Key routes: Plans for the new railroad are taking shape

Railroad plans are central to the country’s development strategy, as a massive boost in capacity is required to preserve and extend the mining boom under way now. The country’s parliament, the Great Khural, formed a new government corporation to address the needs in 2008, and made clear its railway policy in 2010. There has been little progress in implementation, however, as the evolving economic conditions in the country have contributed to some changes, elections have delayed action and negotiations were ongoing to develop a coking coal deposit at one of the country’s biggest mining sites, Tavan Tolgoi. As of late 2012, progress toward additional railway capacity was likely to be bundled with progress at Tavan Tolgoi. Mongolia has 1905 km of railroad capacity, with the majority of it accounted for by the country’s section of the Trans-Siberian Railway, which passes through Ulaanbaatar. To the north of the city it leads to Siberia and then to western Russia; to the south it goes to the Chinese border and links up with China’s rail network there. The rest of the country’s railroad network is composed of several spurs built to service existing mines. The vast majority of these assets are owned and operated by Ulaanbaatar Railways, which is a 50:50 joint venture between the Mongolian and Russian governments.

NEW STATE FIRM: The state created a new company, Mongolian Railways, in 2008. This 100% government-owned firm, which operates much like a private company, was envisioned as the builder of new capacity. The 2010 state railway policy serves as a comprehensive guide to these future plans, including 5683.5 km of new railroads to be built in three phases. The end result would be a link to railroads in eastern Russia that would provide Mongolia access to a Pacific Ocean port from which it could ship its mineral exports, and also an east-west line within Mongolia that would pass close to scores of potential mine sites and Sainshand, a southeastern village envisioned as an industrial centre. The government issued a licence to Mongolian Railways to proceed with the planning and building of Phase 1, which would be an 1100-km route from Dalanzadgad to Choibalsan. Dalanzadgad is the capital of the southern province of Omnigovi, close to both Tavan Tolgoi and Oyu Tolgoi, the mixed-minerals deposit being mined by Rio Tinto. The railroad would then continue east to Sainshand, where it would intersect with the existing trunk line, and then on to the north-east to Choibalsan. There it could meet up with a spur of the Trans-Siberian, providing the link to Russian routes.

IN PHASES: Phase 2 calls for 900 km of new routes heading south from major mining sites, including one from Ukhaa Khudag, one of the six major coal deposits at Tavan Tolgoi, to run 267 km south to the Chinese border. Other routes in Phase 2 include Nariin Sukhait to Shivee Khuren, at 45.5 km, which is being built by Mongolyn Alt Corporation, another private firm extracting coal at that site. Two other spurs would be from Khuut to Tamsagbulag-Munrug (380 km) and from Khuut to Bichigt (200 km). The highlight of the 3600 km in the third phase would be the extension of the Phase 1 line west of Dalanzadgad, then curving north. The 2010 policy allows for flexibility regarding the location, expecting that as exploration continues, new mines in the west may influence the placement of the rails.

According to the results of Mongolian Railway’s case study for the New Railway Project, which was conducted by a McKinsey-led advisory team, the estimated cost of all phases of the project is $5.2bn, of which 40% is expected to be funded through equity investment and the remaining 60% will be funded by limited recourse project financing. Mongolian Railway will own an equity stake in the project, however, the deal was still being negotiated as OBG went to press.

NEIGHBOURING LINKS: Mongolia’s initial preference about leaving links to China for later stem in part from strategic concerns. China is widely perceived as Mongolia’s main customer for mineral exports – the major mines are within a few hundred kilometres of China. Furthermore, Mongolia is landlocked and its other neighbour, Russia, has its own minerals and far lower demand than rapidly industrialising China. Exporting from Russia’s sea ports would be prohibitively expensive: by some estimates adding about $100 per tonne to the cost of coking coal from Tavan Tolgoi, which would more than double the sale price of coal currently delivered to a Chinese buyer via trucks.

The Russian link has been described as crucial to Mongolian business interests, however, because the country does not want to rely on only a single buyer for its resources. The government perceives over-reliance on one buyer to be a major disadvantage when negotiating sale prices. Hence, despite the additional cost, the original plan mandated building the links to Russia’s Pacific ports before the shorter links to China.

STRATEGIC ASSETS: That order of development is also in line with Mongolia’s wider political strategy. Sandwiched between Russia and China, the country’s foreign policy has long been to avoid an over-reliance on either one. This “third-neighbour policy’’ generally means trying to deal with other countries whenever possible, which is why access to a port for mineral exports is a priority. Another crucial decision that reflects these strategic priorities was whether to build narrow-gauge or wide-gauge railroads. The global standard is 1520 mm and is used in China. However, Mongolia’s existing rail lines are built to the Russian standard of 1435 mm, and that causes delays at the border because it necessitates switching wagons to different wheel bogies. Using the Russian standard would add $2 to $4 per tonne of coking coal in shipping costs on Mongolia Mining Corporation’s (MMC) rail line, according to estimates published by the Associated Press.

Because the cost is high Mongolia has considered making railroad-building obligations a part of the development of West Tsanki, a coal field at Tavan Tolgoi. While MMC is developing one and a state-owned consortium another, for West Tsanki the state envisions a multinational consortium including the Chinese, Russian, South Korean and Japanese governments and Peabody Coal, a US-based private corporation. Versions of the agreement between these parties include Russia pledging to build the rail infrastructure, and also providing a 50% discount on shipping costs to its Pacific ports. Negotiations as of late 2012 were ongoing, and had evolved to include another possible route: instead of using Russian ports, Mongolian minerals could be shipped to a Chinese port at Dandong, a coastal city near the border with North Korea. That would be a much shorter and cheaper journey, and Mongolian officials were in negotiations with the port at Dandong as of October 2012 to ensure access, rates, provide facilities and other aspects of the relationship, deputy minister of economic development O. Chuluunbat said.

QUESTION OF A BUILDER: Also now in question is who will build the infrastructure outlined in the three-phase plan. The government revoked the licence of Mongolian Railways for Phase 1 in March 2012, and said that it had decided it would not allow one company to serve as both owner and operator. Mongolian Railways may still be a possible builder, a company official said, but it was awaiting a decision. It had spent $55m on feasibility and impact studies before losing its licence, and the government in late 2011 ordered the Development Bank of Mongolia (DBM) to use its capital to pay for those. In late 2012 the DBM provided a list of disbursements to OBG that did not include the $55m.

Control over railways has emerged as a political concern, however, as Mongolia’s government wants to ensure that it controls its own infrastructure. Given Russia’s stake in the existing railroad operator, this may be a concern. Millennium Challenge Corporation (MCC) agreed to spend $188m on railroad projects in the country; however, after being pressured by Russian officials Mongolia decided in April 2009 to turn down that part of MCC’s aid package.

For now, Mongolian Railways will continue working on developing its capital expenditure programme, which has included the purchase and lease of rolling stock to UB Railway, while it is also establishing a transferring mechanism at the border with China in order to mitigate the difference in gauges and constructing a maintenance facility outside the city of Ulaanbaatar.