Major rail projects in Mongolia showing significant progress

While the construction of roads has been progressing apace, rail has been stalled as a result of political and economic problems plaguing the country and the sector. However, towards the end of 2014 many of the issues were being resolved, and it is possible that significant and crucial headway will be made in 2015. Decisions have been reached on the gauge for some key connections and it now seems the authorities are willing to be flexible on the financial structuring of rail projects.

Millennium Roads

Major road projects are advancing; the economic and political challenges in the country have not unduly slowed their progress. The Western Regional Road Corridor Development Investment Programme, which will ultimately connect Ulaanbaishint, on the border with Russia’s Altai Republic, with Yarant, on the border with China, has obtained financing for another section. In June 2014 the Asian Development Bank (ADB) agreed to loan Mongolia $125m for the project’s second phase, which runs a total of 189.7 km from the centre of Khovd aimag to Ulaanbaishint, and will be finished in 2016. The first phase runs 103.2 km and extends from Baga Ulaan Pass to Mankhan. The corridor, when complete, will run a total of 743.1 km.

The corridor is the second of the Millennium Road Projects. The first, a 990.4-km highway linking Russia and China from Altanbulag via Ulaanbaatar to Zamyn-Uud, is already operational, while the final stage – a 176.4-km road connecting Choir and Sainshand, and sponsored by the Millennium Challenge Corporation – was completed by end-2013. One month prior, a section from Sainshand to Zamyn-Uud was finished with financing from the ADB and Korea EximBank. The first stages, which extend from Russia’s border down to Choir, were completed over a decade ago with the financial backing of the ADB.

In late 2013 the Cabinet signed a concession agreement to make improvements to the Altanbulag-Zamyn-Uud connection. The 25-year, $3.5bn build-operate-transfer (BOT) project, which was awarded to a consortium of 10 companies including Nasnii Zan, Just and Tsast Impex, will involve the building of a modern four-lane highway complete with cloverleaves, suspension bridges and tunnels. Most of the financing is expected to come from international donors, and the rest from the BOT consortium. The road will be the first highway in the country and will be built to European standards.

In total, five Millennium Roads have been planned. According to the blueprint, three others in addition to those completed or started run north-south, connecting Russia and China, while one will cross Mongolia from east to west. The roads will connect with the Asian Highway Network, a system that has been in the planning stages since the 1960s, and will eventually run from St Petersburg to Surabaya, with highways branching off through Central Asia and down to the sub-continent. Mongolia plays a key role in the system, as it provides the most direct link between Beijing and Moscow.

Regional Investment

The work to connect other parts of the country is also ongoing. According to government comments from June 2014, a total of 1886 km of roads were to be paved and six more provinces connected to the capital that year. These provinces are: Umnugovi, Khuvsgul, Dornod, Sukhbaatar, Zavkhan and Govi-Altai. Meanwhile, the Streets Project, which was initiated in 2013 and involves the rehabilitation of intersections and roads in the capital city, has made progress, while newer efforts have been initiated.

Significantly, the Beijing Street Project, worth some $9.76m, has reconditioned the four-lane road that runs by the Chinese Embassy, although some delays have occurred. Progress on the road running from Yarmag Bridge to Power Plant No. 3 slowed in late 2014 as one resident on the intended route refused to sell their property. Another road was also delayed by residents seeking higher compensation.

The international community is becoming more supportive, developing institutions that could benefit Mongolia’s transport system. For example, in late 2014 China proposed a $40bn Silk Road infrastructure fund. While it appears to be focused on Southeast Asia – especially countries with which China has territorial disputes – the theme of a transport bridge linking Asia and Europe suggests that Mongolia and other Central Asian countries will benefit from the planned investment. China’s $50bn Asia Infrastructure Investment Bank is also likely to contribute to the development of transport assets in Mongolia, as the country was a founding member of the bank.

The First Mile

The most important developments in the Mongolian transportation sector, and the ones most necessary for economic development, are those relating to rail. In 2014 a number of key incremental steps were taken, and one big leap was achieved. During the visit of the Russian president, Vladimir Putin, to Mongolia in September 2014, agreements were signed by Russian Railways to invest in Ulaanbaatar Railway and also to invest in an extension of the existing network from Erdenet, past Aspire Mine and on to Arts Suuri in Russia. During the visit of Xi Jinping, the Chinese president, in August 2014 four rail agreements were signed.

Gauging Success

However, the most significant rail achievements relate to the 267 km between Tavan Tolgoi Mine and Gashuun Sukhait, on the Chinese border. In April 2014 Gashuun Sukhait Railway Company was formed to build an 18-km, narrow-gauge line running from Gants Mod in China to Gashuun Sukhait. It is 51% owned by Mongolian shareholders Erdenes Tavan Tolgoi, Energy Resources and Tavan Tolgoi, and 49% owned by China Shenhua Energy, a listed company and China’s largest coal miner. The line is expected to be completed in 2015, and the Mongolian management has said the link would cut the cost of shipping coal by $5 per tonne.

The Gashuun Sukhait Railway is the result of a Cabinet decision that, as a port-to-port connection, the line is not covered under the 2010 State Policy on Transportation, which requires Mongolia’s rail system to be controlled by Mongolia and utilise a broad gauge. Later in 2014 the Parliament amended the rail policy to allow for two lines fully within Mongolia to be narrow gauge.

In a vote in October 2014, a majority of legislators agreed that the Tavan Tolgoi-Gashuun Sukhait line and the Khuut-Bichigt line in eastern Mongolia running down to the border with China, would not need to be built to wide gauge specifications. The decision has been a watershed event for the sector. It makes feasible a line that could lower the cost of coal shipments by another $2 per tonne, and has caught the interest of foreign investors.

Dicing & Slicing

The other major advance is the change in structuring strategy. The original rail plan was to finance the first two phases of the Mongolian Railways (MTZ) project – a total of 1800 km – at once and keep the majority of the project in the hands of the Mongolian government. MTZ now says it is not only willing to break up the project into pieces – and potentially many more pieces than suggested by the original three phases – but is also considering the possibility of majority foreign ownership of some of these smaller sub-projects. The hope would be to ultimately merge all the sub-projects into one master project, which would itself be majority locally owned, but the authorities have recognised the need to build a few key lines quickly and they seem willing to consider creative ways to get this done – particularly in the event of involvement by strategic investors.

The Tavan Tolgoi-Gashuun Sukhait line has already seen significant progress. As of October 27, 2014, 79% of the line’s earthworks were completed, while 58% of the bridges had been finished and 52% of the pipe construction was done. Although the project is slightly behind schedule, MTZ has indicated that the delays are within reason and that relations with the contractor, Samsung C&T, remain positive.