CrossCross--border trade and transport border trade and transport infrastructure development infrastructure development

in NEAin NEA

By: Prof. Gotov Dugerjav, Dr.ScBy: Prof. Gotov Dugerjav, Dr.Sc

ContentsContents

— NEA and Mongolia cooperation— Mongolia’s Macroeconomic Review— Brief description of the Eastern Mongolia— Infrastructure capacity review— Future Development Potential (on-

going/planned megaprojects, traffic forecasts)

— Road and Rail Transport corridors— Conclusions and Recommendations

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I. NEA and Mongolia cooperation

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NEA cooperationNEA cooperation

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Northeast Asia :• 3 of the world’s major powers, • 2 of the 5 permanent members of the

UN Security Council, and • 2 of the largest economies of the world• 2 of the BRIC’s countries.

It is also a home to one of the world’s hottest flash points. The situation in the sub-region remains fragile, although it is relatively stable.

Basis of CooperationBasis of Cooperation

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This area of the World includes countries with very diverse political and economic conditions. The basis of an international economic cooperation framework could be a combination of rich mineral resources of Mongolia and investment capital and advanced technology from South Korea and Japan, as well as a considerable pool of workforce from China (PRC) and North Korea.

MongoliaMongolia’’s foreign trade with s foreign trade with NEA, million USDNEA, million USD

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Export Import

2009 2010 2011 2009 2010 2011Total 1888 385.1 2 908 502.2 4 780 350.5 2 137 673.5 3 200 053.3 6 526 882.4

NEA 1 414 023 2 499 662.6 4 449 328.7 794 553.8 1 355 282.5 2 851 436.7

DPRK - 25.5 - 47.1 798.5 740.0

ROK 15 458.1 30 519.9 1 896.1 155 102.2 181 781.9 350 648.5

PRC 1 393 906.7 2 466 265.5 4 400 735.7 538 582.6 970 976.0 2 007 572.2

Taiwan 94.0 182.0 10.0 3 768.4 5 238.1 8 966.5

Japan 4 564.2 2 669.7 10 694.6 97 053.5 196 488.0 483 509.5

Source: National Statistical Office, Mongolia

II. Mongolia’s economy

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GDP growth, MongoliaGDP growth, MongoliaSpurred By:— Development of large coal,

copper and gold mining projects;

— Continued strong flows of FDI doubled between 2010 and 2011;

— Public investment being raised;

— Strong consumer demand due to disbursement of cash to the citizens.

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InfrastructureInfrastructure capacity review capacity review

2007 2008 2009 2010 2011

Freight (Thousand tones)By RailBy RoadBy Air

23,281.614,072.6

9,207.11,887.2

23,904.414,646.9

9,255.71,847.0

24,729.714,164.510,563.8

1,369.3

29,415.916,753.212,610.2

1,641.6

43,956.618,327.425,635.3

2,930.9

Freight (Million TKM)By RailBy RoadBy Air

9,030.28,360.7

661.97,720.6

9,051.48,261.4

782.17,926.5

8,981.37,817.01,160.73,666.7

12,106.410,286.7

1,834.04,169.5

16,300.211,382.2

4,910.37,708.6

Passengers (Million)By RailBy RoadBy Air

209.94.5

205.00.4

231.64.4

226.90.4

232.43.1

229.00.3

250.73.5

246.70.4

296.23.8

291.80.6

Passengers (Million PKM)By RailBy RoadBy Air

3,263.11,406.4

869.7987.1

3,607.31,400.51,215.0

991.9

3,173.11,003.11,535.9

634.1

3,607.41,220.01,480.2

907.2

4,696.11,400.12,321.8

974.1

Summary Transportation Statistics for Mongolia

Source: Mongolia Statistical Yearbook 2011, National Statistical Office, Ulaanbaatar 2011

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Brief description of the Eastern MongoliaBrief description of the Eastern Mongolia

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Shares to total GDPShares to total GDP

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011

Share to total GDP, Eastern aimags

Agriculture Industry Services

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III. Current situation of Transport corridors in Mongolia and NEA

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Millennium Road RoutesMillennium Road Routes

Source: Ministry of Roads, Transportation, Construction and Urban Development, Mongolia

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Main Mongolia Road CorridorsMain Mongolia Road Corridors

Route 1 (GTI Road corridor- 1a among the studied trans-GTR transport corridors): Ulaanbaatar- Undurkaan-Choibalsan- Sumber- Nomrog.This route will be constructed in the framework of the Millennium Road in nearest future.

Route 2: Altanbulag-Darkan-Ulaanbaatar-Choir- Sainshand-Zamyn UudThis route is being built now and will be completed in 2013. The development plans for the route include implementation of an international highway construction project.

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Road conditions in the Road Road conditions in the Road CorridorCorridor--1a1a

Paved road between Ulaanbaatar and Undurkhaan (331 km)

Earth road between Undurkhaan and Choibalsan (324 km )

Earth road between Choibalsan and Sumber (Nomrog)

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Transport Network in Eastern Transport Network in Eastern MongoliaMongolia

Type of Road State (Km) State (%) Local (Km) Local (%)

Paved 546 15.6 215 3.0

Gravel 556 15.9 57 0.8

Improved Earth 305 8.7 7 0.1

Earth 2,095 59.8 6,876 96.1

Total 3,502 100.0 7,155 100.0

Types of Roads in Eastern Mongolia

From To Distance (Km)Ulaanbaatar Ondorhaan 331

Ondorhaan Baruun Urt 229

Ondorhaan Choibalsan 324

Choibalsan Baruun Urt 191

Choibalsan Ereentsav 240

Choibalsan Khavirga Port 135

Choibalsan Tamsagbulag 200

Road Distances in Eastern Mongolia

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Main Mongolia Rail CorridorsMain Mongolia Rail Corridors

Rail Corridor 1: Suhbaatar-Darkhan-Ulaanbaatar-Sainshand-Zamyn Uud (existing main line);

Rail Corridor 2: Ukhaa Hudag (Tavantogoi)- Zuunbayan- Sainshand-Baruun Urt-Khuut-Choibalsan- Ereentsav;The section ”Uhaa Hudag-Zuunbayan-Sainshand-Khuut-Choibalsan” is going to built within 2.5 years. Therefore, the existing section between Choibalsan and Ereentsav needs to be upgraded.

Rail Corridor 3 (GTI Rail Corridor -1b among the studied trans-GTR transport corridors): Ukhaa Khudag-Zuunbayan-Sainshand-Khuut- Tansagbulag- Sumber BCP (Nomrog bridge).The section of Rail line “Ukhaa Khudag-Zuunbayan-Khuut” will be built under the route 2. Thus, the new construction of the section between Khuut and Nomrog with total length of 338 km would be main focus area under GTI Transport Corridors Project.

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Carrying capacity of the Main rail lineCarrying capacity of the Main rail line

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ZAMYN UUD BCPZAMYN UUD BCPq Besides petroleum products 90%- of the total importq 75% of the total export pass through Zamyn Uud BCPq Transit traffic is significant as well.Year/traffic 2007 2008 2009 2010Imports (tons) 728,056 1,232,829 668,489 870,744Exports (tons) 34,257 52,719 74,260 75,651Trucks inward 18,919 34,501 21,446 19,190Trucks outward 18,106 34,302 21,152 17,453Cars in/out 80,634/81,659 95,350/95,059 98,493/99,246 116,089/104,844Passengers in and out figures rounded

750,000/766,000 809,000/810,000 698,000/702,000 861,000/863,000

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New logistics center in Zamyn UudNew logistics center in Zamyn Uud

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Mongolia and NEA transportation Mongolia and NEA transportation connectionsconnections

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Border crossing points Between Border crossing points Between Mongolia and ChinaMongolia and China

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- Border crossing point

IV. Railway Plans in Mongolia

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MongoliaMongolia’’s railway policys railway policy

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New railway construction phasesNew railway construction phases

Phase I: Dalanzadgad-Tavantolgoi –Tsagaan Suvarga-Sainshand-Baruun Urt-Khuut-

Choibalsan

Phase I: Ukhaa Khudag - Gashuun

Sukhait

Phase II: Nariin Sukhait -

Shiveekhuran

Phase II: Khuut -Numrug

Phase II:Khuut -Bichigt

Phase III: Western Vertical Corridor

Under construction (Samsung)

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Planned Rail networks in Eastern aimags Planned Rail networks in Eastern aimags of Mongoliaof Mongolia

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Applicable legal frameworks Applicable legal frameworks

Road sector legal and regulatory framework:— Between Mongolia and PRC :

Road Transportation Agreement between the People’s Republic of China and Mongolia on June 24, 1991;

— Between Mongolia and Russian Federation:International Road Transportation Agreement between Russian Federation and Mongolia on February

07, 1996.Railway sector:The applicable laws of a specific nature applying to the railway subsector as a whole are:— 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.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:

– 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.

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V. Traffic demand

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Review of onReview of on--going/planned economic going/planned economic development projects likely to impact future traffic development projects likely to impact future traffic — 1/ Tavan Tolgoi (TT) coal mine project. In 2020, volume of the unprocessed products of the mine

would be 67.7 million tons. s:

— 2/ Nariin Sukhait (NS) coal mine project. In 2020, volume of the unprocessed products of the mine would be 30.5 million tons.

— 3/ Oyu Tolgoi (OT) copper mine project. Expected production volume is 2.1 million tons of copper concentrate.

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Traffic and Transport demand forecasting Traffic and Transport demand forecasting Years Growth rate GDP/capita traffic elasticity Growth percentage

GDP Population GDP/capita Passenger traffic (IEp)

Freight traffic(IEf)

Passenger traffic

Freight traffic

2015 7.7 2.0 5.7 1.75 1.39 25.2 10.702020 7.0 2.0 5.0 1.62 1.35 23.5 9.452025 7.0 2.0 5.0 1.35 1.15 19.9 8.05

Traffic forecast diagram between Choibalsan and Sumber BCP (Nomrog bridge)

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Demand for coal in Northeast Asia, million Demand for coal in Northeast Asia, million tons per year, 2020tons per year, 2020

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Coal and copper markets in Asian Coal and copper markets in Asian countriescountries

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Potential markets of MongoliaPotential markets of Mongolia’’s s mineralsminerals

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Coal extraction estimates per year, 2020Coal extraction estimates per year, 2020

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Coal traffic forecast, 2010Coal traffic forecast, 2010--10201020(thousand tons)(thousand tons)

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Possible routes for coal transportation Possible routes for coal transportation from Tavan Tolgoi coalfieldfrom Tavan Tolgoi coalfield

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Possible routes for coal transportation Possible routes for coal transportation from Tavan Tolgoi coalfieldfrom Tavan Tolgoi coalfield

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Mineral transportation flow, million tonsMineral transportation flow, million tons

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Traffic flow forecasts (coal) in 2020, Traffic flow forecasts (coal) in 2020, million tones million tones

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Copper transportation demand, 2020Copper transportation demand, 2020

Òàéëáàð: Áàÿí-Àéðàã /çýñ, àëò/ æèëä 980 ìÿí òí õ¿äýð îëáîðëîæ, áàÿæóóëíà /2012 îíîîñ 2 æèëä áàðèíà/, Îþóòîëãîé/çýñ, àëò/ 2012 îíä ýõä¿¿ëæ, 2013 îíîîñ çýñèéí áàÿæìàë ¿éëäâýðëýíý. Öàãààí ñóâàðãà /çýñ, ìîëåáäåí/ 2014 îíä êàòîäûíçýñíèé ¿éëäâýõ àøèãëàëòàíä îðóóëíà.

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Iron ore transportation forecast, 2020 Iron ore transportation forecast, 2020

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Coal transportation estimates from Khuut Coal transportation estimates from Khuut to Sumber BCP (Nomrog)to Sumber BCP (Nomrog)

According to our estimates, 15.2 million tons coal would be delivered mainly to Chinese market. However, some shares of the coal would be exported to Republic of Korea (ROK) and Japan as well.

On the basis of the interviews’ of officers from the freight forwarders, transport operators and railway specialists, we assume that very rough shares would be as follows:

Eastern China: 10.6 million tons (70%) per yearROK: 2.3 million tons (15%) per yearJapan: 2.3 million tons (15%) per year.

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Margin from the Coal export, USDMargin from the Coal export, USD

Extraction Transpor-tation by trucks to the border

Extractor’sprofit

Price of extractor

Washing cost

Washing loss

Rail cost to Baotou

Rail cost to Tanshani

Trader’s cost

Trader’s margin

SPOT price in China

Possible profit margin from Mongolian coking coal export

Margin from Mongolian coking coal export to China

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VI. Tourism development in Eastern Mongolia

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Natural and Cultural Sites in the Eastern Natural and Cultural Sites in the Eastern aimags of Mongoliaaimags of Mongolia

Source: TERA Consultant

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Tourism Products for Eastern MongoliaTourism Products for Eastern MongoliaTourism Resources Existing and Potential

ProductsPotential Market Segments By

ActivityUnique steppe flora and fauna,especially Mongolian gazelle

Steppe and Flora Tours Ecotourism, education, photography, and research

Unique landscapes and lakes ofSukhbaatar and Dornod Aimags

Adventure 4WD Safari Tours Hard and Soft adventure travel based on walking,climbing, riding, swimming, fishing, photogrpahy, and visits to herdsmen's ger camps

Historic and archeological sites ofthe Mongols and other groups inHentii, Dornod, and Sukhbaatar

Archeological Discovery Tours

Culture, research, education, and ecotourism

Culture of nomadic herdsmen andunique steppe landscape

Soft Adventure, Sightseeing Tours

Sightseeing and photography based on visits to herdsmen; optional horseback riding tours andhiking tours

Buir, Ganga, and Sumiin Steppelakes

Lake Resort Facilities; Fishing Tours

Rest, relaxation, entertainment, and medicaltreatments; special interest in freshwater fishing

Hunting Areas at Khenti-Batashreet,Dornod-Bayan Uul, Dornod-Matad-Sumber, and Sukhbaatar

Hunting Expeditions Hunting Segments

Unique Landscapes, flora andfauna, lakes

Incentive Tours Team building exercises in unique environment:horseback riding, paragliding, survival games

Unique Landscapes, flora andfauna, lakes, and nomadic lifestyle

Caravan Tours Hard and Soft adventure travel based on camping, visiting herdsmen’s gers, photography

Source: Marketing and Product Development; UNDP; WTO Project RAS/00/088; Madrid 2002

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Map of Tourism RouteMap of Tourism Route

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Weaknesses Related to Poor Weaknesses Related to Poor InfrastructureInfrastructure

According to the JICA Study, the ease of moving tourists to and from points of interest and to satisfy their basic needs is a fundamental prerequisite for tourism development. Unfortunately,Mongolia has significant deficiencies in this regard. These deficiencies include:

•Poor Access – this is considered to be one of the biggest constraints for tourism in Mongolia. Improvement in international access in particular was cited as a key need in the sector, along with selective improvement in roads.

• Poor Public and Private Infrastructure – Inadequate infrastructure such as telecommunications and hotels that are not built for those seeking higher standards of comfort were listed as areas for selective upgrading.

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Map of the constructed and proposed Map of the constructed and proposed locations of the Nomrog bridgelocations of the Nomrog bridge

GPS reading:E119’28’24o

N47’19’40o

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Nomrog river bridge (Sumber BCP) Nomrog river bridge (Sumber BCP)

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VII. Potential Transport Corridors

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TransTrans--GTI corridorsGTI corridors

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Missing road

Missing road

Rail link to modernize

Absent rail link

Major bottlenecks along the Major bottlenecks along the transtrans--GTI corridorsGTI corridors

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Source: Final report of the GTI transport corridors

Investment programsInvestment programs— Feasibility studies, design and construction

Railway section between Khuut and Sumber (Nomrog) BCP (FS cost: 1.2 million USD);

— Feasibility study, detailed design and construction of paved road between Choibalsan city vicinity and Sumber (Nomrog) BCP (FS:300 thousand USD).

— Upgrading Rail section between Choibalsan and Ereentsav including replacement of existing wooden sleepers with concrete ones, introducing modern signalization system and electrification.

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VIII. Conclusions

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Conclusions and recommendations:Conclusions and recommendations:

Ø The Halkgol (Sumber) - Rashaan BCPs (Rail Corridor 1b) connection through the Nomrog Bridge seems to be the most cost-effective and feasible connection between Mongolia and NEA especially between Mongolia and PRC, at this time for further development of the tourism sector in both countries.

Ø Due to environmental considerations on both sides of the border, however, it is recommended that this bridge is only used for ecotourism and environmental protection related activities and all the other freight traffic should be carried through another route to be developed further north, away from the Nomrog SPA.

Ø Even though significant mineral resources exist in the Project Area, it will be very difficult to attract private sector investors without building the basic transportation and other required infrastructure. With the exception of some megaprojects, such as the Tavantolgoi (coal mine with proven reserves of 6 billion tons of coking coal) and Oyu Tolgoi (copper and gold mine) Project, it is very unlikely that mining companies will assist in the required transportation infrastructure investment in the Project Area.

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Conclusions and recommendations:Conclusions and recommendations:(continued)(continued)

Ø Main constraints and problems limiting the use of the transport corridors are inadequate development of the infrastructure, especially missing rail and paved road sections along the Corridors.

Ø If the constraints were lift up, traffic would be increased to great extent. Particularly, tourism and border trade between Mongolia and PRC would be much increased along the Road Corridor and freight traffic of coal, coking coal, copper concentrate and iron ore to PRC and further to ROK and Japan would be increased enormously along the Rail Corridor.

Ø Investment Programs are required to missing infrastructure links, namely:§ Conduct feasibility studies, design and construction Railway section between Khuut and Sumber (Nomrog) BCP;§ Upgrading Rail section between Choibalsan and Ereentsav including replacement of existing wooden sleepers with concrete ones, introducing modern signalization system and electrification, and § Preparing feasibility study, detailed design and construction of paved road between Choibalsan city vicinity and Sumber (Nomrog) BCP.

Ø If the Corridors are in operation, Mongolia would have a reliable gate to the ocean. Foreign trade transportation expenses would be reduced to some degree. They will create favorable conditions to develop agriculture especially crop farming, meat and dairy farms in the Eastern region of Mongolia.

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Thank You!Thank You!

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