Patricio Mansilla - Zamyn Uud logistic park demand analysis for PPP

This publication was produced for review by the United States Agency for International Development. The views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

Economic Policy Reform and

Demand analysis for the Zamyn Uud Logistics Park Public-Private

Partnership: Estimation of cargo flows and revenues

July 2009 Ulaanbaatar, Mongolia

Project: Mongolia Economic Policy Reform and Competitiveness Project (EPRC) Report Title: Demand analysis for the Zamyn Uud Logistics Park Public-Private

Partnership: Estimation of cargo flows and revenues Main Author: Patricio Mansilla Contract No. 438-C-00-03-00021-00 Submitted by: EPRC/Chemonics International Inc., Tavan Bogd Plaza, Second Floor, Eronhii

Said Amar Street. Sukhbaatar District, Ulaanbaatar, Mongolia Telephone and fax: (976-11) 32 13 75 Fax: (976-11) 32 78 25 Contact: Fernando Bertoli, Chief of Party E-mail address: [email protected]

mailto:[email protected]

ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank BGT Breusch-Godfrey Lagrange MultiplierTest

BOT Build-Operate-Transfer BOO Build-Own-Operate CDS Credit Default Swap DBOT Design-Build-Operate-Transfer EPRC Economic Policy Reform and Competitiveness Project FPT Fractional Power Transformation GASI General Agency for Specialized Inspections GDP Gross Domestic Product GoM Government of Mongolia IFFC International Freight Forwarding Center of Mongolian Railways MDM Multiplicative Decomposition Model MFFA Mongolian Freight Forwarders Association MNCCI Mongolian National Chamber of Commerce and Industry MNT Mongolian Togrog MOU Memorandum of Understanding MRA Mongolian Railway Authority MRTCUD Ministry of Road, Transport, Construction and Urban Development MTZ Mongolian Tumur Zam NSO National Statistical Office NTTCF National Trade and Transport Facilitation Committee

OLS Ordinary Least Squares PRC People´s Republic of China PPP Public Private Partnership QRVD Quartic Root Dummy Variable RESET Ramsey´s Regression Specification Error Test SEW Single Electronic Window SIP Specialized Inspection Process SPC State Property Committee SPV Special Purpose Vehicle UBTZ Ulaanbaatar Tumur Zam USD United States Dollar VAT Value Added Tax WATT Weighted Average Tariff of Transshipment WEF World Economic Forum YOY Year on Year ZULP Zamyn Uud Logistics Park

TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS ........................................................................................ i TABLE OF CONTENTS ............................................................................................................. i EXECUTIVE SUMMARY ........................................................................................................... i SECTION I: INTRODUCTION .................................................................................................. 3

A. Background .....................................................................................................................................3 B. Mongolia’s poor competitiveness in infrastructure .........................................................................4

SECTION II: THE PROJECT AND ITS CONTEXT ................................................................... 4 A. Zamyn Uud: Mongolia’s gateway ...................................................................................................4 B. Objectives and Project Description .................................................................................................5

SECTION III: A PPP STRUCTURE FOR THE ZAMYN UUD LOGISTICS PARK .................. 11 A. Proposed company structure .......................................................................................................11 B. Services ........................................................................................................................................12

SECTION IV: DEMAND ANALYSIS: ESTIMATION OF CARGO FLOWS AND REVENUES 16 A. Objectives and Methodology of the demand analysis ..................................................................16

SECTION V: CONCLUSIONS AND RECOMMENDATIONS ................................................. 35

EXECUTIVE SUMMARY

This report provides a demand and revenue analysis for the Zamyn Uud Logistics Park(ZULP) PPP project, based on estimated cargo flow through the proposed Logistics Park, and estimated basic revenues that the Park could generate for the use of its services.

The proposed project is located on the Mongolian side of the border with China, between two to six kilometers northwest of current Zamyn Uud border facilities. The site would occupy a space of around 400 Ha (4km in length, and 1km in width), and lay between the existing railway and the access road to Zamyn Uud soum.

The main objectives of this PPP are to: reduce congestion and processing time at the road-to-rail transshipment area for cargo coming from China into Mongolia or cargo continuing on to Russia and other countries; to reduce freight inventory costs and vehicle operation costs; and to contribute to the efficiency of the Trans-Asian integrated Railway connecting Europe with Asia.

This study estimated the overall economic costs incurred due to the lack of infrastructure investment in Zamyn Uud range from $5.7 million to $8.3 million annually, under three different scenarios.

The methodology for the demand analysis consisted of three main steps; first, to examine the economics of what triggers demand for transshipment services at Zamyn Uud. Second, to consider the potential services the project could offer. Third to compile statistics on current demand for transshipment services at Zamyn Uud in order to run several statistical and econometric models predicting future demand and revenues generated by the proposed Zamyn Uud Logistics Park (ZULP) facility.

A time series analysis found statistical and graphical evidence of seasonality. Specifically, from March to October, Zamyn Uud sees high demand for transshipment services, and November to February demand is lower. Those periods correspond with the warm and cold seasons in Mongolia.

To remove seasonality from the time series two models were used, a dummy variable model (Model 1) and a multiplicative decomposition model (Model 2). Both models were used to estimate the seasonal factors of the series so that ultimately the monthly data could be adjusted to exclude the seasonal influence. By removing seasonality from the time series, the overall series trend was revealed.

Rate of earned revenue at Zamyn Uud was estimated by calculating a weighted average tariff of transshipment (WATT) considering the types of products transshipped in Zamyn Uud. The WATT came to $1.73/ton. Revenues for additional services such as parking, commercial services, gas stations, and warehouses were estimated at a conservative $1/truck.

The estimation of total revenues under both models were relatively similar. For example, using model 1, the present value of total revenues came to $38 million using a discount rate of 15%, and $50 million when discounting at 12%. Using the model 2 a range of $32 million to $38 million was found, considering a growth rate of 0.5% or 2%, respectively, in annual income per household at a 15% discount rate. If the discount rate is 12%, the range increases from $39 million to $50 million.

The results of this analysis finds that the ZULP would be a profitable venture. Considering the importance of the project to Mongolia’s economic development, the recommendation is to continue with the next steps of project planning, which would be to investigate investment costs in addition to project operation and maintenance costs and to prepare the financial model.

SECTION I: INTRODUCTION

A. Background

The relationship between economic growth and infrastructure has been broadly studied since the works of Aschauer (1989) and Barro (1990). It is largely understood that investment in transport infrastructure can indirectly reduce poverty. Recently, Fan and Chan Kang (2005) discovered a positive relationship between the investment in roads and the impact on poverty in China.

Recent literature reviews show that transport infrastructure investment and maintenance has the power to increase incomes for the poor by increasing their productivity, improving their accessibility to economic activities, reducing input costs, and reducing transaction costs and time of travel. Finally, transport infrastructure investment presents the possibility of better access to social services.

While increased investment in infrastructure can help to reduce poverty and improve quality of life, real economic development at the community level requires participation and commitment from the local residents, companies and the public sector. If one of these critical parts of the system is absent, the objectives of any social or economic program will not be achieved as fast as they could be.

Public and private sector cooperation on the Zamyn Uud Logistic Park project is imperative to realize the project’s full range of benefits for Mongolia. The project requires investment of time and money on the part the public and private sectors. A preliminary study prepared by USAID/EPRC1 showed that investment in the Zamyn Uud Logistics Park Project, located on the Mongolian side of the border with China, will result in huge net economic benefits. These benefits will be realized by addressing the lack of adequate infrastructure, which requires cargo (principally imported goods) coming from Northern China in the direction of Mongolia and Russia to wait many hours or, in cases of huge congestion, to wait days, just to unload cargo from trucks and to load it onto the railways for the trip from Zamyn Uud across Mongolia and on to Russia.

The necessity of cargo transshipment at Zamyn Uud is twofold: first because of the incompatibility between the Mongolian Gauge (follows the Russian Wide Gauge of 1520 mm gauge) and Chinese Standard Gauge (1435 mm gauge), and second because of the absence of a paved road connecting Mongolia with Russia. USAID estimates the Economic Internal Rate of Return for the Zamyn Uud Logistics Park project to be between 18% and 43%. The main economic benefits of the project emerge from savings in vehicle (trucks) operating costs, freight inventory costs and the reduction of the time spent on the transshipment process. Total savings per lorry are estimated at $43.74 per day.

The ZULP project would solve the problems presented by the lack of a proper road connection to the Russian border, poor maintenance of the vehicle yard, lack of load unitization, inefficient manual transshipment and a shortage of mechanical lifting equipment.

This study estimates that costs incurred due to insufficient infrastructure and lack of investment range from $5.7 million to $8.3 million annually. The details of this estimation are presented in this study.

1 Pre-Feasibility Analysis to Establish Logistics Facilities in Zamyn Uud in Mongolia. April, 2008 USAID-EPRC

Economic Policy Reform and Competitiveness Project

B. Mongolia’s poor competitiveness in infrastructure

The lack of basic infrastructure is clearly a major factor constraining economic growth and poverty alleviation in Mongolia. According to the Competitiveness Index for infrastructure of the World Economic Forum, Mongolia ranks 133 among 134 countries, the second worst infrastructure stock in the world. It is clear that the Mongolian government is not investing enough. This persistent under-investment in infrastructure is having a negative impact on economic growth, living standards, and private sector development. In recent years, developing countries faced with the same fiscal and capacity constraints as Mongolia have turned to the private sector as a partner in the provision of infrastructure services to help reduce the serious investment gaps. Well structured and competitively implemented PPPs are an effective and efficient tool not only to mobilize private capital to develop badly needed, economically-viable, public infrastructure, but also to ensure the efficient provision of operation and maintenance (O&M) financing and services over time which is essential to guarantee the long term sustainability of these major capital investments. SECTION II: THE PROJECT AND ITS CONTEXT

A. Zamyn Uud: Mongolia’s gateway

The main goal of logistics parks around the world is to provide services for cargo transportation and transshipment of cargo. Logistics parks, as a facilitator of transport cargo, need to be efficient and minimize transit time and opportunity costs. Best practice holds that passenger and cargo flows be segregated, and that special types of passengers and cargo (VIP, international, transit, national) receive different treatment (transit, import, exports, fragile and others).

At the Zamyn Uud border crossing, import cargo enters Mongolia by rail or truck. For cargo entering on rail, it must be transshipped from the Chinese railway to the Mongolian railway (because of the gauge differences), and then it typically continues on to customs and inspections clearance, which includes paying taxes and fees. In some cases, cargo entering in sealed containers undergoes inspections and fee processing in Ulan Bator. Once the cargo entering by rail is authorized by Mongolian authorities and loaded onto the Mongolian railway, it can continue to the Ulan Bator Terminal. From the capital city, cargo either continues on the trip to Russia, or is unloaded for final delivery to different areas of Mongolia.

The flow of cargo coming from China in a “shuttle truck” that leaving Erlian, China, travels eight kilometers to the Zamyn Uud border area. After crossing the border, every truck needs to first be weighed. Once the weight scale process is complete, trucks continue to the police, inspections and customs building to complete required documentation and to obtain authorization to enter Mongolia. Next, trucks diverge to take two different paths through the inspection process depending to the type of cargo they carry. Trucks transporting homogeneous cargo, which is feasible to inspect with a scanner, continue to the scanner inspection area. Alternatively, trucks carrying mixed or heterogeneous cargo continue to the manual inspection area.

Section I Page 4 Demand and Revenue estimation for PPP “ Zamyn Uud Logistics Park”


Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 5

Once trucks finish the inspection control process, they must continue on to the last procedure at Zamyn Uud; transshipment. After crossing railroad tracks without any special security measures, trucks arrive at the unpaved road-to-rail transshipment parking area. During peak times, drivers wait several hours or several days to complete the transshipment process that involves unloading cargo from trucks and loading it onto railway wagons. Actual movement or transshipment of cargo in this area is completed manually or with a gantry crane.

In April 2008, EPRC conducted several interviews with drivers in Zamyn Uud. Drivers reported the main problems at Zamyn Uud as: slow cargo processing, inefficiencies in transshipment, an insufficient number of rail wagons, the occasional closure of the Mongolian border requiring drivers to stay overnight in Zamyn Uud, lack of or poor condition of roads, and lack of adequate space in parking areas, among others.

As reported by drivers in April 2008, the average time drivers spent in the transshipment area was around 135 hours. Total time spent at the all four points of control in Zamyn Uud reached 195 hours. The points of control included in the survey were: weight scale, manual inspection, scanner inspection and road-to-rail transfer.

B. Objectives and Project Description

• Objectives The main objectives of the Zamyn Uud Logistics Park project are to:

a) Reduce congestion and processing time for transshipment b) Reduce freight inventory costs c) Reduce vehicle operation costs d) Reduce cargo losses e) Contribute to the efficiency of the Trans-Asian integrated Railway connecting Europe

with Asia. f) Create a logistics zone with different commercial services and a business center g) Protect investment in the zone by executing project development in several steps to

account for the short, medium and long-term h) Encourage private sector participation to accelerate investment and assure adequate

management and the efficient delivery of services.

• Project description2 The project will be located in Zamyn Uud, Mongolia’s border town with Erlian, China. Zamyn Uud is the gateway into Mongolia, Russia and beyond for the neighboring Chinese city of Erenhot3 (or Erlian—as referred to in Chinese)4. Erlian is part of China’s Inner Mongolia Autonomous Region.

The project’s objectives are to expand the capacity and improve the efficiency of the border facilities at Zamyn Uud, principally through:

• Segregating freight from passenger traffic; • Expanding physical facilities for inspections;

2 This section is based on the reports USAID-EPRC Pre-Feasibility Analysis to Establish Logistics Facilities in Zamyn Uud (April 2008), and Zamyn Uud Gateway Logistics Park Pre-Feasibility Analysis (October 2008). 3 In Mongol 4 In Chinese


• Computerizing and linking the General Agency for Specialized Inspection (GASI) with Customs, consistent with the requirements of the Single Electronic Window (SEW) for trade facilitation project;

• Implementing risk management systems

Specific physical infrastructure components could include:

• A new cross-border entry road reserved for trucks; • A second weight scale for lorries; • An expanded and reorganized parking / inspection area; • Platforms for laying out and inspecting freight; • A rerouted traffic flow with designated lanes, including escape lanes; • A dedicated internal road corridor to the scanner facility; and • Perhaps not initially, but as traffic grows over time, the introduction of a second

scanner.

The Mongolian Authorities still need to define the final project location and the final project specifications. However it is estimated that the project could include the following facilities:

a) A road-to-rail transshipment yard accommodating trains; b) A rail-to-rail transfer yard; c) Cross dock road-to-rail consolidation centers for the consolidation of Chinese goods

arriving by train and moving to Russia by rail; d) Road-to-road consolidation facilities for road trains to Ulaanbaatar; e) Warehousing facilities; f) Logistics service facilities; and g) Parking areas to accommodate 300 trucks simultaneously - equivalent to 300 wagons.

Currently wagon loading times using manual methods stretch up to twelve hours. Using unitized methods, it should be possible to achieve a maximum cycle time of six hours. With two overlapping shifts, each 40-wagon line should be able to handle 80 wagons per day, so, to reduce loading times, four lines will be needed.

Some preliminary design principles for the project, according to a feasibility study prepared by EPRC/USAID, could be:

a) The land adjacent to the railway must be reserved for train assembly sidings, the road-to-rail transshipment center, and a relocated and modernized rail-to-rail transshipment centre. This arrangement will simplify the rail layout, reduce costs and allow more flexible planning for remaining sections of the Logistics Park, allowing space for turnouts, train assembly sidings and the transshipment facilities.

b) The second principle is to provide a simple “ladder” primary road system using twin four-lane spine roads about 400m apart along the length of the Logistics Park. The spine roads should be connected by cross roads at about 400m intervals. This ensures maximum flexibility, allowing sites from 16 hectares downwards in the central strip to be leased to individual operators. Local roads can be provided as needed to offer smaller development sites.

c) A third principle is to locate the main vehicle service areas between the road and the point where trucks enter the transshipment, warehousing and value-added logistics areas.

d) The fourth principle is to separate services such as the motel / restaurant / coffee bar complex and cash and carry center, in a second 200m wide landscaped corridor on the side of the road away from the railway. The corridor should be parallel with the road.



Mongolian authorities must finalize the location for the project and determine the availability and registration of the proposed land. This will help to define the specifications of the public sector’s participation as either a participant in the joint venture company, or as provider of the initial assets of the Special Purpose Vehicle (SPV).

The picture below shows the proposed project site, situated 5.5 kilometers northeast of the current Zamyn Uud facilities.

C. Cost of lack of investment in Zamyn Uud To estimate the cost of investment shortfalls in Zamyn Uud, the EPRC project designed a survey for cargo truck drivers that go through the processes and utilize the existing facilities at Zamyn Uud. EPRC identified four points of control that truck drivers must clear and surveyed drivers at each point.

EPRC’s objective was to estimate the time spent on clearing goods at the Chinese and Mongolian borders and on the physical transfer of goods from road-to-rail. EPRC also sought the opinions of lorry drivers on the current situation.

The survey covered the whole transport process, beginning from the point where goods are loaded in Erlian and ending with the transshipment of goods from lorries or cargo trucks to rail wagons and containers at the road-to-rail transshipment point in Zamyn Uud.

The survey’s four points of control include (represented in the graph below):

1. Weight Scale 2. Manual Inspection 3. Scanner inspection 4. Road-rail transfer



Source: EPRC/USAID

Areas covered in Questionnaire 2

The survey used 3 different types of questions:

• Identifying questions related to the date of the interview, type of lorry and goods being carried;

• Quantitative questions regarding the length of time spent at different stages of border clearance and transshipment;

• Qualitative questions mainly focused on obtaining drivers’ views on the current situation at Zamyn Uud and collecting suggestions for improvements.

MCGA and GASI’s Zamyn Uud branches supported the interviews by providing space to conduct interviews and by encouraging drivers to participate. The survey included over 550 interviews conducted from 16-19 April 2008. The distribution of surveys conducted across the four points of control follows:

• 152 interviews at the weight scale, • 126 interviews in the manual inspection area, • 153 interviews in the scanner inspection area, and • 122 interviews in the road-rail transshipment area

The table below shows the average time spent by the drivers in the three segments at Zamyn Uud. Total time spent in the complete network averaged 195.1 hours. For transshipment, the average time spent is 135.1 hours. Excluding Segment 1 (estimating time at the border between China and Mongolia), the total time is 160.9 hours, displaying that the bulk of waiting time occurs on the Mongolian side of the border.

Table 1. Average Time Spent by Cargo Trucks

Segment and Point of Control Average time Minimum Time Maximum Time

Segment 1: China to Weight Scale 32.4 3.5 96



Segment 2: Weight Scale to the end of Custom Clearance 25.8 1.7 14.1

Segment 3: End of Customs Clearance to road-to-rail transshipment area

135.1* 25.0 363*

Total Hours Spent 195.1* 30.2 600 Source: EPRC Survey at Zamyn Uud (*) GASI normally limits the waiting time of the lorries to 72 hours.

In terms of days, the average waiting time for the complete process is 8.1 days and waiting time for the last two segments is 6.7 days. This means that in peak periods drivers must wait for approximately one week to complete the procedures of inspection and customs clearance, transportation across the border and transshipment.

Table 2. Days Spent by Cargo Trucks Segment and Point of Control Average days Minimum Days Maximum Days

Segment 1: China to Weight Scale 1.4 0.1 4 Segment 2: Weight Scale to the end of Custom Clearance

1.1 0.1 5.9

Segment 3: End of Customs Clearance to road-to-rail transshipment area

5.6* 1.0 15.1

Total Hours Spent 8.1 1.3 25 Source: EPRC Survey at Zamyn Uud.(*) GASI normally limits the waiting time to 72 hours for lorries.

Most of the trucks (80.8%) participating in the survey were Mongolian and 19.2% were Chinese. Of the total trucks, 70.5% carried construction materials, 20.2% carried food, and the remaining 9.3% carried electronic appliances, furniture, clothes and other items.

The most prominent complaints by interviewed drivers include overnight stays in Erlian forced by the closure of the Mongolian border, slow transshipment to railway, poor condition of roads, and long waiting times for customs processing.

After establishing waiting time estimations through the survey, the next step in estimating future losses for the Mongolian economy in the absence of investment at Zamyn Uud is to study the value of cargo imported by truck and processed in Zamyn Uud. By analyzing past cargo movement from a representative year, future losses to the Mongolia economy can be predicted in the case no infrastructure improvements are made.

The value of imported goods entering Zamyn Uud by truck has increased seven times over the past five years from $54 million in 2004 to $368.2 million in 2008. This significant increase can likely be attributed at least in part to Mongolia’s relatively new open market. This growth trend is expected to continue for the next few years.

Table 3. Value of Import Cargo processed in Zamyn Uud by Truck

(Million USD) 2004-2008

Year Value (Million US$) 2004 54.2 2005 72.3 2006 96.0 2007 208.0 2008 368.2



Total Accumulated 2004- 2008 798.7 Source: Mongolian Customs Office

The value of monthly import cargo in 2008 displays a growth period from March to June, followed by a period of decline from July to February. The peak in terms of the monthly value of cargo in 2008 was in May at $48 million and the minimum value was in February at $10.3 million.

Three alternatives to calculate the weekly value of import cargo are presented here. The first alternative considers the average for the entirety of 2008, which results in a value of $7.6 million per week.

The second alternative uses the average of only nine months, excluding November, December and January. The excluded months experience low traffic and have a low probability of backlogs. The nine month average weekly value of import cargo is $9.1 million.

The third alternative considers peak months, normally May, June and July. Using this alternative the average weekly value is $11.1 million.

Table 4. Value of Import Cargo Processed by Truck

In Millions of USD (2008) Period Average Monthly Value Average weekly Value

Average 2008 30,686,883.2 7,671,720.8 Average 9 months 2008 (excluding Nov-Dec-Jan)

36,480,003.2 9,120,000.8

Average May-Jun-July 44,512,630.6 11,128,157.6 Source: EPRC/USAID

With an estimated average time delay in Zamyn Uud of around one week, the estimated cost of delays in cargo movement (calculated as the opportunity cost of the cargo stopped at the border) is 20% of profits over the weekly value of import cargo.

An additional 5% loss in the value of weekly cargo should be considered for indirect costs resulting from: damage to fruits and vegetables; broken bricks; robbery; additional cost for salaries of drivers and guards; opportunity cost for construction material; transportation opportunity cost and others.

Table 5. Cost of Cargo Delays for Trucks Transporting Cargo through Zamyn Uud in 2008 (Weekly USD)

Period 20% (Opportunity Cost) 5% (Indirect Costs) Total Weekly Cost

Due to Delays Average 2008 1,534,344.1 383,586 1,917,930.2 Average 9 months 2008 (excluding Nov-Dec-Jan) 1,824,000.1 456,000 2,280,000.2

Average May-Jun-July 2,225,631.5 556,407 2,782,039.4 Source: EPRC/USAID

The following table shows a conservative estimate of the total annual cost of cargo delays at Zamyn Uud. According to the calculations, in peak periods this figure can reach $8.3 million per year. The great scale of this estimated loss shows the urgent need to improve infrastructure and eliminate inefficiencies at Zamyn Uud.

Table 6. Cost of Cargo Delays



(Annual USD)

Period Total Cost of Cargo Delays per Year Average 2008 5, 753,790 Average 9 months 2008 (excluding Nov-Dec-Jan) 6,840,000

Average May-Jun-July 8,346,118 Note: Assumes one week of delayed cargo processing three months per year.

SECTION III: A PPP STRUCTURE FOR THE ZAMYN UUD LOGISTICS PARK

A. Proposed company structure

A Build-Operate-Transfer (BOT) process would take at least two years because the legal structure and bidding process must be established. Because of the time delay in preparing a BOT arrangement, public authorities plan to immediately start the PPP process by creating a PPP company. Project stakeholders envision a wide range of participants from the non-profit, private and public sectors; below is a brief description of each party’s proposed role in the ZULP PPP project.

Government of Mongolia: Governmental agencies representing the GoM in the LPDC will include the Ministry of Finance, Ministry of Roads, Transport, Construction and Urban Development, the State Property Committee and UBTZ. The GoM will contribute 400 ha of vacant land to the LPDC.

Mongolian Freight Forwarders (MFFA): This private association formed by private transport companies operating in Zamyn Uud will be part of LPDC and will contribute equity to the company.

Strategic Investors: Once GoM and MFFA sign an MOU to establish the PPP company, USAID/EPRC will provide technical assistance. USAID/EPRC will complete studies examining the business conditions of the ZULP, and the prospect for participation of additional LPDC private shareholders.

Construction companies: The LPDC will directly hire construction companies to build specific project zones. Alternatively the LPDC will appoint operator(s) that have the right to hire construction companies and manage the concession.

Operation companies: Operation companies will have a contract with LPDC, most likely as a result of a bidding process. The LPDC will be the party to establish the principal requirements that a company must fulfill as an LPDC operator. Operation companies will eventually maintain day-to-day relations with logistics park users.

Users: Users will principally be transport companies and cargo owners (import companies). Zamyn Uud workers and drivers will use the commercial services provided by the logistics park.

Regulation agency: Competition and tariff regulation must be provided by an independent agency or through a contract with LPDC operators, with the approval of the Agency for Fair Competition and Customers. The LPDC could also be a self-regulated company considering that GoM representatives will be on the board of directors.



Capital markets: Capital markets in Mongolia are still small, so it’s highly probable that the project will be funded by a combination of equity from shareholders and debt and equity from operators. The LPDC also could obtain debt against assets (land and potential revenues) in the medium to long-term. Project stakeholders should explore the possibility of IFC participation as a company shareholder with investment equity.

A graphic representation of the project’s business model is as follows:

Graph 2.

Business Model for ZULP Private

Shareholders

Logistic Park Development Co.

Regulatory Agency or

Regulation by contract

Users

Bond Issue

ContributesEquity

Tariff Regulation

Tariffs

Capital Markets

Min.FinanceMin. Road, Transport

SPC-UBTZContributes Land

Payment for services

Coupon Payments (i + p)

MFFA

OperationCompanyServices:Parking

Road-RailRail-Rail

ConsolidationWarehouse

ConstructionCompany

Specific contract

Regulation

ContributesEquity

OperationContract

FeePayment

Dividends DividendsDividends

B. Services

A specialized operator could be selected through a bidding process to conduct non-core business functions such as a warehouse facilities business or parking services. ZULP could prepare a bid and select a candidate based on displayed capacity to earn the highest level of fees for ZULP in exchange for a set of adequate and accessible user tariffs.

ZULP could offer facility space to other private companies to work in the commercial services area. ZULP could establish a rental tariff for each m2 and/or require a percentage of gross revenues generated from the commercial services area.

Finally, ZULP could enter into an additional area of business related to several possible real estate opportunities.

In summary, the project could have three clearly defined groups of services under the umbrella of general PPP services, as shown in the following figure:




PPP Services

Basic NonCommercial

Services

BasicMandatory

CommercialServices

Complementary Services

Graph 3. Services Structure at Zamyn Uud

• The first group could consist of basic non-commercial services (building and concession areas maintenance, cleaning services, parking for public transport service and others mentioned below).

• The second group of services could include basic mandatory commercial services (parking services, warehousing, transshipment cargo and others).

• The last group could consist of complementary services, including the food court area, financial services and all additional activities to support the land port (cargo transfer, fumigation, spraying, cargo incineration and cooling services).

Complementary Services, described above, are the following:

• Support of port activities: cargo transfer, fumigation, spraying, cargo incineration, cooling service.

• Financial Services area • Food Court • Others allowed by the legal framework

• Core Services to be Regulated

Logistics parks developed under a concession or PPP scheme normally identify a group of tariffs that should be regulated as services are often operated by a monopolistic organization. When setting regulations, government officials identify which of the logistic park services face competition in markets in or around the logistics park and the potential of contestable markets. The services that do not face competition or are not subject to contestability must be regulated by setting a maximum tariff.

On a preliminary basis, the services listed below, divided between transshipment services and basic and commercial services, have been identified for regulation in the proposed Zamyn Uud Logistics Park. However, final tariff rates should be determined based on the parameters of the business model and financial analysis.

Table 7. Regulated Tariffs for Transshipment Services in Zamyn Uud


Transshipment Services Road to Rail (Imports)

Rail to Rail (Imports)

Rail to Road (Exports)

Transit Cargo (to Russia)

Transit Cargo (To China)

Table 8. Regulated Tariffs for Basic and Commercial Services in Zamyn Uud

Basic and Commercial Services

Access to the Logistics Park and use of infrastructure

Parking over 24 hours

Time overrun for use of decks and customs inspection

Public parking per hour

Monthly parking

Office rent per m2

Public transportation between Logistics Park and Zamyn Uud

Warehousing

B. Main flow of Projected PPP Revenues Based on the identification of services and tariffs, the scheme for potential concessionaire revenues could be the following:




Graph 4. Flow of Revenues

One important advantage of the ZULP project is the potential for large land extensions into areas presently under GoM ownership.5 One fundamental difference between the proposed ZULP project and other similar international projects is that the land is “clean,” implying that project stakeholders will not incur new costs for land expropriation or for the application of the eminent domain, (the right of the public sector to acquire land in order to execute projects of public interest).

As soon as possible, the GoM should create a strategy to develop not only the project’s Master Plan but also a Master Plan for the city of Zamyn Uud. The starting point for such a plan is to create a land inventory, noting whether land lies in public or private hands. Following the inventory, land that is not yet registered should be registered on behalf of the GoM. This procedure will avoid the occupation of land by people speculating on possible future benefits when the GoM might expropriate land to start a project and need to compensate land occupants accordingly.

The strategy must also include value capture via the sale of future land to the private sector once the GoM has improved utilities services and several projects are operating in Zamyn Uud. This will help the GoM to recover public costs.

5 It is important to confirm before launching the project that the land included in the project proposal is actually GoM property, as assumed in this study.

Logistic Park Development Co.

Parking Real Estate

Development

Commercial Services

Road to Rail Imports

Rail to RoadExports

Rail to Rail Imports

Revenues from theBusiness or fee Revenues from the

Business or fee Tariff for rent m2

and % of business

Fee Fee Fee

Warehouse Gas Station Fee Fee



SECTION IV: DEMAND ANALYSIS: ESTIMATION OF CARGO FLOWS AND REVENUES

A. Objectives and Methodology of the demand analysis

The methodology for estimating and forecasting future demand for the proposed services to be provided by the Zamyn Uud logistics park consists of three phases, each of which include several activities. The phases are the following:

Phase 1: UnderstandingMongolia´s Currenttransport system

Phase 2: Identifying existingor current demand andrevenues

Phase 3: Forecasting futureProject demand and revenues

•Competitiveness and investment in infrastructure in Mongolia•Cost of lack of investment in Zamiin Uud•Identification of the main public institutions involved in logistics services in Mongolia•Identification of main private companies operating in the transport system in Zamiin Uud•Identification of the cross border public institutions currently working in the transport system and their main responsibilities•Relevance of international donors and cooperation in Mongolia

•Mongolian Macroeconomic Performance as a source of project dynamism•Mongolian international trade •Analysis of Zamiin Uud´scurrent demand•Identification and quantification of the current center of business and revenues in Zamiin Uud•Economic Situation of the main commercial partners of Mongolia: China and Russia•Identification and quantification of current Customs revenues in Zamiin Uud

•Selecting models to predict the demand•Forecast of demand for the project•Estimation of revenues•Present value of revenues for the project•Simulation of revenues

B Demand Analysis at Zamyn Uud6 Data on cargo tonnage was obtained from MCGA as registered at the Zamyn Uud office. Both the cargo and the truck carrying the cargo must receive clearance from MCGA, after which the truck travels to the UBTZ transshipment area. There the cargo is unloaded from the truck and loaded onto the railway wagons to be transported to Ulaanbaatar or other cities in Mongolia. The graph below shows the organization of information received on the total amount of cargo processed in Mongolia from MCGA. First, the data was organized and processed to include only information from the Zamyn Uud MCGA office. Once the total cargo for Zamyn Uud was derived, the team worked on dividing the information between rail-to-rail and road-to-rail transshipment in the case of both imports and exports. Once this data was organized, the team separated each group of information by type of product and by month for the period of 2004-2008.

Graph 5. Organization of Statistical Information

6 This section uses statistical information from MCGA. Given that the team received partial information from the MRA, the team created an additional section to do adjustments to the estimation of revenues. However, trends in both data sets are similar. The data from MCGA, though, is conservative in comparison to that provided by the MRA, likely due to the fact that not all cargo is processed directly in Zamyn Uud. In some cases, cargo will be transshipped in Zamyn Uud, but will register with MCGA in Ulaanbaatar.


Given that road-to-rail and rail-to-rail transshipment services for import cargo are the core services for the proposed project, this analysis focuses primarily on the movement of this cargo and then, secondarily, on export cargo as it relates to rail-to-road transshipment. This second service moves low levels of cargo compared with the transshipment levels of import cargo, but it must be considered because of it would utilize core services of the proposed PPP project.

The analysis will also focus on the diagnostic of the time series to identify behaviors and/or patterns of cargo transshipment in Zamyn Uud. This analysis allows prediction of future demand for the PPP project. Understanding the pattern of the cargo series helps to make decisions regarding how to adjust the series in the case of seasonality, for example, and also to determine which econometric model is optimal for this analysis.

B.1 Total Import Cargo Processed at Zamyn Uud Over the past four years, the average annual growth of total import cargo processed at Zamyn Uud was 33%, growing from around 524,000 tons in 2004 to 1.5 million tons in 2008. Zamyn Uud is Mongolia’s main border control point, and according to estimations made during the course of this study, cargo flows through Zamyn Uud will continue to grow over the next couple of years.

Annex G Page 18 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park”


Table 9. Growth in Total Cargo (Tons) Processed Yearly by Road and Railway 2004-2008

Year Tons by Truck Tons by Railway Total Growth Rate

2004 311,627 212,664 524,292 - 2005 362,563 222,957 585,520 11.7% 2006 416,260 228,300 644,561 10.1% 2007 698,593 293,589 992,182 53.9% 2008 1,189,794 350,744 1,540,539 55.3%

Source: EPRC and Mongolian Customs Office – May 2009

The following table shows information on total import cargo moved through Zamyn Uud by month. This information will be used for the econometric model for prediction and forecasting. The table shows that the monthly average of total import cargo moved through Zamyn Uud grew from 2004 to 2008, reaching 128,000 tons per month in 2008 compared to 43,000 tons in 2004.

Zamyn Uud’s cargo processing peaks in July. During the course of the five years examined in this analysis, the top three months in terms of cargo processing traffic were: July with an average of 101,000 tons; June with an average of 94,000 tons; and May with an average of 90,000 tons.

Because of harsh weather conditions in December, January and February, these months experience the lowest average activity levels.

Table 10. Monthly Cargo Processing Rates

Total Cargo (Tons) Processed in Zamyn Uud by Road and Railway 2004-2008

2004 2005 2006 2007 2008 Average January 23,866.153 29,277.436 30,225.754 31,966.569 87,333.419 40,533.866February 19,207.254 22,397.425 32,065.066 29,440.064 81,379.371 36,897.836March 36,015.163 43,184.018 43,636.150 48,330.923 165,170.691 67,267.389

April 53,873.209 62,905.096 57,763.667 78,421.236 187,587.026 88,110.047May 57,468.028 57,914.687 62,581.153 86,671.477 189,039.761 90,735.021June 67,266.459 62,716.385 74,825.930 104,834.253 160,690.731 94,066.751

July 47,856.327 67,932.232 69,396.434 152,588.527 169,283.233 101,411.351August 49,986.145 64,283.940 75,185.164 130,501.745 117,651.584 87,521.716September 55,643.238 59,210.501 67,203.198 96,206.249 129,331.700 81,518.977October 46,706.214 46,979.934 59,773.490 97,003.042 125,471.351 75,186.806November 33,835.384 39,840.188 39,919.603 66,490.841 68,038.323 49,624.868December 32,568.693 28,879.147 31,986.077 69,727.999 59,561.815 44,544.746Total 524,292.268 585,520.989 644,561.685 992,182.925 1,540,539.007 Average 43,691.022 48,793.416 53,713.474 82,681.910 128,378.251


The graph below shows that the level of cargo processed at Zamyn Uud peaked in May 2008 at around 189,039 tons. April 2008 also processed unprecedented levels of cargo, reaching 187,587 tons for the first time in Zamyn Uud’s history. In 2008, the lowest cargo level was in December at 59,561 tons. Yet, in spite of the global financial crisis, the December 2008 average was higher than the average for December of the previous four years. This could indicate that Mongolia is experiencing a structural change in consumption and growth of disposable household income. If this is true the next years will realize higher growth of imports and commercial trade, which will increase the level of cargo traveling through Zamyn Uud.



In the time series below it can be observed that February has the lowest levels of cargo traffic. Specifically, in 2004 cargo processed in February totaled only 19,207 tons, 22,397 tons in 2005, 32,065 tons in 2006 and 29,440 tons in 2007. The series shows very clear seasonality with low levels of cargo from November to February and higher levels of cargo from March to October.

Time series normally have both trend and seasonality. Trend is represented, for example, as a plateau followed by a period of exponential growth; technically defined as systematically linear, meaning that it changes over time and does not repeat over the range of the data under analysis. In the case of seasonality, the difference is that the pattern is repeated in systematic intervals over time. This is exactly the case in the below statistical series.

Graph 6. Total Import Cargo (Tons) Processed Monthly by Railway and Road, 2004-2008

The graph below shows the growth rates of total import cargo transshipped from road-to-rail from 2004 to 2008. March and April are the months with the highest growth rates because they follow periods of low activity (November, December, January and February).

Graph 7. Growth Rate of Total Import Cargo (Tons) Processed by Road and Railway 2004-2008

Growth rates for the months of January, March, May, July, October and November always show positive growth compared to the same months of previous years (YOY basis) - a



combined response to seasonality and natural annual growth in cargo flows through Zamyn Uud.

Table 11. Growth Rate of Total Import Cargo (Tons) by Railway and Road YOY 2005-2008

2005 2006 2007 2008 January 22.7% 3.2% 5.8% 173.2% February 16.6% 43.2% -8.2% 176.4% March 19.9% 1.0% 10.8% 241.7% April 16.8% -8.2% 35.8% 139.2% May 0.8% 8.1% 38.5% 118.1% June -6.8% 19.3% 40.1% 53.3% July 42.0% 2.2% 119.9% 10.9% August 28.6% 17.0% 73.6% -9.8% September 6.4% 13.5% 43.2% 34.4% October 0.6% 27.2% 62.3% 29.3% November 17.7% 0.2% 66.6% 2.3% December -11.3% 10.8% 118.0% -14.6%


Zamyn Uud’s high congestion period includes May, June and July, representing around 33% of total import cargo. For the years of 2004-2008, if the low level period is excluded (November-December-January-February), the eight remaining months comprise 80% of total cargo movement in a year.

Graph 8. Import Cargo (Tons) Processed by Road and Railway Monthly Comparison 2004-2008



B.1.2 Total Import Cargo Handled by Road-to-Rail Transshipment

The table below shows the total amount of cargo processed monthly entering Zamyn Uud by truck. Annual truck cargo grew from 310,972 tons in 2004 to 415,034 tons in 2006. 2007 is a transition year between the relatively homogeneous period of 2004-2006 and the explosive growth shown in 2008. Truck cargo transshipped in 2008 grew approximately two-fold from 2007 and around three-fold from 2006.

Over the five-year analysis period, the volume of cargo grew from 311,627 tons in 2004 to 1.1 million tons in 2008. In terms of monthly averages, volume grew from 25,914 tons in 2004 to 98,877 tons in 2008 and the annual average of cargo processed throughout the five-year period is 590,970 tons.

The total cargo processed at Zamyn Uud over the five-year period is 2,954,852.28 tons; 2008 represents 40% of the total five years (2004-2008) in cumulative terms. If 2007 and 2008 are considered together, cumulatively they represent 63% of cargo for the period under analysis.



Table 12. Volume of Truck Import Cargo Processed

Truck Import Cargo (Tons) Processed in Zamyn Uud 2004-2008

2004 2005 2006 2007 2008 Average January 11,360.639 20,725.408 15,698.180 17,396.220 61,849.336 25,405.956February 12,740.343 7,287.958 12,452.393 14,436.693 56,605.670 20,704.611March 22,041.652 27,372.116 26,397.417 36,837.066 138,254.854 50,180.621April 30,071.710 37,688.315 37,452.227 54,490.459 155,317.133 63,003.969May 36,782.140 35,327.338 43,647.077 56,582.080 147,456.771 63,959.081June 40,278.487 43,387.474 51,723.106 78,720.959 128,959.126 68,613.830July 29,178.032 35,204.603 44,500.234 114,867.118 114,453.334 67,640.664August 26,805.884 40,245.462 52,259.097 90,118.278 97,032.705 61,292.285September 33,241.660 40,146.613 46,450.417 73,930.079 109,165.652 60,586.884October 28,750.397 30,775.180 42,079.980 73,235.513 101,470.659 55,262.346November 20,742.959 25,989.484 24,042.354 41,577.759 43,923.360 31,255.183December 19,633.645 18,413.124 19,558.292 46,400.943 35,306.264 27,862.454

Total 311,627.547 362,563.076 416,260.775 698,593.166 1,189,794.863 Average 25,968.962 30,213.590 34,688.398 58,216.097 99,149.572

Source: National Customs Office (2009)

The graph below displays monthly behavior of the cargo statistics presented in the previous table. 2004-2006 display a very clear upward trend with evident concavity and maximum and minimum points. The graph’s three low level “mountains” represent this concavity.

A certain regularity from 2004 to 2006 is observed in cargo levels increasing beginning in March, and decreasing beginning in the third and fourth quarters each year.

The graph shows that the maximum cargo level was in April 2008 at around 155,317 tons. The steepest slope occurs between May and December 2008, showing a rapid decrease from the April 2008 peak to only 35,285 tons in December 2008.

Interestingly, 2008’s minimum is similar to 2004’s maximum. This could indicate real growth and stabilization of future cargo flows at this level as normal, notwithstanding 2009, which is the period that reflects the largest negative impact of the global financial crisis.

February reflects the minimum levels of the statistical series. For example in 2004, February processed 12,735 tons of truck cargo, 7,287 tons in 2005 (the smallest volume for the entire period from 2004-2008), 12,435 in 2006 and 14,433 in 2007.



Graph 9. Truck Cargo (Tons) Processed Monthly 2004-2008

Graph 12 below shows a different representation of the seasonality of the statistical series of cargo. The bar chart shows cumulative monthly demand for cargo processing in Zamyn Uud over the five year analysis period; June and July experience the highest traffic of the series.

The demand in April, May, August, September and October is important for understanding seasonality in a normal year in Zamyn Uud. The months with the lowest levels of demand in a year are November, December, January and February. Finally, March is a “bridge month” linking the low-demand and high-demand months.

The series’ regularity is confirmed by the total accumulated movement presented in the graph below. The cumulative cargo movement shows a minimum in February with 103,357 tons and a maximum in June with 341,622 tons, followed very closely by July with 337,202 tons.

Total cargo movement over five years reached 2.9 million tons. Cumulative movement in June and July over the five year period represents 23% of the total period, around 0.67 million tons, and March to October represent 82% of total movement for the period, which totals around 2.4 million tons.

Another interesting finding is that the months from April to September each have a monthly average higher than 60,000 tons, which represents 64.5% or 1.9 million tons in cumulative terms.



Graph 10. Cargo (Tons) processed by Truck Monthly Comparison 2004-2008

Source: EPRC with information of National Customs Office (2009) The next table shows annual truck cargo movement through Zamyn Uud. The figure starts with 311,627 tons in 2004 and finishes in 2008 with impressive annual growth of 70% over 2007. The growth rate for the period 2004-2008 was 281%, and between 2006 and 2008 the growth rate was 185%, highlighting the importance of the last two years of the statistical series.

Table 13. Table Growth Rate - Import Cargo (Tons) Processed Yearly by Truck 2004-2008

Year Tons Growth Rate 2004 311,627 2005 362,563 16% 2006 416,260 14.8% 2007 698,593 67.8% 2008 1,189,794 70%

Source: EPRC with information of National Customs Office (2009)

The table below shows the monthly growth rate for the analysis period. From the data, cycles of increasing and diminishing growth can be observed.

The graph below shows that the greatest level of negative growth was seen in November 2008, at -57.37%. This downturn could be the result of high levels of positive growth seen in March of the same year. The largest month-to-month growth during the period was from February to March 2005 with 275.33% in March as a result of the low level of cargo in February 2005.

Graph 11. Graph Growth Rate - Cargo (Tons) processed by Truck 2004-2008



B.1.3 Total Railway Import Cargo Processed in Zamyn Uud at Rail-to-Rail Transshipment The average annual rail-to-rail transshipment growth rate is 13.7% lower than the that of road-to-rail transshipment. One of the reasons for this substantial difference is because the data was obtained directly from MCGA, not MRA. This means that some cargo is not represented in this data analysis because a percentage of container cargo can bypass MCGA in Zamyn Uud and go directly to transshipment. This cargo will be registered with MCGA in Ulan Bator.

A section of this report adjusts the yearly statistics for rail-to-rail transshipment to include the higher real numbers. However, this initial analysis did not have access to MRA’s monthly data and therefore modeled the econometric system using data obtained from MCGA.



Table 14. Annual Growth Rate of Railway Cargo (Tons) Processed 2004-2008

Year Tons Growth Rate 2004 212,664 - 2005 222,957 4.8% 2006 228,300 2.3% 2007 293,589 28.5% 2008 350,744 19.5%


The statistical series for railway import cargo processed in Zamyn Uud indicates that the monthly average grew from 17,722 tons in 2004 to 29,228 tons in 2008. Rail cargo monthly averages shows the same tendencies as truck cargo; growing from April to July and then declining from October to February.

Table 15. Volume of Transshipped Rail Import Cargo

Rail Import Cargo (Ton ) Processed s2004-2008

2004 2005 2006 2007 2008 Average January 12,505.514 8,552.029 14,527.573 14,570.350 25,484.083 15,127.910February 6,466.911 15,109.467 19,612.673 15,003.371 24,773.702 16,193.225March 13,973.511 15,811.902 17,238.733 11,493.858 26,915.837 17,086.768April 23,801.499 25,216.781 20,311.440 23,930.777 32,269.893 25,106.078May 20,685.888 22,587.348 18,934.076 30,089.396 41,582.990 26,775.940June 26,987.972 19,328.911 23,102.824 26,113.294 31,731.604 25,452.921July 18,678.296 32,727.629 24,896.199 37,721.408 54,829.900 33,770.686August 23,180.261 24,038.478 22,926.067 40,383.467 20,618.879 26,229.430September 22,401.578 19,063.888 20,752.782 22,276.171 20,166.049 20,932.093October 17,955.817 16,204.754 17,693.509 23,767.529 24,000.692 19,924.460November 13,092.424 13,850.704 15,877.249 24,913.082 24,114.963 18,369.684December 12,935.049 10,466.023 12,427.785 23,327.055 24,255.552 16,682.293Total 212,664.721 222,957.914 228,300.910 293,589.759 350,744.144 Average 17,722.060 18,579.826 19,025.076 24,465.813 29,228.679


The graph below shows similar statistical behavior between railway and truck cargo. The differences are in the volume, with higher truck cargo movements than railway, and in two to three peak months every year in fall, summer and spring.

Graph 12. Railway Cargo (Tons) Processed Monthly 2004-2008



The growth rate shows several jumps over the analysis period, two of the most important being the first quarter of 2004 and the second quarter of 2007.

Graph 13. Graph Growth Rate - Cargo (Tons) processed by Railway 2004-2008



Graph 14. Railway Import Cargo (Tons) Processed Monthly Comparison 2004-2008

B.2 Total Export Cargo Processed in Zamyn Uud by railway and road Mongolian exports continued to grow in 2008 despite the global financial crisis. Exports produced in Mongolia are moved by train to Zamyn Uud at which point, cargo transported by rail continues across the border into Erlian-China. China and Mongolia have agreed that export cargo from Mongolia is to be transshipped to the Chinese railway gauge in Erlian, after which it continues on to intermediate or final destinations in China or other countries. Thus, rail-to-rail transshipment for export cargo is not part of projected project revenues in this analysis.

Data in table 54 in the next section shows that movement of rail-to-road export cargo was very low in 2008 at around 53,663 tons. This service will be considered in the project revenue analysis.

Approximately 2 million tons of export cargo passed through Zamyn Uud in 2008; nearly twice the amount of cargo in 2004. No monthly export trend was identified, even for the months that show lower import movement (November- December- January- April).

Table 16. Exports Transshipped Rail-to-Road 2004-2008

Total Export Cargo (Tons) Transshipped from Rail-to-Road 2004-2008

2004 2005 2006 2007 2008 AverageJanuary 54,806.301 59,243.596 91,471.519 118,665.508 139780.363 92793.4February 52,597.285 40,728.925 111,752.430 108,718.671 72679.511 77295.3March 15,028.479 58,630.509 90,329.039 88,718.375 161257.224 82792.7April 76,631.147 61,791.621 124,231.134 88,377.967 161898.882 102586.1May 77,242.114 74,554.465 138,287.379 91,922.616 192966.549 114994.6June 64,138.412 57,163.041 82,795.963 85,279.732 146280.089 87131.4July 55,945.294 74,662.602 101,315.890 86,736.598 182222.917 100176.6

August 62,226.702 114,748.507 125,288.567 76,461.653 239158.646 123576.8September 61,723.633 99,524.806 92,109.323 76,459.678 229107.300 111784.9October 69,373.309 123,617.854 108,472.282 83,038.005 207980.452 118496.3

November 59,867.940 131,342.046 123,397.934 133,378.754 179738.824 125545.0December 78,874.154 148,106.570 144,210.284 174,825.780 117609.519 132725.2Total 728,454.770 1,044,114.544 1,333,661.743 1,212,583.338 2,030,680.281

Average 60704.56421 87009.54537 111138.4786 101048.6115 169223.3567 Source: EPRC with information of National Customs Office (2009)



B.2.1 Export Cargo moved through Zamyn Uud by railway (Transshipped in Erlian-China) Export cargo moved by railway comprises about 97% of total exports moved through Zamyn Uud. Rail export cargo growth has been high in the analysis period, but it is not considered as a source of revenue for the study.

Table 17. Export Cargo Transshipped from Rail-to-Rail 2004-2008

Export Cargo (Tons) Processed in Zamyn Uud by Railway 2004-2008

2004 2005 2006 2007 2008 Average January 53,733.485 57,519.685 88,820.996 115,411.873 134693.8005 90035.9February 51,446.329 39,718.978 110,599.808 106,214.428 69,847.186 75565.3March 11,736.521 56,454.268 88,204.487 84,348.890 157,862.538 79721.3April 73,947.698 59,926.130 123,130.822 86,049.130 157,072.768 100025.3May 75,892.811 73,825.290 137,453.135 89,539.742 188,571.557 113056.5June 63,321.478 54,823.081 81,187.823 81,913.218 142,478.009 84744.7July 54,849.378 73,876.169 99,736.588 84,359.553 176,888.291 97941.9August 60,535.612 113,647.568 123,723.731 74,185.989 234,481.283 121314.8September 59,855.066 97,778.263 89,693.768 73,065.629 223,594.907 108797.5October 67,294.403 121,522.550 106,496.743 80,317.831 203,607.210 115847.7November 57,273.119 129,430.165 121,121.237 126,965.277 175,085.657 121975.0December 77,373.506 145,608.277 139,589.441 165,580.217 112,833.895 128197.0Total 707,259.404 1,024,130.423 1,309,758.577 1,167,951.776 1,977,017.101 Average 58,938.284 85,344.202 109,146.548 97,329.315 164,751.425

Source: EPRC with information of National Customs Office (2009) B.2.2 Export Cargo Transshipped from Rail-to-Road in Zamyn Uud Rail-to-road export cargo transshipped in Zamyn Uud is just 3% of total exports and basically consists of goods for Erlian and close Chinese cities in the Inner-Mongolia region.

The table shows growth in rail-to-road transshipment for exports in Zamyn Uud from 2004 to 2008, but the cargo levels are still insignificant. Despite the low volume of cargo transshipped from rail-to-road, these flows will be considered in the revenues analysis. In future years with the addition of a paved road connecting Ulan Bator with Zamyn Uud, an increase in the flow of exports crossing the border by truck is predicted.

Table 18. Export Cargo Transshipped from Rail-to-Road

Export Cargo (Tons) Transshipped from Rail-to-Road at Zamyn Uud 2004-2008

2004 2005 2006 2007 2008 Average January 1,072.817 1,723.911 2,650.522 3,253.635 5,086.562 2757.4 February 1,150.956 1,009.947 1,152.623 2504.243 2,832.325 1730.0 March 3,291.958 2,176.242 2,124.553 4,369.485 3,394.687 3071.3 April 2,683.449 1,865.491 1,100.312 2,328.837 4,826.114 2560.8 May 1,349.303 729.176 834.244 2,382.874 4,394.993 1938.1 June 816.935 2,339.960 1,608.140 3,366.514 3,802.081 2386.7 July 1,095.917 786.433 1,579.302 2,377.045 5,334.627 2234.6 August 1,691.090 1,100.940 1,564.836 2,275.664 4,677.364 2261.9 September 1,868.567 1,746.543 2,415.555 3,394.049 5,512.393 2987.4 October 2,078.906 2,095.305 1,975.538 2,720.175 4,373.242 2648.6 November 2,594.821 1,911.881 2,276.696 6,413.477 4,653.168 3570.0 December 1,500.649 2,498.293 4,620.844 9,245.563 4,775.625 4528.1 Total 21,195.367 19,984.121 23,903.166 44,631.562 53,663.180



Average 1,766.281 1,665.343 1,991.930 3,719.297 4,471.932 Source: EPRC with information of National Customs Office (2009) B.3 Import Cargo Processed in Zamyn Uud between January–April 2009 In the first four months of 2009, movement of import cargo through Zamyn Uud reached a cumulative total of 163,770 tons, which is three times lower than 2008, but still similar to 2007 levels. This shows that 1) 2008 had extraordinary levels of cargo movement and 2) that flows are facing structural change, as seen by high cumulative cargo levels in 2009 compared to 2004-2005 and 2006.

Table 19. Total Import Cargo (Tons) Transshipped from January-April to Road and Railway 2004-2009

Import Cargo (Tons) Transshipped at Zamyn Uud to Road and Railway January-April 2004-2009

2004 2005 2006 2007 2008 2009 January 23866.2 29277.4 30225.8 31966.6 87333.4 34445.4 February 19207.3 22397.4 32065.1 29440.1 81379.4 25981.1 March 36015.2 43184.0 43636.2 48330.9 165170.7 35359.2

April 53873.2 62905.1 57763.7 78421.2 187587.0 67985.0 Total 132961.8 157764.0 163690.6 188158.8 521470.5 163770.7


Cargo transshipped from road-to-rail followed the same trend as total cargo for all months of 2009 showing higher levels in the same months as 2004, 2005, 2006 and 2007.

Table 20. Total Cargo (Tons) Transshipped from Road-to-Rail in January-April

2004-2009

Import Cargo (Tons) transshipped from Road-to-Rail in Zamyn Uud January-April 2004-2009

2004 2005 2006 2007 2008 2009 January 11360.6 20725.4 15698.2 17396.2 61849.3 24363.0 February 12740.3 7288.0 12452.4 14436.7 56605.7 14568.5 March 22041.7 27372.1 26397.4 36837.1 138254.9 22576.5 April 30071.7 37688.3 37452.2 54490.5 155317.1 55954.1 Total 76214.3 93073.8 92000.2 123160.4 412027.0 117462.1


The data shows a strong decline in imported cargo transshipped from rail-to-rail in 2009. The table below shows that 2009 cumulative cargo through April declined to 2004 levels. This negative trend differs dramatically from the strong growth seen in road-to-rail transshippment. Table 21. Total Cargo (Tons) Transshipped from Rail-to-Rail in January-April 2004-2009

Import Cargo (Tons) Transshipped from Rail-to-Rail in Zamyn Uud January-April 2004-2009

2004 2005 2006 2007 2008 2009 January 12505.5 8552.0 14527.6 14570.3 25484.1 10082.5 February 6466.9 15109.5 19612.7 15003.4 24773.7 11412.6 March 13973.5 15811.9 17238.7 11493.9 26915.8 12782.7 April 23801.5 25216.8 20311.4 23930.8 32269.9 12030.9 Total 56747.4 64690.2 71690.4 64998.4 109443.5 46308.7 Source: EPRC with information of National Customs Office (2009)



C. Center of Business Revenues in Zamyn Uud This section explains the methodology used to identify and quantify Zamyn Uud’s main center of business in 2008. The table below shows total revenues for the railway system in 2008, with a maximum level in November of around MNT 21.258 million, and a minimum of MNT 13.895 million in March. The average monthly revenue in 2008 was MNT 17.380 million. Table 22. Revenues, Passengers and Cargo of the Mongolian Railway System in 2008

Month Revenues (Million MNT)

Passengers (Thousand)

Cargo (Thousand tons)

January 17300.0 347.4 1327.5 February 14507.7 364.8 1179.6 March 13895.0 344.8 1266.6 April 18120.3 355.8 1226.1 May 17544.5 368.6 1121.2 June 15053.5 369.8 1072.5 July 16198.8 404.4 1121.2 August 19840.3 453.8 1197.5 September 15748.4 372.6 1321.1 October 20800.8 362.5 1388.2 November 21258.8 340.2 1258.0 December 18295.8 272.2 1118.9 Total 208563.9 4356.9 14598.4 Average 17380.325 363.075 1216.533

Source: National Statistical Office of Mongolia (2009)

Total revenue for 2008 was MNT 208.563 million, which is equivalent to $179 million using the actual exchange rate for each month of 2008.

Assuming that 50% of total passengers pay a tariff of $10 and the remaining 50% pay a tariff of $20 it can be estimated that total revenue coming from passengers is $65 million.

Total revenue received by the Mongolian railway system from cargo can be calculated as total sector revenue minus passenger revenue. Using this methodology, 2008 cargo revenue is estimated at $114 million. 2008 estimates for average monthly cargo revenue is $9.5 million, and $5.5 million for passengers.

The revenue from Zamyn Uud transshipment facilities is estimated as a sub-group of total cargo revenues. To calculate this estimate, transshipment services in Zamyn Uud are categorized as a different business than cargo transportation.

To calculate transshipment business revenues, the team used 2008 information gathered from MCGA. MCGA data showed quantity of imports entering Mongolia by both road and rail and outlined the amount of cargo transshipped using road-to-rail and rail-to-rail transshipment, respectively. The data was further organized by type of product in tons,

The team inquired with actual railway system users to determine transshipment tariff rates. The reported tariff system as follows:

Table 23. Transshipment Tariffs for Import Cargo 2009 (MNT)

Service of Transshipment Tariff (Togrogs)

20´ road-to-rail 45000 20´ rail-to-rail 45000

40´ road-to-rail 90000



40´ rail-to-rail 90000 Bulks & Equipment rail-to-rail or

road-to-rail (per ton per bulk) 3500

Construction material (per ton) 1200 Note: All covered wagons have a total capacity of 66 tons

Table 24. Transshipment Tariffs for Exports 2009 (MNT)

Service of Transshipment Tariff (Togrogs)



Bulks & Equipment rail-to-rail or road-to-rail (per ton per bulk)

3000

Table 25. Storage Tariffs in 2009 (MNT)

Storage Tariff (Togrogs)

20´ per day 6500 20´ per day 6500 40´ per day 6500 40´ per day 6500

Bulks per day/per ton 300

Finally, estimated 2008 revenues for the total center of business, including rail-to-rail, road-to-rail and rail-to-road (exports) transshipment in Zamyn Uud, is around $2.8 million.

Below is a summary of the main findings for revenue of the entire proposed transshipment business center in Zamyn Uud:

Table 26. Transshipment Revenues

Item Revenues (Million $)

Road to Rail 2 Rail to Rail 0.67

Rail to Road 0.13 Total Transshipment Revenues 2.8



D. Forecasting Future Demand and Revenues for the Project This section focuses on the demand and revenue analysis for the PPP project. The analysis looks closely at estimates of the cargo that would pass through the Logistic Park in Zamyn Uud and the basic potential revenues that the project could generate in the form of a PPP.

First, data from MCGA was compiled and tabulated to yield monthly statistical information. Calculations showed current demand for transshipment facilities separated by road-to-rail and rail-to-rail for the case of import cargo and rail-to-road for the case of export cargo.

The team then visited the Zamyn Uud facilities to observe the current situation first-hand and better understand logistics processes for cargo, trucks and people entering Mongolia from China.

The third activity involved collecting, compiling and tabulating statistical information of cargo processed by type of product, primarily to assist in identifying 2008’s composition of demand and to calculate estimated revenues for transshipment facilities in 2008 using current tariff rates.

Total revenues for transshipment facilities in 2008 were estimated at $2.8 million. Of this, $2.67 million was earned from import cargo transshipment, $2 million was collected from road-to-rail and $0.67 million from rail-to-rail. The GoM collected $0.13 million for export cargo transshipment using rail-to-road facilities.

Upon receiving annual information from MRA, the team adjusted the estimations because data acquired from MCGA underestimated revenues earned from the rail-to-rail component. With this new source, the team revised revenue estimates upward to $3.8 million for 2008. Of this new figure, $3.67 million was earned from import cargo transshipment, where $2.11 million originated from road-to-rail services, $1.56 million was earned from rail-to-rail services and $0.13 million was earned for export cargo transshipped from rail-to-road.

In the demand forecast, the team used MCGA data. MCGA collects monthly data, which is useful for conducting econometric tests that yield valid results.

In the time series depicting the transshipment of cargo on a monthly basis in Zamyn Uud, it can be observed see that the series has statistical and graphical seasonality. Specifically, transshipment experiences high-demand from March to October, and low-demand from November to February. These periods correspond to the warm and cold months of the year in Mongolia.

In order to isolate seasonality from the time series two models were used: a dummy variable model and a second multiplicative decomposition model. Both models estimate seasonal factors to adjust every month, and ultimately de-seasonalize the time series. Once we adjust the months for seasonality, we can then see the series trend.

After this adjustment the Quartic Root Dummy Variable (QRDV) model and a Log-Linear Model were used. The first model uses time as the dependent variable and dummy variables to model seasonality. The second model was chosen from several models as the best choice to accurately estimate the impact of a one Togrog change in income per household in Mongolia. The model showed that a one Togrog change will induce a change of approximately 0.05% in the demand of cargo transshipment at Zamyn Uud.

The demand of cargo transshipment, using both models, was forecasted for the period 2011-2040, considering a PPP period of 30 years beginning in January 2011. An anticipated project start date of January 2011 would allow sufficient time to complete feasibility studies, issue the international tender, and complete construction.



Rate of earned revenue at Zamyn Uud was estimated by calculating a weighted average tariff of transshipment (WATT), considering the types of products transshipped at Zamyn Uud. After adjusting for underestimation due to the rail-to-rail annual gap, the WATT came to $1.73 per ton. Revenues for additional services such as parking, commercial services, gas stations, and warehouses were estimated at a conservative $1 per truck.

Estimations of total revenues under both models were relatively similar. For example, using the QRVD model the present value of total revenues came to $38 million using a discount rate of 15%, and $50 million when discounting at 12%. Using the Log-linear model the range of revenue was from $32 million to $38 million, using a growth rate of 0.5% or 2%, respectively, in annual income per household at a 15% discount rate. At the discount rate of 12%, the range became $39 million to $50 million.

Finally, different scenarios were simulated based on changes in the WATT and using a discount rate of 15%. Using the QRVD model, if the WATT is lower, for instance bye $1.2 per ton, the present value of total revenues is $26.9 million. However if the WATT is higher, for example $1.91 per ton, the present value of revenues grows substantially to $41.7 million.

For the second model, results fluctuate between $22 million and $27 million for the first WATT ($1.2 per ton) and between $35 million and $42 million for the second WATT ($1.91 per ton).

The details of the forecast of demand and revenues are shown in Annex A: Forecasting Demand and Revenues in ZULP.

SECTION V: CONCLUSIONS AND RECOMMENDATIONS According to the results of the study, the present value of revenues of the business is enough to have a successful bidding process. However in order to get positive results, Mongolia government will need to prepare a well-structured and bankable PPP transaction. Our recommendation is to follow a systematic life-cycle approach in two phases:

• Phase A. Transaction Design: Preparation of the technical, financial, economic, institutional and legal framework. This will includes the following:

o Due diligence. Collection and analysis of all available technical, economic, and financial feasibility studies, traffic/cargo demand projections, tariff analysis, and other relevant existing documents.

o Technical project design. Analysis of engineering studies to define the technical scope of the project, the amount of initial capital investment required to achieve realistic levels of service, in accordance with cargo levels, during the Engineering and architectural studies will be essential to define which civil works should be included in the project and to determine the total required investment and future operational costs. These studies will be prepared once the location of the project is defined and they will outline the equipment needed in addition to the necessary horizontal and vertical infrastructure. It will also be necessary to plan the future sources of energy and water for the facilities in strict coordination with government authorities. Based on these studies, project managers will be able to estimate the operation and maintenance costs under a PPP business model.



o Master Plan. The preparation of a Master Plan will be crucial to regulate future project expansion and also to include the possibility of developing a new real estate market for Zamyn Uud. Real estate brokering could reinforce the PPP project as a source of new revenue and encourage social development.

o Environmental impact assessment to ensure that all environmental protection requirements are met.

o Financial modeling to develope and tailor specifically to the particular requirements of the project.

o Design of credit enhancement mechanisms, if required, (e.g. partial credit guarantees).

o Risk analysis, allocation, and mitigation to allocate responsibility of the main financial, commercial, operational, engineering, construction, and other risks associated with the implementation of the concession project.

• Phase B. Transaction Implementation: Managing the competitive transaction process from project promotion to contract award and financial closure. This includes the following:

o Organization of the data room. All existing information and documentation pertaining to the projects is gathered and organized in a transaction data room and available to all qualified bidders.

o Preparation of bid documents:

Investment brochures that provide all the basic information that a potential bidder needs to make a preliminary assessment of the project.

Requests for Proposal: A complete RFP package including the bidding rules and evaluation criteria to award the concession contracts following Mongolian laws and regulations and best international practice.

Concession/PPP contract. Reflects the details of the technical, financial, and legal transaction design.

o National and international project promotion campaign to ensure robust competition.


