety of articles ranging from household furniture and appliances to construction equipment are leased either under open-end or close-end lease contracts. In the open-end lease contract the lessee has the option at the end of the lease term to buy the article under terms specified in the contract. In the close-end this option is not available to the lessee; the article has to be returned to the lessor.

89

267. In a 2008 survey conducted by the International Finance Corporation (IFC) the following conclusions were reached:22

The total volume in new leases reached almost $90 million in 2007, more than double the volume in 2006, and over eight times the leasing volume in 2005;

The leasing industry has been growing rapidly, reaching a total volume in the outstanding leasing portfolio of over $80 million in 2007, almost three times the leasing portfolio in 2006 and a seven-fold increase over the leasing portfolio in 2005;

The number of lease providers almost quadrupled -- from 13 in 2005 to 48 in 2007 – reflecting the positive changes in the legal environment for leasing industry in Mongolia;

The main lessors are banks and equipment suppliers, constituting the bulk of the portfolio;

The market is diversified, though cars, consumer items, and mining equipment still make up a large percentage of the portfolio;

The share of leasing as a percentage of Gross Domestic Product (1.6 percent in 2007) and in the total loans provided by the banks (3 percent in 2007) has been increasing over the last years, showing that leasing is becoming one of the important sources of financing.

The repayment rate was high for all lease providers, well over 90 percent; and

The sector has stabilized to some degree as indicated by the more favorable terms offered – longer term durations and lower interest rates.

268. There are some restrictions and weaknesses in the LOFL, however, which need to be addressed:

The prohibition against financial leasing of state-owned property has to be removed so that railway and terminal equipment which will be owned by the ZULC Authority (discussed in Section 10 of this Report) can be leased to the private sector companies operating in the terminal on a short-term (monthly, weekly, daily, hourly) basis.

In Article 3, the meaning of who is a “third party” should be clarified.

Article 15 of the Law introduces the concept of temporarily repossessing the asset under certain circumstances. The lessor only needs to notify the lessee in these cases. Nevertheless, the Article increases the risks to the lessor because it penalizes it with unnecessary costs of repossessing and reversing the

22 IFC. 2008. Mongolia Leasing Industry Survey.

90

repossession in cases where the other party (lessee) is at fault. It also contradicts the concept of legal ownership of the asset by the lessor who, after repossessing the asset, would normally sell it or lease it to a new lessee in a secondary lease arrangement.

Articles 9.1.2 and 9.1.3 which refer to the right of the lessor to repossess the property of the lease and cancel the contract appear to conflict with Article 15 which refers to a right of temporary repossession. Temporary repossession is contrary to the concept that under the financial lease, the lessor retains ownership of the property in question.

Article 16 refers to termination and cancellation of the lease. Cancellation of a financial lease contract generally contradicts the concept of a financial lease, which is a financing arrangement, not a rent. In fact, according to Article 5, a financial lease contract cannot be cancelled before one of the criteria for the lease contract is met; otherwise the agreement cannot be considered a financial lease contract.

Enforcement of the lease agreements is also an area of concern. There are several provisions regarding remedies in the case of non-payment, including the remedy of repossession (Article 15).

269. The approach to enforcement with the least risk would be a bank guarantee or a standby letter of credit. Both options are permissible under Mongolian Law, both under the CC and under the LOFL.

270. Commercial Leasing. Mongolia does not have a commercial leasing law. Instead, the Company Law of Mongolia (CLOM, see Subsection 7.2.6 above) and the Law on Financial Leasing (LOFL) have been utilized as the legal instruments for commercial leasing. Recent assessments below) have identified certain problems with the application of the LOFL to leasing equipment and other items which constrains the development of commercial leasing, and thus limits the use of this important financing vehicle by companies throughout the Mongolian economy and in particular the transportation, logistics, mining and construction sectors.

271. Establishing a more formalized and appropriate structure for commercial leasing would enable more companies to lease equipment and increase their participation in the anticipated major growth in Mongolia’s mining and energy sectors, as well as in transportation and logistics. Commercial leasing is a widely used and well-established financing vehicle for mining, transport and logistics operations in many countries, and which should be supported in Mongolia as well.

272. It appears likely that there will be support provided to the government to draft a commercial leasing law, which will be especially important for logistics operators including for cargo handling and other equipment at ZULC.

B. RAILWAY SECTOR LEGAL AND REGULATORY ISSUES

273. The applicable laws of a specific nature applying to the Logistics Center and the railway subsector as a whole are:

91

1996 Law on Railway Safety (1996 Law);

the Law on Railway Transport (LRT);

Parliamentary Resolution approving the establishment of Mongolian Railway Authority (MRA);

MoRTT (now MRTCUD) Regulation dated February 2, 2005 Amendment 2; and

Law of Government Inspection 2003.

274. The applicable agreements of a specific nature applying to the railway subsector as a whole are:

the 1949 Agreement between Russia and Mongolia on the Establishment of the Ulaanbaatar Railway Joint Stock Company (UBTZ) and its protocols (1949 Agreement), and

Multi-Lateral Agreements on Rail Transit Transportation:

o the Border Railway Agreement between Mongolia and Russia, 1953;

o the Border Railway Agreement between Mongolia and PRC, 1954; and

o the Border Railway Agreement between Mongolia, Russia and PRC, 1956.

1. The 1996 Law on Railway Safety (1996 Law)

275. The 1996 law which had set out UBTZ’s duties and responsibilities with respect to safety and includes safety procedures, instructions, approvals and other safety measures, has been replaced by the Law on Railway Transport. According to the 1996 Law, the railway is essentially self-regulating on safety matters and is governed by the 1949 Joint Stock Agreement (see Subsection 7.3.6 below) and its Rules and Protocols with respect to organizational structure and railway operations. It is regulated by other domestic laws of general application, such as the Law Against Unfair Competition, which applies to all monopolies, including UBTZ. Whether these Mongolian laws are enforced against UBTZ is another issue.

276. Under the 1996 Law, UBTZ adopts technical, signaling and operating rules already in existence. These rules are also in force for any other railway, such as private industry railways which must follow the same regulations adopted by UBTZ.

2. The Law on Railway Transport 2007 (LRT)

277. LRT relates to regulatory issues and the regulatory framework for railway operations. It represents a new approach to railway regulation in Mongolia by setting out a comprehensive regulatory scheme for the railway sector, covering railway safety, economic issues and independent regulatory oversight. The policy which gave birth to the law originated in Parliamentary Resolution No. 24 of 2004, which itself was issued as a result of the Government Action Plan 2004-2008. In that Resolution, the GOM approved a plan that included undertaking legal reforms to allow for the reorganization of

92

the railway sector, in particular to separate infrastructure from railway operations and to implement changes to increase the competitiveness of the railway in the international rail transport market.

278. The stated goal of LRT is to ensure railway transport safety and develop the railway transport sector while balancing the interests of the state, the public, customers, carriers and owners of railway infrastructure.

279. The means to achieve this was initially through the creation of MRA, an independent government entity, formed in 2004 by Parliamentary Resolution. MRA’s mandate under this Resolution is to oversee and regulate railway safety and implement railway policy relating to both safety and economic issues. Additional powers are given to MRA in LRT relating to a licensing scheme for market entry and a track access regime permitting new operators to use the railway infrastructure on which to operate their services.

280. LRT also defines the respective roles of the GOM, the Central State Administrative Body in charge of railway transport issues, the aimag, the city of UB, the soum and the district governors, and UBTZ, giving each of these a role in railway safety.

281. Regarding safety regulations, the railways will be covered by the same codes and rules followed before, but now, in Article 15 of LRT, these rules are enshrined in legislation. A State Railway Inspection Body (SRIB) was created within MRA, thus separating rail safety enforcement from UBTZ and transferring this function to a division within the independent regulatory authority. The SRIB is empowered to exercise administrative supervision over railway safety (employee and public safety) and over service matters (Article 13), and will consist of the State Railway Senior Inspector and the State Railway Inspector (Article 13.4) who will supervise the implementation of all safety legislation under the guidance of the MRA Chairman. The SRIB also has a role in the choice of new license holders under the proposed new market entry provisions (Article 13.7.5), most likely by advising on safety aspects of licensing applications.

282. Important new features of LRT are new market entry provisions (licensing of new operators of railway services) and an open access scheme whereby railway infrastructure continues to be owned by UBTZ, with what appears to be a duty on the part of UBTZ to enter into contracts with other carriers (Article 19.2.3) allowing them non-discriminatory track access subject to capacity restrictions of the infrastructure operator. Where the railway is both infrastructure operator and a railway service provider, the railway has a duty to keep separate accounting (Article 19.3).

283. Another important new feature of LRT, closely related to the open access provisions noted above, is the new licensing scheme for railway operators. It would appear from LRT that a company that manufactures rolling stock would be considered to be a rail operator. Would a leasing company incorporated to acquire rolling stock also be required to hold a license? LRT states that a special license is needed for building infrastructure, repairing, manufacturing and installing infrastructure and rolling stock and for carrying out railway transportation services (Article 16). It, therefore seems, unlikely that purchase or leasing of rolling stock is included in these categories. An oversight role for MRA regarding such leasing would have to be accomplished by specifically giving MRA this role rather than it being inherent in the mandate. This approach is recommended by the Consultant.

93

284. Thus, while the law enables other railway operators to utilize track and other facilities, there have been no other operators or licenses granted as of August 2010. The Government, however, established Mongolian Tumur Zam (MTZ) in March 2008 as a fully state-owned railway transport company under SPC’s ownership with its operations and overall supervision delegated to MoRTT (now MRTCUD) and with regulatory oversight by MRA. Appendix 2-B includes the regulations establishing MTZ.

285. The following issues are noted with respect to the open access provisions under LRT:

The open access provisions should be carefully thought out, especially the degree of control that UBTZ as the infrastructure provider will have over the choice of operators. There does not appear to be any control by the railway under the provisions, as long as the new operator meets safety and financial requirements under the licensing provisions; and

The open access provisions appear to make assumptions regarding land and usage of railway track covered by the 1949 Agreement that may be open to question by the Russian partner of the Agreement. They assume that any rights granted to UBTZ under the Agreement are not exclusive, which would seem to be a contentious position to take.

286. It is recommended with respect to open access provisions that additional powers be given to MRA in LRT to make regulations regarding open access, but for the time being, omit the general principle of open access now provided in Article 19.2.3. This would allow for such provisions if and when necessary, and would give the MRA flexibility to decide on the type and degree of access desirable.

3. Parliamentary Resolution # 14 Approving the Establishment of MRA, 2004

287. MRA was created by Parliamentary Resolution No. 14, dated September 2004. This Resolution approves the establishment of certain agencies and Ministries, including MRA.

288. A Parliamentary Resolution is apparently equivalent to a Law. The use of such a powerful legislative instrument to create MRA indicates the importance that the GOM places on rail transportation as an element in Mongolia’s economic development.

4. MoRTT Regulation Dated February 2, 2005, Amendment 2

289. Although the term used in English translation for this instrument is “regulation,” MRA officials indicated to the Consultant that this is a law, passed by Parliament that embodies the government policy of 2004 to regulate railways through a separate and independent oversight authority. The exact status of this instrument remains to be established.

290. The instrument in question sets out the powers and duties of MRA. It states that MRA is a government implementation agency responsible for:

94

The implementation of government policy relating to railway transportation, and

The implementation of laws and other acts of legislation to ensure railway transportation safety and rational utilization of state property relevant to railway transportation safety.

291. Under this Regulation, MRA has powers of oversight and recommendation, for example with regard to drafting international agreements relating to rail, coordinating activities of railway organizations, supervising and monitoring railways regarding railway safety and recommending changes to passenger tariffs. Also under this Regulation, MRA has original powers to:

Make and enforce safety regulations;

Implement (but not make) railway sector policy;

Make and implement railway transportation development strategy;

Possess, maintain and lease state property and enter into contracts to maintain, rehabilitate and renew possessed state property;

Grant licenses for railway activities;

Conduct investigations; and

Determine and implement policy regarding railway transportation human resources.

292. Many of these powers overlap with those provided in LRT, such as the power to grant licenses for railway activities. In one important respect, the Resolution gives powers to MRA not found in LRT: the power to “possess, maintain and lease state property and enter into contracts to maintain, rehabilitate and renew possessed state property.” LRT provides additional powers to MRA, in particular, the power to issue stop orders regarding unsafe operation of railway infrastructure and rolling stock. Under LRT, the MRA will also supervise unfair competition rules as they relate to the railway sector.

293. The following issues are noted with respect to MoRTT Regulation dated 2 February 2005, Amendment 2 and LRT:

The MoRTT regulation should be consolidated with the LRT and afterwards repealed. Both deal with the same subject matter and the existence of two legislative instruments dealing with the same topic is confusing, especially when the two instruments do not appear on the face of it to have the same force. Even though MRA officials affirm that this regulation is equivalent to a Law, it appears to have been enacted by MoRTT, not Parliament.

Specifically, the powers to possess, maintain and lease state property should be incorporated into MRA’s powers under Article 12 of LRT; property other than state-owned property should be added.

In addition, the powers of a “legal person” as defined in the Civil Code of Mongolia should be given to MRA in order to cover all it

95

needs as an asset-holding entity. This would enable it, if required, to handle future reform in the railway sector, such as a decision to separate railway infrastructure from UBTZ railway operations and put infrastructure in an independent legal entity (assuming a new railway agreement is negotiated with Russia).

MRA should also be given the power under LRT to incorporate other companies, individuals or entities and to enter into any contractual arrangements with other companies, individuals or entities in furtherance of its mandate; this is implicit in the powers of a “legal person,” but its inclusion in MRA’s powers is recommended for greater certainty.

5. Law of Government Inspection 2003

114. According to this Law, the State Inspection Agency, established under this Law with the same status as a Ministry, has the duty to inspect the Railway. It has delegated its mandate to the MRA, so in theory, the safety monitoring function has been separated from UBTZ. In practice however, UBTZ continues to inspect itself, using its own railway inspector. While MRA has the power to inspect the railway under this Law and at times has organized inspections on UBTZ, it has no inspection department as yet, as a result of budgetary constraints. As has been seen, under LRT, the safety inspection function will be transferred from UBTZ to the SRIB to be created as a separate division within MRA.

6. The 1949 Agreement between Russia and Mongolia on the Establishment of the Ulaanbaatar Railway Joint Stock Company and its Protocols (1949 Agreement)

294. The 1949 Agreement represents the current legal framework governing the operations and infrastructure of the UBTZ. The complete agreement, along with Protocols in English is included in Appendix 7-A.

295. The 1996 Law also applies to UBTZ but it is mainly safety oriented and does not conflict with the 1949 Agreement. It does, however, contain some insight into the interpretation of the 1949 Agreement and the intention, at least from the Mongolian side, as to what was transferred in the Agreement.

296. The 1949 Agreement consists of 15 articles. It is of unlimited duration, with termination only by agreement of both parties (Article 14). In it, the parties agree to establish a Soviet-Mongolian joint venture for the construction and operation of a railway line from the Soviet–Mongolian frontier point of Naushki to Ulaanbaatar (402 km). Protocols to this Agreement extend the line from UB southward to the Chinese-Mongolian border to a point just beyond Zamyn Uud (712.69 km) with a branch line from Salkhit to Erdenet (163.5 km) and other branch lines from Khonkhor to Nalaikh (12 km), Darkhan to Sharyn Gol (61.8 km), Tolgoit to Songino, Bagakhangai to Baganuur (94.4 km), Airag to Bor-Undur (58.2 km) and Sainshand to Zuunbayan (47.3 km).

297. The Agreement was signed by the Ministry of Railway of the former USSR and the Ministry of Transport for the former Mongolian People’s Republic (MPR) and provides for equal ownership of stock in the joint venture.

96

298. The Agreement provides for the formation of a Railway Board of Directors consisting of 3 members from each country including a Chairman of the Board appointed from the Mongolian members and a Deputy Chairman appointed from the Soviet side. The Rules signed in 1968 relating to the Agreement specify that the Chairman of the Railway rotates every 3 years between a Mongolian and a Russian member.

299. Under the Rules of 1968, the Chairman of the Railway has extensive powers to act on his own and in particular, to procure, rent, transfer and sell property, both movable and immovable.

300. Article 5 of the Agreement is of particular importance with regard to the issue of available land for use by UBTZ. That article sets out what was transferred to UBTZ by GOM to pay for its share of the joint stock. It uses the words “transferred for unlimited use,” with unlimited referring to time, of 120 meters of railway strip (60m on each side of the railway track), 300 meters in width of the station (150m on either side of the station) and 2,000 meters lengthwise beyond the station land. It also provides for the transfer of 10,000 hectares of land over and above the land referred to above, for unlimited use, unlimited again referring to time, of this land for purposes of obtaining construction materials, coal and oil to operate the railway and to construct technical facilities, buildings and other construction.

301. The following conclusions can be drawn from the 1949 Agreement, along with its Rules and Protocols, which total about 27.

302. Legally, it is an international agreement but is not registered as a treaty in accordance with the Vienna Convention of the Law on Treaties, 1969. It predates that Convention, but the Convention is a codification of customary law regarding treaties and as such requirements such as the one found in Article 1, that the instrument be signed by heads of State or other persons specially authorized, would most likely have applied even in 1949. The significance as to whether it is a valid treaty is that under Mongolian Law, the terms of a treaty will prevail over domestic law unless it conflicts with the Constitution and as a corollary, cannot be amended or changed by domestic law. Moreover, if it is not a valid international treaty, an authentic “international treaty,” could supersede it.

303. If the 1949 Agreement is a valid international treaty and prevails over domestic law, it is submitted that the provisions on transfer of land cannot be read to mean transfer of ownership. The present Constitution (passed in 1992) as noted earlier, prohibits the transfer of ownership of state-owned land to anyone but a Mongolian citizen. The Constitution in effect in 1949 contained similar provisions; in fact it was more specific and peremptory regarding state ownership and stated that among other things, air, water, land, railways, roadways, minerals and communication systems were the property of the State and could not be alienated. A strong argument therefore can be made that any transfer of land or other resources under the Agreement cannot be taken to mean transfer of ownership. This approach is consistent with the treatment of land on the financial books of UBTZ where land is not included as an asset in the UBTZ accounts.

304. It is also consistent with the wording itself of the Agreement which, as noted earlier, refers to transfer of the track for use and not ownership. As to the other 10,000 hectares, these were transferred, again only for use, for particular purposes, such as for

97

logging and lumbering to be used for constructing the railway and for certain facilities related to railway operations. It can be further argued that “use” is a more restrictive term than “possession” and that as long as the land referred to in the 1949 Agreement is not being used, the GOM, the owner of the land, is free to allow another party to use it.

305. The Law of 1996 mentioned earlier, is in essence consistent with the interpretation of the land in question being “transferred for use”, although it does refer to “possession and use” with respect to the right of way. Article 11.7 states that the railway strip line belongs to the State and the railway organization, i.e. UBTZ only has the rights of its possession and utilization. This is GOM domestic legislation that in principle cannot overrule an international treaty, but it does emphasize that State land, especially when being used for the public benefit, is treated in a special manner in Mongolian Law; it also echoes the protection given State land in the current Constitution, which was even more explicitly given to railways in the pre – 1992 Constitution.

306. The LRT does not contain the above provision, but goes even further in its interpretation of how the land transferred to UBTZ can be used. It clearly provides in Article 6 that the railway infrastructure, defined in Article 3 as the track and all other associated facilities and construction, is the property of the State, not UBTZ. It also provides for the licensing of other rail operators (Article 16) and sets out the principle of open access by those operators on the railway infrastructure (Article 19.2.3). It is evident that the GOM position with regard to what was transferred in the 1949 Agreement, whether it was use or use and possession, was nonexclusive use or possession.

307. On the question as to the nature of the right given to UBTZ in the 1949 Agreement, there is a similarity in the rights of use and possession granted to UBTZ in 1949 to the right of usufruct, a right of use and enjoyment that is found in the Civil Code at Article 152. Usufruct is a real right and as with all real rights has registration formalities. In 1949, these could not have been followed as there was no Civil Code, no usufruct rights and no registration procedure. Usufruct would not have applied to State land in any case. The analogy to usufruct is simply to indicate that ownership of the land itself does not pass with wording that gives a right of enjoyment and use. Even on the question of use, there are distinctions in the 1949 Agreement between use of the railway strip and associated land and use of the 10,000 hectares. In the case of the railway strip, the right of use relates to operation of the railway and as long as it is used as such, UBTZ could argue an exclusive right to use. In the case of the 10,000 hectares however, the right of use is narrower than that granted with respect to the right of way and is limited to specific purposes. It would be difficult to argue that UBTZ’s rights over this land are exclusive.

308. From this perspective, it is submitted that there are good legal arguments to support the view that the Agreement does not affect ownership of any of the land, including the right of way, transferred to UBTZ for operating uses of the railway. There are also good legal arguments to support the right of the GOM to use unproductive or unused land for other purposes, such as to grant a possession or use permit under the Land Law to someone else, for example to build an intermodal terminal.

7. Bilateral/Multilateral Agreements on Rail Transit Transport

309. In recent years, PRC has become the major market for Mongolian exports. Trade between Mongolia and PRC has been rapidly increasing and is likely to grow in the

98

years to come. In addition, transit traffic of goods through the territory of Mongolia is ongoing with dramatic increases and decreases in annual volumes.

310. Mongolia has entered into three agreements regarding transit and import/export rail traffic, one with Russia, one with PRC and one tripartite agreement involving all three parties:

The Border Railway Agreement between Mongolia and Russia, 1953;

The Border Railway Agreement between Mongolia and PRC, 1954; and

The Border Railway Agreement between Mongolia, Russia and PRC, 1956.

311. The above three Agreements govern the relationship of border operations such as which party is responsible for gauge change (between PRC and Mongolia), receipt and return of one party’s wagons and other equipment by the other party, rules governing repair of a party’s rolling stock by the other party, distribution of revenue on goods moving under through bills of lading, etc.

VIII. IMPLEMENTATION ARRANGEMENTS

A. INTRODUCTION

312. As the first dedicated logistics facility in the country, the Zamyn Uud Logistics Center (ZULC) will be a new undertaking for the Ministry for Roads, Transport, Construction and Urban Development (MRTCUD) and more generally Mongolia. Importantly, there are institutional structures already in place to facilitate the Logistics Center’s implementation and operation. This includes the National Committee for Transport and Trade Facilitation, which is chaired by the Minister for MRTCUD and established as part of regional cooperation within the CAREC framework.

313. This section discusses the implementation arrangements for the ZULC, including its implementing structure, the role of the design and supervision consultant, the ZULC Management Consultant, and private sector participation. The section concludes with the Procurement Plan.

B. IMPLEMENTING STRUCTURE 314. Table 8.1 summarizes the organizations involved in the Project’s implementation and principal roles and responsibilities. The Executing Agency (EA) will be the MRTCUD and the Implementing Agency (IA) will be the Mongolian Railway Authority (MRA). The EA has considerable experience in implementing ADB and other internationally-funded projects, especially in the roads subsector. The IA has not had this experience but is an agency under the EA. Thus, there will be considerable support provided to the IA during implementation of the Logistics Center as well as during its operations.

99

Table 8.1: Project Implementation Organizations

Project Implementation Organizations Management Roles and Responsibilities

Ministry of Roads, Transport, Construction, and Urban Development (MRTCUD -the executing agency)

recruiting project management consultants (PMC);

finalizing surveys, design, bidding documents, and contract awards;

timely provision of agreed counterpart funds for project activities;

monitoring and evaluation of project activities and outputs, including periodic review, preparation of review reports reflecting issues and time-bound actions taken (or to be taken);

involving beneficiaries and civil society representatives in all stages of project design and implementation;

public disclosure of project outputs; quality assurance of works, and services of

consultants and counterpart staff; establishing strong financial management

system and submitting timely withdrawal applications to ADB, conducting timely financial audits as per agreed timeframe and taking recommended actions;

complying with all loan covenants; preparing regular periodic progress reports, and

project completion reports and their timely submission to ADB; and

ensuring projects' sustainability during post implementation stage and reporting to ADB on the assessed development impacts.

Ministry of Finance (MOF)

signing the Loan Agreement for the Project; monitoring of the project implementation and

providing respective coordination and facilitation;

allocating and releasing counterpart funds; endorsing to ADB the authorized staff with

approved signatures for WAs processing; and processing and submitting to ADB any request,

when required, for reallocating the loan proceeds.

Mongolian Railway Authority – MRA (Implementation Agency)

recruiting project management consultants (PMC);

finalizing surveys, design, bidding documents, and contract awards;

overall construction supervision with the Project Management Consultants, quantity and quality validation of installation of civil works, equipment and procured machinery;

involving beneficiaries and civil society representatives in all stages of project design and implementation;

public disclosure of project outputs; quality assurance of works, and services of

consultants and counterpart staff; establishing strong financial management

system and submitting timely withdrawal applications to ADB, conducting timely financial audits as per agreed timeframe and taking recommended actions;

100

complying with all loan covenants; preparing regular periodic progress reports, and

project completion reports and their timely submission to ADB; and

ensuring projects' sustainability during post implementation stage and reporting to ADB on the assessed development impacts.

MRTCUD’s Roads and Transport Policy Department; Finance, Investment and International Cooperation Department; and Internal Auditing, Monitoring and Evaluation Department (organization units supporting the Implementation Agency)

Primarily responsible for supporting MRA, PIU in the implementation of the project;

Practical (on-the-job) training of MRA PIU staff on ADB documentation requirements, as needed.

Asian Development Bank (ADB)

assist the MRTCUD and its project implementation agency in providing timely guidance at each stage of the project for smooth implementation in accordance the agreed implementation arrangements;

review all the documents that require ADB approval;

conduct periodic loan review missions, a mid-term review, and project completion mission

ensure compliance of all loan covenants including safeguards;

timely process withdrawal applications and release eligible funds;

ensure the compliance of financial audit recommendations;

regularly update the project performance review reports with the assistance of MRTCUD and MRA;

regularly post on ADB web the updated project information documents for public disclosure, and also the safeguards documents as per disclosure provisions of the ADB safeguards policy statement

Source: PPTA Consultant

C. ASSESSMENT OF FINANCIAL MANAGEMENT

315. The MRA as the IA has a separate accounting division, Administration and Finance, which manages all accounts under it and oversees all budgetary actions and expenditures. Given the generally satisfactory environment for planning and budgetary control, it is reasonable to assume that these functions at the Project level, to be manned by experienced staff sourced from MRTCUD are expected to be performed with diligence and in a satisfactory manner. This has been confirmed in the Consultant’s discussions with the MRTCUD and MRA officials.

316. The 1998 ADB TA-2993 on Project Accounting as well as the regular training conducted since then for accounting staff has contributed greatly towards making project accounting meet international standards. This includes the use of modern accounting software, which computerizes all accounting procedures. The fact that ADB’s rules and requirements are followed in road project financing and that disbursements are made separately from the Government agency directly to the executing body from ADB results in a suitable control structure ensuring that the requirements of project financial procedures are met.

101

317. Additionally, enactment of the Law on Foreign Loans and Grants and the approval of Rules on Inspection/Auditing and Assessment of Internationally Financed Project Activities have given impetus to improving internal auditing of projects.

318. The Consultant’s review of the financial management activities of the EA includes: (i) analysis of the EA’s structure and management framework with regards to financial management; (ii) assessing the EA’s resources, including the number, quality and technical capabilities of its staff, the extent of financial and budgetary support it obtains, the nature of technology, equipment, software in use; (iii) assessing the EA’s operating results and identifying specific performance shortfalls, if any, and specific institutional deficiencies and related institutional strengthening interventions, pertaining to both the management framework and those due to resource constraints. The Financial Management Assessment Questionnaire is in Supplementary Volume II, Appendix 8-A. Table 8.2 presents a summary of financial management assessment.

319. The EA’s accounting policies were reviewed, including standards of financial reporting and general accounting practices. These policies conform to accepted national standards and practices, which facilitates comparison and performance evaluation.

320. Proper internal control is an important element of good governance and an important anticorruption measure. For ensuring accountability for project implementation funds, each project should have an adequate accounting and internal control system for recording and reporting project-related financial transactions from the time that project expenditures commence.

321. Given the above, the conclusion of the Consultant is that adequate systems, controls and safeguards are in place to effectively manage Project implementation and construction. The EA, MRTCUD, as well as the Ministry of Finance have considerable experience implementing internationally-funded projects including ADB-funded projects.

322. One Implementation weakness experienced in past projects, is delays in implementation principally caused by: (i) postponement of counterpart funding due to national budgetary constraints during periods of economic and financial hardship; and (ii) ambiguous contract terms on bilaterally-funded projects where enforcement of contract terms and resolution of disagreement with contractors have been time consuming. To avoid recurrence of such delays, the Government has assured that counterpart funding for the Project will be made in a timely manner. Also, a procurement expert will be included in the consulting services contract for detailed design and implementation supervision to assist the EA and IA in drafting contracts for ICB with clear and enforceable terms. These ICB tender packages will be further reviewed by ADB for clarity, enforceability, and compliance with ADB requirements.

323. To strengthen the financial management of the Project the following actions are required by the MRTCUD:

(i) MRA, PIU’s financial staff must undergo training on ADB financial management procedures to understand them and strengthen their internal audit capacity;

(ii) A separate financial management manual for the project should be established in accordance with the Government and ADB requirements before loan effectivity; and

102

(iii) MRA should maintain separate accounts for the Project and have such accounts audited annually, in accordance with appropriate auditing standards consistently applied by independent auditors whose qualifications, experience, and terms of reference are acceptable to ADB.

Table 8.2: Summary of the Financial Management Assessment

Particulars Conclusions

A. Funds Flow Arrangements

To date, various international financing projects have been implemented by MRTCUD, with most projects financed by ADB, the World Bank, European Bank for Reconstruction and Development (EBRD), and bilateral assistance organizations from Germany, Japan, and United States. However, internal funds flow arrangements are although mostly reliable and secure, delays have been encountered due to financial and economic downturns. MRTCUD has enough capability to smoothly work under the proposed project with the training for MRA’s PIU staff designed through ADB TAs in procurement and preparation of terminal management contract bidding package and by the project implementation consultant during project implementation.

B. Staffing MRTCUD’s Finance, Investment and International Cooperation Department, which oversees funds flow, is staffed with experienced financial specialists who are experts in managing the internal finance. All employees are full time with formal job descriptions for each position. Experienced staff in this Department will provide the necessary support to the PIU.

C. Accounting Policies and Procedures

The chart of accounts based on the state standard format has been in use by the Financial Department for many years. Segregation of duties is specified in the comments on the questionnaire including budgeting system, payments, policies and procedures, cash and bank, safeguard over assets, other offices and implementing entities. A separate financial management manual is planned to be established for the Project to be used by the PIU in accordance with ADB requirements.

D. Internal and External Audits

An Internal Audit function is available through the Internal Auditing, Monitoring and Evaluation Department of MRTCUD. For the external Audit, the independent governmental auditor is the Mongolian National Audit Office. Annual audited report by this agency for 2008 has been received and reviewed by the PPTA consultant.

G. Reporting and Monitoring

Financial statements are currently prepared for MRTCUD on monthly, quarterly and annual basis. Existing reporting system can be linked with the financial information of physical project progress but with the help of financial management specialist of the consultants.

H. Information Systems

Financial management system is computerized and it produces the necessary financial reports of the ongoing development works. The staff is adequately trained to maintain the system and the management organization and processing system safeguard the confidentiality, integrity, and availability of the data

Source: PPTA consultant

D. REPORTING REQUIREMENTS 324. Figure 8.1 shows the reporting requirements during the implementation of the ZULC Project. A Project Implementation Unit (PIU) will be established for day-to-day management of the Project. The PIU will be staffed with experienced personnel from

103

MRTCUD organizational units and recruitment of qualified candidates. An international firm will be engaged as project management consultants (PMC) with responsibility for detailed design and implementation supervision as well capacity improvements in procurement and logistics terminal management. Contract modalities will include civil works and procurement and installation of terminal equipment and systems, hence the PMC’s role will be to manage contracts with IA and PIU and give hands-on training in project management and oversight, financial management, operation and maintenance, asset management, and reporting. Considering this being the first IFI-funded project in MRA, the direct involvement of MRTCUD’s related departments in project execution will result in their effective capacity improvement for implementing externally-funded projects. The institutional and reporting arrangements are considered appropriate and more than adequate to ensure compliance with ADB’s policies and guidelines.

Figure 8.1: Reporting Requirements for Implementation of the ZULC Project

I. Provide monthly, quarterly, and other reports on work performance. II. Provide findings upon inspection and verification of work performed. III. Submit a request to finance the job to the Ministry of Finance upon completion of the

Withdrawal Application and Site Supervisor inspection report. IV. Ministry of Finance reviews and submits the Withdrawal Request to ADB. V. ADB makes direct payment to the contractor(s) and consultant. VI. Submit a report on usage of the loan to ADB twice a month.

Ministry of Finance

Mongolian Railway

Authority (IA)

Project Accountant

Project Implementation Unit

Project Advisor

Company(ies) contracted for construction of Logistics Center

III

VIIV

VI

V

I II

III II

I

II VI

Ministry of Road, Transport, Construction

and Urban Development (EA)

Intermediary (Correspondent)

Banks

Asian Development

Bank

Detailed Design and Construction Supervision Consultant

104

E. RISK ANALYSIS 325. During the implementation phase, the MRTCUD and MRA might face some risks that can generally be divided in two main categories: (i) country level; and (ii) organization/project level. Delay in the release of counterpart funds can be attributed as major country specific risk for the Project. Further, all the contracts with foreign suppliers/consultants financed out of loan funds are subject to approval by the MRTCUD, MOF, and other cognizant agencies, which takes considerable time and eventually it will negatively affect the project implementation. This, together with project-specific risks and activities to mitigate them, are summarized in Table 8.3. Financial management risks shall need to be considered and updated throughout the life of the Project. Risk mitigation measures shall also be updated accordingly.

Table 8.3: Risk Assessment and Mitigation Measures

Risk Risk

Assessment*Risk-Mitigation Measures

Inherent Risk 1. Country-specific Risks M MOF and MRTCUD shall ensure the timely release of

counterpart funds, as per loan covenants 2. Entity-specific Risks M MRA is new to ADB procurement guidelines and

disbursement procedures. Involvement of MRTCUD staff and international procurement specialist at the initial stage of the project until all contract awards and consultants recruitment, and on-the-job training on ADB procedures shall be carried out.

3. Project-specific Risks M Legal documents for transfer of land use to MRA for the ZULC site as well as easement rights for construction of access rail and road with overpass bridge will be completed before loan effectiveness

Overall Inherent Risk M Control Risk

1. Implementing Entity N Organizational capacity of MRTCUD to oversee the implementation is satisfactory.

2. Funds Flow S Timely availability of counterpart funds will be ensured by implementing the proposed funds flow arrangements

3. Staffing M Implementation consultant shall assist the MRTCUD to design and implement the training program for PIU staff of MRA especially for ADB financial reporting requirements and their integration into overall national financial reporting requirements.

4. Accounting Policies and Procedures

N Accounting Policy and Procedures Manual for PIU shall be drafted taking into account the national accounting standards and the requirements of ADB.

5. Internal Audit N Capacity of MRTCUD’s Internal Auditing, Monitoring and Evaluation Department shall be reviewed and improved, as necessary, by the implementation consultant.

6. External Audit M Audit of the project accounts shall be done in accordance with the International Standards on Auditing, by an external auditor acceptable to ADB.

105

Risk Risk

Assessment*Risk-Mitigation Measures

7. Reporting and Monitoring M MRTCUD, MRA and implementation consultant shall regularly report in accordance with ADB requirements on inherent adequate control mechanisms.

8. Information Systems S Appropriate computerized information systems shall be installed at MRA, PIU to strengthen the efficiency of existing information system and reporting.

Overall Control Risk M * H – High, S – Substantial, M – Moderate, N – Negligible or Low. Source: PPTA consultant

F. DISBURSEMENT 326. The Loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time)23.

327. Pursuant to ADB's Safeguard Policy Statement (2009) (SPS),24 ADB funds may not be applied to the activities described on the ADB Prohibited Investment Activities List set forth at Appendix 5 of the SPS. All financial institutions will ensure that their investments are in compliance with applicable national laws and regulations and will apply the prohibited investment activities list (Appendix 5 of SPS) to subprojects financed by ADB.

328. Only direct payment procedures will be used for all goods and civil works contracts, which are designed as large, and also for consulting services. Since there are very few expenditures envisaged other than civil works and goods contracts and consulting services, as shown in detailed cost estimates, a Project imprest account for ADB-funded expenditures will be established with minimal account balances.

329. MRTCUD will be responsible for (i) preparing disbursement projections, (ii) requesting budgetary allocations from MOF for counterpart funds (on behalf of MRA for the Project), (iii) collecting supporting documents, and (iv) preparing and sending withdrawal applications to ADB. Before the submission of the first withdrawal application, the Government shall submit to ADB sufficient evidence of the authority of the person(s) who will sign the withdrawal applications on behalf of the borrower, together with the authenticated specimen signatures of each authorized person. The minimum value per withdrawal application is US$100,000, unless otherwise approved by ADB. The MRTCUD is to consolidate claims to meet this limit. Withdrawal applications and supporting documents will demonstrate, among other things that the civil works, goods, and/or services were produced in or from ADB members, and are eligible for ADB financing.

330. All disbursements under government financing will be carried out in accordance with regulations of Mongolia relevant to co-financing of the projects financed by the Multilateral Financing Organizations. The MRA shall open and maintain an imprest account for government co-financing funds.

23 Available at: http://www.adb.org/Documents/Handbooks/Loan_Disbursement/loan-disbursement-final.pdf 24 Available at: http://www.adb.org/Documents/Policies/Safeguards/Safeguard-Policy-Statement-June2009.pdf

106

G. ACCOUNTING 331. The MRA will (i) maintain separate accounts and records; (ii) have such accounts audited annually, in accordance with appropriate auditing standards consistently applied by independent auditors whose qualifications, experience, and terms of reference are acceptable to ADB; (iii) furnish to ADB as soon as available but in any event not later than 6 months after the end of each related fiscal year, certified copies of such audited project accounts and the report of the auditors relating thereto (including the auditors’ separate opinions on the use of the loan proceeds and compliance with the financial covenants of the loan agreement; and (iv) furnish to ADB such other information concerning such accounts and the audit thereof as ADB shall from time to time reasonably request. The independent auditors will be engaged and financed under the Project.

H. AUDITING 332. The MRTCUD will cause the detailed consolidated project accounts to be audited annually in accordance with International Standards on Auditing by an auditor acceptable to ADB. The audited accounts will be submitted in the English language to ADB within 6 months of the end of the fiscal year by the MRTCUD. The annual audit report will include a separate audit opinion on the use of the imprest accounts, and the SOE procedures. The Government and MRTCUD have been made aware of ADB’s policy on delayed submission, and the requirements for satisfactory and acceptable quality of the audited accounts. ADB reserves the right to verify the project's financial accounts to confirm that the share of ADB’s financing is used in accordance with ADB’s policies and procedures.

I. INSTITUTIONAL STRUCTURE DURING OPERATIONS 333. Figure 8.2 presents the institutional structure for the Logistics Center during the operations phase. Within one year of loan effectivity a new government-owned entity, Zamyn Uud Logistics Center Authority (ZULCA), will be established under the MRA with shareholding by Mongolia Temur Zam (MTZ), the state-owned railway company under MRA, and other government agencies as decided by SPC and MRTCUD. ZULCA will be the state-owned company, which will be supported by the design and implementation supervision consultant in selecting the private management contractor through ICB to manage the terminal. ZULCA will oversee the day-to-day operations of the terminal management contractor and advertising, selection, and leasing the land areas specifically designated for private sector investment within the ZULC. At the completion of the performance period of the private management contract for ZULC, expected to be 5 years, ZULCA will take over the management of the ZULC with staff trained by the contractor for operations, marketing, and other functions. This will assure sustainability of benefits and outcomes designed for the Project. The same accounting and auditing policies, procedures and control measures as detailed above will be utilized during the operations phase of the Project.

334. The purpose of ZULCA is to act as landlord for ZULC on behalf of the Government, and to ensure that there is close, constant and consistent oversight of the Center’s operations, as well as to provide a readily accessible vehicle for communications with senior government decision makers, including the National Transport and Trade Facilitation Committee and its broad-based membership. This is

107

especially important given that Customs, Health, and Quarantine are all going to be based in and working at the ZULC.

Terminal Tenants (Private Sector Shippers, Logistics Operators)

National Transport and Trade Facilitation Committee

Figure 8.2: Institutional Structure During Operations

MRTCUD

MRA

Zamyn Uud Logistics Center Authority (ZULCA)

Terminal Management Contractor

J. DESIGN AND SUPERVISION CONSULTANT

335. The design and supervision consultant will prepare detailed designs for the ZULC, including Customs and Quarantine Center, terminal access road and rail, and overpass bridge. In addition, during the construction supervision period, the Consultant will work with the EA and IA to assist with the: (i) establishment of the ZULCA; (ii) train PIU and ZULCA staff in project management, terminal management, and procurement; and (iii) tendering for terminal management contract under ICB procedures.

336. The Consultant will work through the IA to ensure that the other government agencies which are occupants of the Center (e.g., Customs, Health, Quarantine) are aware of progress and/or revised plans, and that their needs are incorporated in the design and construction of the facilities. It is recommended that the IA establish a working group that includes these various other agencies and clients at least once the Consultant has been selected, if not earlier.

337. Following the establishment of ZULCA, the Consultant will assist with preparing the tender documents for the selection of the Terminal Management Contractor, the evaluation of proposals received, and as required, assist with the selection of and contract negotiations with the Contractor. The contract will be awarded through ICB procedures. It is recommended that the contractor will be an established international firm with considerable experience operating logistics terminals throughout the world.

338. The issues that need to be resolved if this recommended option is selected include the structure of the ICB process and the selection criteria. In addition, the actual structure of the contract including duration, liabilities, payments, charges for terminal users, and sharing of profits and risks.

K. TERMINAL MANAGEMENT CONTRACTOR 339. The Terminal Management Contractor will operate the ZULC for a period of 3-5 years. During this period, the selected firm will manage and operate terminal operations

108

including to load/unload wagons, perform gauge transfer, manage container yards and movement between the yard and the railside, prepare trains for dispatch, operate entry/exit gate, maintain and operate all public-funded facilities. These will include utilizing the gantry cranes and reach stackers to load/unload containers from the platforms into/out of the adjoining storage sheds. The contractor will be responsible for maintaining the ZULC, the terminal yard, and equipment.

340. The Contractor will work with the Zamyn Uud Logistics Center Authority to define how best to develop the Logistics Center including preparation of marketing and business plans. The Contractor will be responsible for attracting shippers, freight forwarders, customs brokers, and other logistics establishments to invest and develop warehouses and other facilities in the terminal area.

341. In addition, in coordination with ZULCA, the Contractor will identify the types of light industries and specific companies which would be suitable occupants of the facilities. These industries and companies will be keys to developing a value chain for the production of manufactured items.

342. The Contractor will also be required to provide regular training workshops for its own employees and the employees of logistics companies operating in the Center, and to organize training as requested by the ZULCA. Capacity development for Mongolian logistics companies and terminal personnel should be seen as a high priority to assure sustainable operations at the completion of the terminal management contract.

L. PRIVATE SECTOR PARTICIPATION 343. As indicated above, logistics companies be allowed to build warehouses in designated areas in the ZULC according to strict guidelines for development. These warehouses and associated handling equipment used to handle cargo within the warehouse and between the warehouse and the ZULC storage and handling areas will represent investments by the private sector. The logistics companies will be tenants of ZULC under mid- to long-term tenancy contracts of 5 years or more, and as such, pay rent to ZULCA and service/maintenance charges to the management contractor.

344. Selection mechanisms (e.g., bidding) and selection criteria, as well as structuring of contracts (including rents, fees and other charges) enabling the logistics companies to invest in and develop assets and operate within the ZULC will need to be developed that provide incentives as well as security of contracts for the logistics companies to invest, operate and maintain assets. Similarly, GOM and the EA/IA will require contract provisions that ensure that the logistics companies are performing as specified in the contracts and that there are adequate contractual mechanisms enabling contract cancellation and acquisition and disposal of non-performing contracts and their assets. The Terminal Management Contractor will assist ZULCA in preparing the structure for the contracts and with the selection mechanisms.

109

M. PROCUREMENT PLAN 345. All advance contracting will be undertaken in conformity with ADB’s Procurement Guidelines (February 2007, as amended from time to time)25 and ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time)26. The issuance of invitations to bid under advance contracting will be subject to ADB approval. The MRTCUD has been advised that approval of advance contracting does not commit ADB to finance the Project.

346. Two contract packages are currently proposed under advance contracting – Package 1 for civil works; and Package 2 for design and implementation supervision consulting services. Advance contracting will include (i) preparation of tender documents; (ii) evaluation of bids; and (iii) recruitment of consultants.

347. All procurement of civil works and goods will be undertaken in accordance with ADB’s Procurement Guidelines. International Competitive Bidding (ICB) will be used for civil works and goods contracts estimated to cost $1 million and above. National Competitive Bidding (NCB) is not applicable. All ICB contracts are required for prior review and approval by ADB of the procurement documents (bidding and contract).

348. All consulting services will be recruited according to ADB's Guidelines on the Use of Consultants. A total of 172 person months of consulting services (60 international, 112 national) grouped into one package will be funded under the Project, to support the EA in: (i) Preparation of detailed design and implementation supervision; (ii) training of PIU staff; (iii) tendering for terminal operations management; (iv) environmental monitoring; (v) procurement management; and (vi) project implementation and institutional capacity improvement. Consultants will be engaged using QCBS, with the standard ratio of 80:20.

349. An 18-month procurement plan indicating threshold and review procedures, and civil works, goods and consulting service contract packages is presented in Tables 8.4 to 8.8 below.

Table 8.4: Procurement Plan and Tentative Contract Packages Project Information Country Mongolia Name of Borrower Mongolia Project Name Regional Logistics Development Project Loan Reference TBD Date of Effectiveness TBD Project Cost Amount ($ million) $71.6 million Of which ADB Loan Amount ($ million) $45 million Executing Agency MRTCUD Approval Date of Original Procurement Plan 30 October 2010 Approval of Most Recent Procurement Plan TBD Publication for Local Advertisement TBD Period Covered by this Plan 4 October 2010 – 31 March 2012

TBD = to be determined.

25 Available at: http://www.adb.org/Documents/Guidelines/Procurement/Guidelines-Procurement.pdf 26 Available at: http://www.adb.org/Documents/Guidelines/Consulting/Guidelines-Consultants.pdf

110

Table 8.5: Procurement Thresholds for Civil Works, Goods, Related Services/Supply &

Install Method Threshold International Competitive Bidding (Civil works/Goods) > $1,000,000

Table 8.6: Procurement Thresholds for Consultants Services

Methods Threshold Quality- and Cost-Based Selection (QCBS) > $1,000,000 by Full Technical Proposal Individual consultants In accordance with ADB's Guidelines on the

Use of Consultants with procedures acceptable to ADB.

Table 8.7: List of Contract Packages in Excess of $100,000

Goods and Consulting Services

Ref Contract Description Estimated Costs ($ million) a

Procurement Methods

Date of Advertisement

Prior RevieY/N

1. Civil works and associated goods

35.4 (4 lots)

ICB Oct 2010 Y

2. Terminal Equipment and Systems

6.1 (2 lots)

ICB Oct 2010 Y

3. Services 2.7 (2 lots)

QCBSb Oct 2010 Y

ADB = Asian Development Bank, ICB = international competitive bidding, N = no, QCBS = quality- and cost-based selection, Y = yes. a Cost estimates do not include taxes and duties, and physical contingencies. b A 80:20 weighting will be applied. Sources: MRTCUD and Consultant.

Table 8.8: List of Contract Packages

Contract No.

Lot No.

Item Estimated Value ($ million)

Procurement Mode

A Civil Works and Associated Goods 35.43

A1 Access Road and Bridge 7.18 ICB

A2 Buildings and Facilities 4.12 ICB

A3 Rail works, Site works and Utilities, and Pavement

20.83 ICB

A4 Lighting, Safety, and Security 3.80 ICB

B Terminal Equipment and Systems 6.11

B1 Logistics Center Management System 4.25 ICB

B2 Customs and Quarantine Equipment and Forklifts

1.86 ICB

C Services 2.71

111

C1 Environmental Mitigation and Monitoring 0.52 ICB

C2 Detailed design and construction supervision

2.20 ICB

Source: Consultant.

N. IMPLEMENTATION SCHEDULE 350. MRTCUD designated the Mongolian Railway Authority (MRA) as the Implementation Agency (IA). The IA will establish a Project Implementation Unit (PIU), which will be supported by the staff of MRTCUD’s Roads and Transport Policy Department; Finance, Investment and International Cooperation Department; and Internal Auditing, Monitoring and Evaluation Department on as-needed basis.

351. Draft safeguards documents (Feasibility Study Report, Social and Poverty Analysis Report, and Initial Environment Examination) have been completed. Approval of the Ministry of Environment and Tourism (MoET) has been obtained to commence construction of ZULC based on the Initial Environment Examination (IEE). Assistance proposed for project implementation will include recruitment of a procurement consultant to assist the IA in the preparation of bidding documents for all contract packages for goods and civil works as well as the request for proposal (RFP) for implementation consultants. Bid invitations are expected by early January 2011. Similarly the consultant selection process for project management, construction supervision, and MRA’s institutional capacity improvement will commence from early January 2011 under the advance contracting facility. Overall program readiness activities are shown in Table 8.9.

Table 8.9: Project Readiness Activities

Activities

Months

Who responsible Augor

Prior Sep Oct Nov

Dec ‘10

Feb. ‘11

May

Designation of Implementing Agency √ MRTCUD

Government counterpart funds allocation √ MOF

Loan Fact Finding Mission and MOU Signing

√ ADB and Government

Completion of the bidding documents for all contracts

√ MRTCUD/MRA and TA Consultant

Advance contracting actions:

A. Project Management consultants Recruitment

Commencement

Completion

√

√

MRTCUD/MRA

B. Civil Works and Goods bidding

Invitation for bids for ICB

Contract Award

√

√

MRTCUD/MRA

ADB Board approval √ ADB

112

Loan signing √ ADB and Government

Issuance of legal opinion √ Government

Loan effectiveness √ Government

ADB = Asian Development Bank; ICB = International Competitive Bidding; MOF = Ministry of Finance; MRTCUD = Ministry of Roads, Transport, Construction, and Urban Development; PPTA = Project preparatory technical assistance Source: MRTCUD and Asian Development Bank estimates

352. Physical implementation will be completed by 31 December 2015 and loan account will close by 30 June 2016. Overall project implementation plan is shown in Figure 8.3.

353. The project duration is 5 years, and the overall implementation plan will be updated annually and submitted to ADB.

IX. FINANCIAL EVALUATION

354. The financial assessment of Zamyn Uud Logistics Center (ZULC) is undertaken using ADB Guidelines for Preparation and Presentation of Financial Analysis. Financial Internal Rate of Return (FIRR) of ZULC, analysis of pro forma financial statements, and sensitivity analysis are undertaken and described in this Section. Also this Section includes the proposed procurement plan for the Project.

355. As detailed in Section 8, it is proposed that ZULC is owned by the Government and operated initially by a private management company as contractor. The management contractor should be internationally experienced in successfully operating a logistics center with multiple cargo transfer, storage, and other functions of a container terminal as an on-going business entity. The State Property Committee (SPC) under Mongolian law (see Section 7, Legal and Regulatory Framework) will be the legal owner of ZULC. The operational responsibility for ZULC will be delegated to the Ministry of Road, Transport, Construction and Urban Development (MRTCUD), the Executing Agency (EA). The Implementing Agency (IA) will be the Mongolian Railway Authority (MRA), an organizational unit under MRTCUD. A new government owned entity, Zamyn Uud Logistics Center Administration (ZULCA), will be established under the MRA with shareholding by Mongolia Temur Zam (MTZ), the state-owned railway company under MRA, and other government agencies as decided by SPC and MRTCUD. ZULCA will be the state-owned company which will be responsible from selecting the private management contractor and overseeing its day-to-day operations as well as advertising, selection, and leasing the land areas specifically designated for private sector investment within the ZULC. At the completion of the performance period of the private management contract for ZULC, expected to be 5 years, ZULCA will take over the management of the ZULC with staff trained by the contractor for operations, marketing, and other functions. This will assure sustainability of benefits and outcomes designed for the Project.

113

Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 1st H 2nd H 1st H 2nd H

1Procurement Schedule for Civil Works Packages

207

A.General Procurement Notice and Invitation for Bids

13

B. Receive and Evaluate Bids, ADB Approval 13

C. Award Bid, Sign Contract 5

D. Mobilization and Construction for Civil Works 176

2 Procurement Schedule for Goods Packages 233

A.General Procurement Notice and Invitation for Bids

13

B. Receive and Evaluate Bids, ADB Approval 13

C. Award Bid, Sign Contract 5

D. Mobilization, Delivery, Installation of Goods 202

3Recruitment Schedule for Design, Implementation Supervision, and Capacity Improvement Consultant

267

A.CSRN Announcement, Receipt of EOIs and Shorlisting

7

B.Receipt and Evaluation of Technical Proposals

13

C.Public Opening of Financial Proposals and Computation of Final Evaluated Scores

3

D. Contract Negotiation and Award 4

E.Mobilization of Consultant and Delivery of Services

240

5 Civil Works Defects Liability Period 52

6Goods Warranty Period and Trial Operations

26

Source: PPTA Consultant

Item

ADB - Asian Development Bank; CSRN - Consultant services recruitment notice; EOI - Expression of Interest; Qtr - Calendar quarter.

ProjectTime

(weeks)2010 2011 2012 2014 20152013

Figure 8.3: Implementation Schedule

114

A. FINANCIAL RATE OF RETURN

356. The financial analysis covers the 4.5-year construction period from beginning-2011 to mid-2015, including six-month trial operations in 2015, and commercial operations from 2015 to 2033, including trial operations. Details of the financial analysis, including assumptions and findings are presented below.

357. FIRR of ZULC is calculated based on constant 2010 financial costs, which include all capital costs, operating expenses and business and income taxes. Revenues are estimated based on forecast traffic detailed in Section 3. FIRR has been estimated for net cash flows before and after income tax collected by the state on net income.

1. Revenue Projections

358. There are two principal revenue sources for the ZULC: (i) Container handling operations including rail-to-rail, truck-to-rail, rail-to-truck, and truck-to-truck transfer of containers; and (ii) Rental revenues collected from private sector companies which are tenants of land designated for leasehold improvements by the tenants. Tenants will enter into 5- to 10-year term rental contracts with ZULCA acting as landlord for the land they will use to build their own warehouses, logistics and light manufacturing facilities in the ZULC.

359. Container stuffing and unstuffing operations will be performed by tenants as well as other clients, which operate outside of the ZULC but use it as a container originating or terminating point. Marking of containers, preparation of packing lists and other shipping documents, customs and quarantine clearance, and all other logistics related functions will be performed by tenants. Therefore, the only functions that ZULCA will perform (initially through the management contractor and eventually by itself) are loaded and empty container loading/unloading operations within one mode or between rail and truck modes of transport and storage of empty and loaded containers. As such ZULCA will be serving as a terminal operator in support of its tenants and other clients outside ZULC.

360. Container revenue is based on a number of factors which determine the cost for the service performed by the terminal. Following are the principal factors which determine the cost and the tariff per container:

Direct versus grounded operation. In the Operating Scheme D adopted for ZULC (see Section 4), a container which has arrived at the terminal with onward shipment by either rail or truck can be directly loaded on to the vehicle/wagon if the transport equipment has been already arranged by the customer and is waiting for the container to be loaded. In this case, the container is picked up from the arriving vehicle/wagon and directly loaded on to the departing vehicle/wagon. This type of direct unloading/loading operation is termed a “single lift”, i.e. the container is not placed on the ground to wait for the availability of the onward transport equipment. One example of this operation is direct rail-to-rail transfer from standard gauge to broad gauge by use of the rubber tired gantry (RTG) crane which performs a single hoist to complete the transfer. On the other hand, if the onward transport equipment is not available the container is grounded at the container yard until the equipment is available. In this case, the container is lifted from the arriving equipment and placed on ground in the

115

container yard; and then lifted a second time from the ground to the onward transport equipment. In this case the container is “double lifted”. One example of this operation is the arrival of a loaded export container by truck, which goes through customs clearance by logistics/customs brokerage firm before being loaded on a broad gauge wagon for export.

Empty vs loaded operation. Empty containers weigh less. Therefore, they require lower capacity (lower cost) handling equipment than loaded containers. In the empty container storage area the design includes 6-ton capacity forklifts estimated to cost $80,000 each, as opposed to loaded container yard, where 45-ton capacity reach stackers costing $350,000 each will be employed.

Container size. A TEU is half the size of a FEU; its weight is less and space requirement is also less. The cost and tariff for the two container sizes are not linearly related, however, since the same container handling equipment is used with the same cycle time per lift. The TEU cost and tariff, therefore, is slightly less than the FEU, generally 20% lower.

Type of handling equipment used. A direct rail-to-rail transfer of a loaded container uses only the RTG crane; whereas a rail-to-truck grounded operation for the same container needs: (i) the RTG to lift it off the wagon, (ii) a yard tractor and chassis combo to carry it to the container yard, (iii) a reach stacker to lift it off the chassis and place it on “ground” in the stacking area, (iv) a reach stacker to lift it off ground and load on to the truck when it arrives to pick it up. The cost structure and therefore the tariff between the two operations would be different.

361. It is customary in container terminals to estimate cost upon which tariff is based on the basis of per lift. Therefore, for purposes of financial analysis, traffic estimates provided in Section 3 expressed in TEUs have been converted to number of lifts. The

362. The total market is divided into its composition by type of operation. As shown in the table, 8 operation types are included: direct and grounded operation for each of rail-to-rail, rail-to-truck, truck-to-rail, and truck-to-truck transfer. The market composition is based on the recent container operations in Zamyn Uud during the 2006-2009 time period and anticipated changes in the composition as a result of significant developments in the transport infrastructure such as the opening of the regional road which will increase truck operations.

363. The share of rail-to-rail container operations is estimated at 16% equally divided between direct and grounded transfer. The share of rail-to-truck operations is estimated at 29% with 4% as direct and 25% as grounded transfer. The latter is considerably higher because access of trucks to railside for direct transfer of containers is limited due to the scheduling conflicts between trains and trucks.

364. The share of truck-to-rail is estimated at 20% with 8% and 12% for direct and grounded transfer, respectively. This is somewhat lower than rail-to-truck at 29%, because loaded TEUs are mainly imports from PRC, which will favor onward transport in Mongolia by truck due to increased competition of road transport using the soon-to be-completed hard-surface road from Zamyn Uud to Ulaanbaatar.

365. Truck-to-rail of import containers will be less favored by importers. This operation will be mainly confined to consolidation by logistics firms of less-than-container lots brought over by day traders across the border and bulk cargo in containers (such as

116

cement in bags) for which the tariff can remain competitive compared to the higher road transport cost.

366. The share of truck-to-truck is estimated at 35% with 15% direct and 20% grounded transfer. All-truck movements will be the highest share in the composition of the container transport market in Zamyn Uud for the foreseeable future. Compared to all-rail movements at 16% this represents a modal split of 31% for all-rail and 69% for all-truck transport.

367. From the Zamyn Uud container transport market composition for 8 different types of transfer operation, the traffic of ZULC is estimated by assuming a beginning market share for ZULC in 2014 and an annual growth rate in the market share. For example, the ZULC market share for rail-to-rail grounded and direct transfer is assumed at 20% for 2014 with an annual growth rate of 8 percentage points. ZULC market share for truck-to-truck and truck-to-rail at 40% and 50%, respectively in 2014 is considerably higher than rail-to-rail and rail-to-truck market share of 20%. This is because containers arriving by truck will arrive at the Customs and Quarantine Center adjacent to the terminal, i.e. a captive market that ZULC-based logistics companies and the ZULC management contractor can effectively capture through proactive marketing based on customer needs and requirements. To assist the logistics companies located in the ZULC in their marketing efforts, the design includes booths at the truck entrance parking area (see Section 4).

368. The market share for rail-to-rail and rail-to-truck is lower than the other two types of transfer operation because the national railway carrier (UBTZ) controls rail access to ZULC and would view its existence as a threat to its own market. In fact, UBTZ management rejected the Consultant’s reasoning for the need of access track to its mainline from ZULC on the grounds that when even full trains are ready for dispatch they will have to be shunted to the UBTZ marshalling yard before they can depart on mainline track. The direct access track is akin to an industrial siding that UBTZ has used before for large shippers such as power plants and mines. However, in the case of ZULC, UBTZ refuses to accept that direct access to the mainline for train loads is a necessary industrial siding.27

27 Another factor of UBTZ resistance to deliver trains to ZULC is their rail-to-rail transfer facility (Terminal 2). By way of background, Terminal 2 was built with Japanese funding assistance to the Government. It is officially owned by SPC as a Government facility. When the facility was completed in 2001, a three-party lease agreement was executed between the Ministry of Finance (MoF), SPC and UBTZ, leasing the terminal to UBTZ to operate it. The lease term is indefinite; however, it is renewable annually and can be terminated at its any anniversary upon specific notice by one of the parties. With the establishment of MTZ as a solely Mongolian Government owned entity on 20 March 2008, the Government served notice to the UBTZ that the lease agreement for Terminal 2 will be terminated at its next anniversary and its possession should be transferred to MTZ. UBTZ still has the possession of Terminal 2 resisting delivery by putting forward indefensible arguments that such delivery would be a violation of Organization for Cooperation of Railways (OSJD), the Warsaw-based railway organization of principally railways of the former Warsaw Pact nations of which UBTZ is a member. UBTZ’s argument that OSJD requirements for cargo insurance would preclude rail-to-rail transfer of containers by non-members of OSJD is unfounded. The Consultant’s discussion that the train-load dispatches from the ZULC to PRC or other countries would move under UBTZ waybills same as all trains dispatched by UBTZ was rejected without reason. Based on the above, it is certain that UBTZ would resist cooperation with the ZULC and refuse delivery or pick up of train loads. It is

117

369. Based on the assumed market shares the total loaded TEUs were estimated. The TEUs were converted to lifts on the basis of one lift for direct transfer operations and two lifts for grounded operations. Empty TEUs were estimated by using an empty:full ratio of 4:5 (44% for empty and 56% for loaded containers). The empty TEUs were also converted into number of lifts in the same manner as loaded TEUs.

370. A small revenue will be realized from demurrage (extra storage) of containers. It is customary to allow free storage for loaded and empty containers in terminals. In the case of ZULC the free period is proposed at 4 days. For containers stored at the terminal beyond this period due to actions attributable to the customer a daily charge of $2 per TEU escalating at the rate of 1% per year is included in revenue projections. The estimated number of TEU demurrage days is based on 10% of total loaded and empty TEUs for the year. Some containers may have one day demurrage and some more than one day. Assuming an average demurrage of 4 days for containers which are assessed demurrage, the 10% assumption means that only 2.5% of the containers will pay demurrage and 97.5% will be cleared from the terminal within the free 4-day time period.

371. The design of ZULC described in Section 4 incorporates a comprehensive development strategy to encourage establishment of logistics companies as well as value added light manufacturing operations. Sufficient space has been reserved for private sector entities to lease land and build and operate their own facilities within the ZULC and the adjacent area designated for development. The total land area reserved for this development is 48.26 ha with a 3-phased development: (i) in the first phase from 2014 to 2016 it is envisioned that 82,800 sqm inside the ZULC and 50,000 sqm in the adjacent land area reserved for light manufacturing will be leased to the private sector; (ii) in the second phase (from 2017 to 2019) additional 92,300 sqm inside of and 90,000 sqm adjacent to the terminal will be leased; and (ii) in the third phase (2020-2022) additional 77,450 sqm inside and 100,000 sqm adjacent land area will be leased.

372. The lease rate will be determined through competitive bidding for space. The average annual lease is estimated at $12 per sqm with an additional charge of $6/year per sqm for maintenance of common areas. The rate is assumed to escalate at the rate of 1% per year with adjustments in the lease rate made every 5 years.

2. Expense Projections

373. Investments envisioned by private sector companies which will lease land at ZULC and construct their own facilities are not included in the Project’s cost. The financial costs and benefits expected to be realized by the tenants are unique to each company and excluded from the financial evaluation of ZULC.

374. Capital costs during the construction period for FIRR calculation include all incremental outlays related to the Project, but exclude interest during construction, price contingency, and working capital. Annual capital cost outlay for civil works during the construction period is assumed at varying rates depending on the cost component. Subgrade, clearing, and earth works are components which will be implemented first.

necessary that clear cut and enforceable covenants are included in the ADB loan documents so that the events experienced in April 2009 with UBTZ’s refusal to cooperate, which led to the cancellation of the $187 million U.S. Government grant to Mongolia for the Railway Development Project, are not repeated.

118

Telecommunications, installation of terminal equipment, and track works will be implemented during the later years of the construction period.

375. During the operation period of ZULC 100% terminal equipment replacement expenditures and infrastructure maintenance are expected on civil works, particularly for the bridge, access road, and terminal road. These costs are expected to recur every seven years (in 2022 and 2029) and would amount to 20% of the initial capital investment for track materials, track work, pavement, lighting, safety and security, buildings, access road, and bridge or $23.46 million inclusive of physical contingency.

376. Depreciation rates and other relevant information for different categories of capitalized fixed assets are shown in Table 9.1.

Table 9.1: Depreciation Rates

Type of Fixed Asset Economic Life

(Years) Annual Depreciation

Rate (%) Residual Value

(%)

Civil Works (average of subgrade 100 years, bridges 65 years, and road works 40 years)

65 1.5 2.5

Rail infrastructure 65 1.5 4 Buildings 45 2.2 1 RTGs 15 6 10

Other Terminal Equipment 10 9 10

Source: Consultant.

377. Changes in working capital, as part of the cash flow of the Project, are calculated on the basis of requirements for annual working expenses and incremental investments. Investment funds are assumed to lag one month during construction and working expenses two months during operation. Initial working capital is assumed to be equal to zero.

378. Fixed costs include fixed labor, fixed power, fixed maintenance materials, and other fixed costs. Fixed labor costs represent the staffing at the administrative office, security staff, overhead labor, and other basic support services. Total fixed employment at ZULC is estimated at 58 employees from 2014 to 2022, increasing to 66 employees thereafter.

379. The average annual labor cost inclusive of all taxes, pension fund payments, and fringe benefits is assumed at $15,000 per employee. The average annual labor cost is assumed to escalate at a rate of 3 percent per year. The average cost per employee is high because of the senior management staff some of whom will be expatriate employees of the management contractor.

380. The fixed power requirements of ZULC are 18 million KWh (based on average usage of 20 KWh per sqm per year). Even without traffic this power is needed for security, office buildings, lighting, other fixed facilities and uses. The power cost is assumed at $0.05/KWh. The fixed maintenance materials cost is assumed at $0.15/sqm per year escalating at the rate of 3% annually.

119

381. Based on the assumptions described above, the fixed costs of ZULC are estimated at $2.10 million in 2014, increasing to $2.39 million in 2022 and $3.16 million in 2033. The fixed costs do not include the estimated fee of $3 million per year from 2014 to 2018 for the management contractor. This cost is included in the working expense projections.

382. Variable maintenance costs are separately estimated for civil works, electric power and facilities, terminal lift equipment, and other facilities. These costs are estimated on the basis of empty and loaded TEUs. Unit maintenance costs per TEU for variable maintenance costs are $0.25 for civil works, $0.15 for electric power and other utility systems, $0.45 for terminal lift equipment, and $0.15 for other facilities and equipment.

383. Variable labor costs include all terminal operating employees. During the first year of operation the variable number of workers is estimated at 182 for two shifts of work per day. The number of variable workers will increase to 285 by 2022 and 535 by 2033.

384. The average annual labor cost inclusive of all taxes, pension fund payments, and fringe benefits is assumed at $3,000 per employee for 2014. The average annual labor cost is assumed to escalate at a rate of 3 percent per year.

385. Variable electric power cost is assumed at 10 KWh per TEU and fuel utilization principally for terminal lift equipment at 0.75 litres per TEU.

386. Other variable costs are assumed at 5 percent. Based on these assumptions, the average variable cost for passenger transport is estimated at $8.51 per TEU in 2014 decreasing to $4.62/TEU by 2033 as a result of improved productivity.

387. Other operating costs are assumed at $0.15/TEU plus a fixed charge of n$3 million per year for the management contractor for the first five years of operation from 2014 to 2018.

388. In addition to the operating expenditures above, ZULC also needs to pay business tax, and other national and local taxes. The effective total tax is assumed at 5% on total revenue. Income tax is imposed on the net taxable profit at 10% with net loss cumulatively carried forward for up to five years from the first year of profit realization.

389. The revenue for ZULC is principally based on charges assessed for handling of containers. It is assumed that the charge will be $25/lift for loaded TEUs and $6.50/lift for empty TEUs both escalating at the rate of 1% per year with rate increases every five years. For direct transfer of containers these per lift charges will be the same per TEU since a single lift will be used to effect transfer. For grounded operations the charge will be $50 for loaded and $12 for empty TEUs, respectively. Considering the charge of $70/loaded TEU currently used in PRC, these rates are highly competitive.

390. Other revenues include container demurrage which will be assessed at the rate of $2 per day per TEU. Residual value of fixed assets is calculated at the rate of one-half of net book value at the end of the evaluation period.

120

391. The estimated weighted average cost of capital (WACC), after tax, in real terms was calculated based on the capital mix and costs of funds (Table 9.2). The numbers reflect 2010 data. Costs have been considered as follows: (i) ADB debt at 1.0% during implementation and 1.5% during repayment period with 0% front end fee and 0.15% commitment charge; (ii) Other loan at 5.0%; (iii) Cost of equity at 8% (based on the opportunity cost of capital for the Government). The WACC computation reflects the impact of income tax at 10% on borrowed funds. Domestic and international inflation rates of 7.0% and 1.0%, respectively have been assumed for domestic and foreign currency denominated debt for the share of each source of financing for the Project. The WACC at 0.93% is lower than most WACC rates because the inflation rate is slightly lower than the tax adjusted nominal cost, causing a significant drop in the real cost.

Table 9.2: Weighted Average Cost of Capital

Item ADB Loan Other Loan Equity Total

Amount ($ Million) 40.00 11.00 15.59 71.59

Weight 55.8704% 15.3644% 21.7812% 93.0161%

Nominal cost 1.5000% 5.0000% 8.0000%

Tax rate 10.0000% 10.0000% 0.0000%

Tax adj nom cost 1.3500% 4.5000% 8.0000%

Inflation rate 1.0000% 1.0000% 7.0000%

Real cost 0.3465% 3.4653% 0.9346%

Weighted component 0.1936% 0.5324% 0.2036%

WACC 0.930%

392. As shown in Table 9.3, the FIRR results are as follows:

After Income Tax: 8.54%

Before Income Tax: 9.24%

393. The FIRR of the Project is considerably higher than the WACC of 0.93%. The Net Present Value over the 2011-2033 time period at the discount rate equal to WACC is $155.72 million for net flows after income tax. The financial viability of the Project is considered highly satisfactory.

B. SENSITIVITY ANALYSIS

394. A sensitivity analysis was performed to test the effects of possible unfavorable scenarios with respect to changes in the key parameters that determine costs and revenues. The results of this analysis are summarized in Table 9.4.

395. The sensitivity analysis indicates that the Project’s financial viability would be dependant on the number of loaded TEUs handled by the terminal. This is expected since the charge per loaded TEU is four times higher than the charge for an empty TEU. Decrease in the number of loaded TEUs handled by 30% would reduce FIRR to 5.77% and 4.72% for income before tax and after tax, respectively. On the other hand, a 30% increase in Project cost will result in a FIRR of 7.02% and 6.32%, respectively, indicating that the Project’s financial viability is more sensitive to traffic variation than to cost variation. Therefore, realistic tariff setting and proactive marketing the new terminal are

121

important for the sustained viability of the Project. In the case of a decrease in loaded TEUs of more than 59.81% (after tax) would make the Project infeasible since the FIRR will be lower than the WACC of 0.93%.

2011 (23,031.23) 0.00 0.00 0.00 0.00 0.00 0.00 (23,031.23) (23,031.23)2012 (33,935.36) 0.00 0.00 0.00 0.00 0.00 0.00 (33,935.36) (33,935.36)2013 (12,616.16) 0.00 0.00 0.00 0.00 0.00 0.00 (12,616.16) (12,616.16)2014 (2,011.45) (987.05) 5,922.30 3,131.84 156.59 0.00 0.00 (5,945.55) (5,945.55)2015 0.00 (1,008.11) 6,048.65 4,451.85 222.59 0.00 0.00 (2,827.50) (2,827.50)2016 0.00 (1,030.94) 6,185.66 6,077.66 303.88 0.00 0.00 (1,442.82) (1,442.82)2017 0.00 (1,057.45) 6,344.69 8,335.26 416.76 0.00 0.00 516.36 516.362018 0.00 1,093.62 6,540.42 10,044.14 502.21 0.00 0.00 4,095.14 4,095.142019 0.00 (465.69) 3,746.27 12,488.37 624.42 464.48 0.00 7,651.99 7,187.512020 0.00 28.15 3,915.15 14,928.01 746.40 682.72 0.00 10,294.61 9,611.892021 0.00 51.06 4,221.51 17,455.83 872.79 895.71 0.00 12,412.59 11,516.882022 (23,455.10) 2,012.49 4,568.91 20,220.77 1,011.04 843.18 0.00 (6,801.78) (7,644.96)2023 0.00 (1,873.28) 5,056.75 21,899.99 1,095.00 957.66 0.00 13,874.95 12,917.302024 0.00 48.40 5,347.15 25,019.83 1,250.99 1,228.86 0.00 18,470.08 17,241.222025 0.00 58.42 5,697.65 26,922.96 1,346.15 1,494.45 0.00 19,937.57 18,443.122026 0.00 63.58 6,079.16 29,032.30 1,451.61 1,674.84 0.00 21,565.11 19,890.272027 0.00 61.47 6,447.98 31,368.51 1,568.43 1,864.19 0.00 23,413.57 21,549.382028 0.00 76.59 6,907.54 33,954.21 1,697.71 2,068.33 0.00 25,425.55 23,357.222029 (23,455.10) 2,038.65 7,411.90 38,681.52 1,934.08 2,471.61 0.00 7,919.10 5,447.492030 0.00 (1,861.60) 7,969.82 42,002.90 2,100.14 2,751.48 0.00 30,071.33 27,319.852031 0.00 79.23 8,445.22 45,672.23 2,283.61 3,089.49 0.00 35,022.62 31,933.132032 0.00 110.65 9,109.13 49,723.73 2,486.19 3,413.16 0.00 38,239.06 34,825.912033 0.00 124.63 9,856.92 54,194.90 2,709.74 3,768.49 25.36 41,778.22 38,009.73

FIRR 9.24% 8.54%

179,085.70 155,720.46WACC

Operating Revenue

Tax

Year Capital CostWorking Capital

Working Expenses

Table 9.3: FIRR Calculations for ZULC ($ thousand)

Net Business & Other

Income Tax

Before Income Tax After Income Tax

Residual Value of

Fixed Assets

Net Cash Flow

Source: Consultant estimates

NPV @ WACC 0.93%

0.93%50.00% 260.64% 220.19%30.00% 71.79% 59.81%40.00% 175.28% 152.37%30.00% 112.34% 102.60%40.00% 132.00% 111.70%40.00% 120.24% 104.25%

NPV reduced by 20%

NPV reduced by 21%

Source: Consultant estimates.

Table 9.4: Sensitivity Analysis

ScenarioSensitivity of FIRR Switching Values for FIRR

Before Income Tax After Income Tax Before Income Tax

After Income TaxBase Case WACC 9.24% 8.54%

Empty TEUs decrease by 7.65% 6.81%Loaded TEUs decrease by 5.77% 4.72%

Working Expenses Increase by 7.35% 6.54%Project Cost Increase by 7.02% 6.32%

Variable Costs Increase by 6.72% 5.82%5.62%

Delay Implementation by 1 Year 7.98% 7.32%

Fixed Costs Increase by 6.48%

396. On the cost side, a 100% increase in the Project costs will still allow for the Project to remain financially viable. Implementation delay of one year, would reduce the after tax FIRR to 7.32% and NPV by 21%.

X. ECONOMIC ASSESSMENT

397. Traffic forecasts detailed in Section 3 have been used as a basis for the economic analysis of the Project. Traffic forecasts are made separately for normal traffic, diverted traffic, and generated traffic.

398. The Project is essentially an integrated logistics center and container handling facility in Zamyn Uud with customs and quarantine operations, light manufacturing facilities, warehouses for logistics companies, access road and rail networks, container

122

yards for storage and loading/unloading of containers. The Zamyn Uud Logistics Center (ZULC) will accommodate rail-to-rail transfer of containers between the standard gauge (PRC) and broad gauge (Mongolian) tracks, as well as rail-to-truck, truck-to-rail, and truck-to-truck transfer.

399. The primary objective of the proposed ZULC is to improve logistics performance and reduce congestion at the Mongolia-PRC border crossing in Zamyn Uud. As such, the traffic forecast through the ZULC is based on the cross border trade in Zamyn Uud. In this respect, two types of trade flows are relevant for forecasting traffic volume through the ZULC:

(i) Trade flows, which are cleared through the Customs Office in Zamyn Uud. These flows are mainly cargo passing through the border facilities by road where imports are cleared for final entry into Mongolia through the Customs Office in Zamyn Uud. Also exports to PRC are cleared by the same office.

(ii) Trade flows, which pass through the Customs Office in Zamyn Uud and move to ultimate destination under bonded transport. The national rail carrier, Ulaanbaatar Tumur Zam (UBTZ), is entitled to move inbound freight from PRC under Customs bond for final clearance in Ulaanbaatar (UB) or any other city in Mongolia where there is a local Customs office. Also exports by rail to PRC can complete export clearance formalities in UB and move by UBTZ under bond to PRC.

400. Normal Traffic. Normal traffic represents existing imports and exports in containers passing by road and rail through the ZU border. The operational improvements represented in the Project’s design envisages shifting the customs and quarantine transactions for these containers away from the currently congested border post area to the new ZULC. The regional road connecting the border post with ZULC will be designated as Customs Road allowing an 8-km stretch for trucks to arrive at the ZULC for clearance.

401. Normal traffic in containers surged during the recent years, experiencing an annual growth rate of 400% from 2006 to 2009. However, the decrease of 55% in 2009 from 2008 does not conclusively establish a solidly rising trend. Despite the volatility, the long-term upward trend in normal traffic is reflected in assumed annual growth rates of 9% in 2015-2019, 10% in 2020-2025, and 7% thereafter.

402. Diverted Traffic. Diverted traffic is represented by the volume of containerizable freight which would use containers, i.e. change from its present general loose cargo packaging to International Standards Organization (ISO) containers. Containerization is rapidly growing in the world with growth rates more than 9% annually. There are numerous advantages for use of containers with main reasons frequently cited as reduced handling and insurance cost, shorter transit time, and reduction in cargo loss and damage.

403. With the increasing awareness of shippers of the advantages offered by the ZULC (such as faster clearance of containers), it is expected that many commodities, which are currently shipped as break bulk general cargo will shift to containers. The ZULC terminal operations contractor will facilitate this shift since marketing and promoting ZULC will be included as an important responsibility under its contract with

123

performance-based payment provisions. Diversion will not be overnight, however. Many shippers do not ship in container loads and logistics companies, which offer consolidation of multiple shipments in a single container are not yet widely established in Mongolia. ZULC’s design is directly dealing with this deficiency by encouraging establishment of logistics companies in the ZULC.

404. The diversion rates assumed in the traffic forecast represent that portion of the containerizable traffic which can be captured as containerized freight. It is assumed that diversion will start at a modest level of 10% containerization in 2015 with annual increases of 2 percentage points, reaching 48% by 2034.

405. Generated Traffic. The design of ZULC incorporates a comprehensive development strategy to encourage establishment of logistics companies as well as value added light manufacturing operations by the private sector. Sufficient space has been reserved for private sector entities to lease land and build and operate their own facilities within the ZULC and the adjacent area designated for development. The total land area reserved for this development is 48.26 ha, excluding the container yards, truck parking areas, equipment maintenance workshop, waste water treatment plant, vehicle parking areas, terminal building, road and rail infrastructure, and other facilities within the ZULC which add an additional 53.05 ha and the adjacent Customs and Quarantine Center of 11.8 ha.

406. Cargo volume intensity per sqm widely varies by the type of industry, type of technology (labor intensive versus automated operations), and other factors. Garment manufacturers average 3-5 tons per year per gross sqm, canning of fruits and vegetables 8-12 tons, and electronic assembly operations 5-8 tons. Assuming an average of 7 tons, the annual output would then be 1.12 million tons with the same volume as inbound inputs since none of these are weight-gaining (e.g. soft drink bottlers) or weight-losing (e.g. steel mills) industries.

407. The economic evaluation considers all Project components including those under ADB financing as well as by the government. These include: (i) rail track materials and track works; (ii) pavement; (iii) lighting; (iv) safety and security; (v) buildings and facilities; (vi) site works, clearing, and earth works; (vii) site utilities (electric, water, fibre optic communication lines); (viii) access road and bridge; (ix) rail infrastructure; (x) terminal equipment; (xi) environmental mitigation and monitoring; and (xii) consulting services for detailed design, implementation supervision, and capacity improvements.

408. Alternative Analysis. As part of the economic analysis, possible alternative interventions that would meet the projected transport demand for normal, diverted, and generated traffic were evaluated. As described in greater in Section 4, alternative analysis included evaluation of four sites for the location of ZULC and access road options to connect the selected ZULC site to the Mongolia-PRC border post. The selected alternative sites were evaluated for conformance with the ZU Master Plan and land use currently under preparation, geologic and topographic conditions, terrain considerations, land acquisition, cost estimates, relative impact on the environment, and integration with the regional, national, and local transport network. The site and technical design that was selected is the most appropriate in terms of cost, efficiency, land acquisition, environmental impact, and other site evaluation criteria.

124

409. Cost. The economic evaluation is based on a comparison of with- and without-Project scenarios, using constant 2010 economic prices. Under the without-Project scenario it is assumed that the normal traffic (139.7 thousand TEUs in 2015, increasing to 349.2 thousand in 2025, and 651.7 thousand TEUs in 2034) would face the same inefficient processing and cargo transfer operations in ZU with its resultant high cost and long delays. The diverted traffic (10.7 thousand TEUs in 2015, 80.4 thousand TEUs in 2025, and 240.4 thousand TEUs in 2034) would continue moving as break bulk general cargo rather than by more efficient and cost-effective ISO containers. Furthermore, the generated traffic estimated under the with-Project scenario (8.5 thousand, 109.9 thousand, and 208.8 thousand TEUs in 2015, 2025, and 2034, respectively) would not materialize under the without-Project scenario.

410. The project benefits and cost were revalued in economic prices by separating the cost items into tradable materials and equipment, non-tradable materials, labor, and land. The prices were expressed in $ using the foreign price numeraire with a shadow exchange rate factor (SERF) of 1.01 for foreign exchange effects. A shadow wage rate factor of 0.80 was used to put an economic value on the wages paid to unskilled labor but not on wages for skilled labor, since there is no clear surplus of skilled workers.

411. The economic costs included in the evaluation are (i) initial investment in fixed assets and facilities, container and terminal handling equipment, logistics center management system, customs and quarantine equipment; (ii) additional investment in repair and maintenance of assets and equipment renewal; (iii) change in working capital; and (iv) recurring costs including fixed and variable operating costs and other costs.

412. Benefits. Economic benefits include (i) time savings for rail-to-rail, rail-to-truck, truck-to-rail, and truck-to-truck transloading operations; (ii) diverted traffic cost savings, which consist of containerization benefits in current rail and road traffic that is not containerized; (iii) diverted traffic cargo loss or damage and logistics cost savings; (iv) generated traffic benefits; and (v) other benefits, including pollution savings and energy savings.

413. For road diverted traffic, i.e. break bulk cargo currently shipped by road (36.6 thousand tons in 2015, 238.5 thousand tons in 2025, and 669.2 thousand tons in 2034) the economic benefit is savings attributable to reduced cost of transport by containers. This cost saving ranges from $0.3 million in 2015 to $7.8 million in 2034. The corresponding diverted traffic benefit for rail (35.7 thousand, 234.6 thousand, and 663.6 thousand tons in 2015, 2025, and 2034, respectively) is $0.2 million in 2015 increasing to $4.2 million in 2034.

414. For generated freight traffic benefits ($1.6 million in 2015, increasing to $25.8 million in 2034) an adjusted economic value-added of $94.48 per ton for containerized cargo was computed on the basis of current financial value ($403 per ton), nontax elements, SERF, percentage value added, percentage net taxes, depreciation, and operating surplus. The adjusted economic value per ton represents the net economic value, i.e., the value of output at economic prices less the costs of production (sum of all intermediate input costs, wages, and annualized investment costs). Since generated traffic benefits represent producer’s surplus, one-half of the economic value for each commodity is multiplied by estimated generated freight tons. Conservatively a market share of 20% of generated traffic for ZULC was assumed, with the remaining 80% not using the terminal’s facilities (direct shipment to/from the manufacturing facility).

125

415. Time saving benefits ($0.1 million in 2015; $1.26 million in 2034) were estimated for normal and diverted traffic.

416. Energy and pollution benefits were also estimated for the Project. Without the Project the current inefficient operations of UBTZ will continue with widespread shipper dissatisfaction due to long delays in cargo transfer in ZU. The completion of the regional road at the end of 2013 will provide a hard-surface all-weather truck transport capability between ZU and Mongolia-Russian Federation border in the north through UB. Under with project conditions rail transport will be able to maintain its attractiveness because the Project will reduce the cargo handling time. Based on the actual experience of traffic shift from rail to road in the aftermath of the opening of the Altanbulag-UB road in 2000, without efficient terminal operations in ZU it is expected that 40% of rail traffic will move to road by 2015.

417. Truck transport is inherently more polluting and less energy efficient that rail transport. On the basis of recent research conducted by the International Energy Agency, the number of tons of carbon dioxide (CO2) per ton-kilometer (TKM) for road and rail were computed. This saving for rail compared with road is 24 tons of CO2 per million TKM. This value was included in the benefit stream ($30,000 in 2015, increasing to $380,000 in 2034). In addition, the saving in reduced total fuel consumption ($0.45 million in 2015, $5.83 million in 2034) is estimated and included in the benefit stream as fuel cost savings. Unit operating costs for both road and rail transport were adjusted to exclude fuel costs in order to eliminate double counting of this benefit.

418. Economic Return. The economic internal rate of return (EIRR) for the Project is 18.7% (Table 10-1) with Net Present Value (NPV) at the discount rate of 12% totaling $50.5 million. Transport cost savings to shippers are the major economic benefit (57% of benefits), followed by generated traffic benefits (35%). Time savings and other benefits make up approximately 8% of total benefits.

419. Sensitivity Analysis. Sensitivity analysis tested 10 scenarios to assess the robustness of the results of the economic analysis (Table 10-2). The total cost would have to be more than 72.7% higher than estimated for the EIRR to fall below the cutoff rate of 12%. This switching value is unlikely to occur. A 1-year delay in completion would reduce NPV by 34.8%, but would not bring it down to zero. A delay in implementation is unlikely, as the implementation period is 5 years. Combinations of adverse effects of benefits and costs were also tested. The results showed that the Project would maintain its economic viability under plausible scenarios of variability in key parameters.

126

Table 10-1: Economic Internal Rate of Return (2010 economic prices, domestic price numeraire, $ million)

Costs Benefits

Year Capital Operation and Mtce.

Total Costs

Time Savings

Diverted and

Generated Freight Benefits

Other Benefits

Total Benefits

Net Benefits

2011 (6.1) 0.0 (6.1) 0.0 0.0 0.0 0.0 (6.1) 2012 (26.9) 0.0 (26.9) 0.0 0.0 0.0 0.0 (26.9) 2013 (15.9) 0.0 (15.9) 0.0 0.0 0.0 0.0 (15.9) 2014 (3.6) 0.0 (3.6) 0.0 0.0 0.0 0.0 (3.6) 2015 0.5 (5.2) (4.8) 0.1 4.4 0.5 5.0 0.2 2016 0.9 (5.3) (4.4) 0.1 5.8 0.6 6.5 2.1 2017 0.9 (5.5) (4.5) 0.1 7.6 0.7 8.4 3.9 2018 (1.0) (5.6) (6.6) 0.2 10.4 0.8 11.4 4.8 2019 0.4 (5.8) (5.4) 0.2 13.5 1.0 14.7 9.3 2020 (0.0) (3.3) (3.3) 0.2 13.9 1.1 15.3 11.9 2021 (0.0) (3.5) (3.5) 0.3 18.7 1.4 20.3 16.9 2022 (22.4) (3.7) (26.2) 0.3 24.0 1.6 25.9 (0.2) 2023 (1.8) (4.0) (5.8) 0.4 27.4 1.9 29.7 23.9 2024 1.7 (4.5) (2.8) 0.4 31.3 2.2 33.9 31.1 2025 (0.0) (4.7) (4.8) 0.5 35.1 2.4 38.1 33.3 2026 (0.1) (5.0) (5.1) 0.6 39.4 2.7 42.7 37.7 2027 (0.1) (5.4) (5.4) 0.6 44.2 3.0 47.9 42.5 2028 (0.1) (5.7) (5.7) 0.7 49.5 3.4 53.6 47.9 2029 (20.7) (6.1) (26.8) 0.8 55.4 3.8 60.0 33.1 2030 (1.8) (6.5) (8.3) 0.9 61.9 4.2 67.0 58.7 2031 1.6 (7.0) (5.4) 1.0 69.1 4.7 74.8 69.4 2032 (0.1) (7.4) (7.5) 1.1 77.1 5.3 83.5 76.0 2033 (0.1) (8.0) (8.1) 1.2 86.0 5.9 93.1 84.9 2034 42.2 (8.7) 33.5 1.3 92.3 6.2 99.8 133.3

EIRR 18.66%

NPV @ 12%

50.52

Table 10-2: Sensitivity Indicators and Switching Values

Parameter

Reference Value

Change By Revised

EIRR Sensitivity Indicator

Switching Value (%)

NPV @ 12% ($ million)

EIRR 18.66% 50.51

Terminal Equipment Costs 100% 16.42% 0.24 424.43% 38.61

Project Works Costs 25% 17.62% 0.40 248.17% 45.42

Annual Costs 20% 18.00% 0.48 207.66% 45.64

Total Costs 20% 16.36% 1.38 72.68% 36.61

Generated Benefits -80% 14.51% 0.83 -120.13% 16.87

Total Benefits -25% 15.07% 2.38 -42.09% 20.51

Passenger Transport Benefits -100% 17.76% 0.16 -633.08% 42.53

Delay Implementation by 1 Year N/A 16.68% NPV declines by

34.81% 32.93

Reduce Benefits by 20%; Increase Costs by 20%

-20%; +20% 13.66% 3.75 -26.65% 12.61

Source: TA Consultant. EIRR = economic internal rate of return, NPV = net present value at 12%.