Transport works in Mongolia to lead to better integration with international networks

The transportation situation in Mongolia has improved a great deal over the past few years. Substantial additions have been made to the road system, with a total of 5469 km being built between 2012 and 2016. The Streets Project has resulted in the reconditioning and redesigning of roads and intersections in the capital city, Ulaanbaatar, and this has helped unsnarl the everworsening traffic there. Meanwhile, air travel has evolved considerably, with MIAT Mongolian Airlines taking delivery of new aircraft, opening additional services and considering more to come. In terms of rail, a number of breakthroughs were made in 2014 that promise lines that have long been delayed. Overall, real progress has been made and momentum remains strong.

Nevertheless, the country still faces considerable transportation and logistics challenges. Ulaanbaatar remains congested to the point that business and trade are negatively affected. Financing constraints limit the expansion of air services, while the macroeconomic picture brings into doubt future investments. Most of all, questions have been raised about whether the work that has been done is appropriate for the country.

Strategy Debate

While the projects undertaken to date have certainly had an impact on the economy and eased transportation problems in some places, it is not clear whether the focus was in the right areas. Transportation experts argue it would have been better to concentrate efforts on projects that get resources to market, rather than on wide-scale connectivity. The focus should also be, the experts contend, on some of the more complex elements of transportation, such as logistics and mass transit, instead of simply pouring more miles of asphalt. “It is a fallacy that building only roads without developing public transport systems will solve the traffic problem,” Raushan Mamatkulov, project specialist at the Asian Development Bank (ADB), told OBG.

Networking

While landlocked and remote, Mongolia has been developing domestic connections and international links for decades, and some of these efforts have proven to be substantial. The country’s first highway was built in 1937; it connected Ulaanbaatar with Sukhbaatar and Altanbulag, on the Russian border. The first international air route flown was between Ulaanbaatar and Ulan-Ude in Russia in 1926, and service continued, with the addition of new routes, through the Second World War. In 1946 the Civil Air Transport Unit was founded with seven aircraft and served a number of domestic destinations. MIAT was then formed in 1956 under the auspices of the Ministry of People’s Army and Public Security Affairs. The first flight was to Irkutsk the same year. MIAT started by utilising five Antonov An-2s, single-engine biplanes developed by the former Soviet Union. Three years later, the Mongolian airline was flying 12 An-2s and seven Ilyushin Il14s, twin-engine aircraft developed in 1950. In 1970 the airline was serving 130 local destinations.

The first rail was completed in 1939, connecting the coal mine at Nalaikh with the power station in Ulaanbaatar. The Trans-Siberian Railroad was completed in 1894, and a branch line was run from Borzya to Bayantumen in Mongolia. The Ulaanbaatar Railway (UBTZ) was formed in 1949, and a 404-km line was run from Ulaanbaatar to Naushki in Russia, with the connection operating from 1950. The route was extended south to Zamyn-Uud in 1952, and the connection with China was operational in 1955. The UBTZ transformed Mongolia and allowed many of the assets once used for hauling to be retasked to other parts of the country.

Hard Times

Through to the Democratic Revolution of 1990, the Mongolian transportation system was useful and heavily utilised, but the connections were limited and much of the country lacked good links to the capital. After 1990 the installed base fell on hard times. By 1992 rail transit was down by 86.7% from three years earlier and freight carried had fallen by 39.1%. Air traffic dropped precipitously as well. Between 1991 and 1999, the number of air passengers carried fell by twothirds before finally returning to comparable levels in 2012, when it peaked at 770,240. The figure has since fallen to 672,200 in 2014. Nevertheless, ambitious plans for the sector continued to be developed to increase connections domestically and internationally. In 1992 a road was proposed that would connect Kyzyl, the capital of Tuva, with Ulaangom and Khovd, and link up to roads extending to Urumqi, China. But in the years after 1990 Mongolia was constrained by a lack of resources in developing its transport networks.

Off Track

Development efforts were often stymied by international politics. The UBTZ had fallen into disrepair in the decades following the 1990 revolution due to the economic troubles of both Russia and Mongolia. Neither country was able to make the sorts of investments that were needed to properly maintain the track, rolling stock and equipment. In 2007 the US committed $188m to the upgrade and expansion of the railroad; it was estimated that 70% of the wagons and half the track were in need of replacement. The money was never invested, however, because the Russian partners in the railroad, who had an equal equity stake to Mongolia, refused to allow US auditors to examine the books of the venture. The Russians also countered the US offer by investing funds in the UBTZ and making other concessions, including the transfer of the Russian government’s UBTZ shares to Russian Railways.

The railway has remained a point of contention between the two countries. Mongolia has been pushing for years to gain control of the line, seeking at least a 51% share, while Russia has been pushing the Mongolians to expand their rail system using the wide gauge of Russia and allow it a major stake in any expansion.

Economic Challenges

In recent years, slowing economic growth has been the main problem for the sector. Due to the fall in foreign direct investment and the loss of confidence on the part of international investors, and because the government has had difficulty raising fresh funds, some planned projects have not come off as hoped. Mongolian Railways, which was envisioned to span 1800 km and cost $5.2bn, has yet to complete the first 267-km stretch (see analysis).

Economic troubles have also had an impact on those utilising the transportation network, and this is reflected in traffic numbers. In 2013 there was a 6.7% decline in tonnes of freight hauled, a 5.5% drop in passengers carried by rail, and air travel was stagnant. This compares poorly with 2012, when freight carried was up 21%; 2011, when it rose 49.5%; and 2010, when it increased 18.7%. The last down year for freight was 2007.

External Support

Despite the problems with developing transportation infrastructure over the years and the recent downturn in the economy, some progress has been made and the country is becoming better connected within its borders and to the wider world. Proceeds from the Chinggis bond have gone towards road and rail development, while multilaterals, especially the ADB, and official development assistance organisations, the Japan International Cooperation Agency (JICA) in particular, have been steadily supporting projects. They believe that better transportation will help resolve some of the country's economic problems.

In 2012 the ADB approved funding for a bus rapid transit (BRT) system and related infrastructure and has continued to push for the adoption of this relatively inexpensive alternative to more expansive rail options. JICA, meanwhile, is still pursuing the goal of an operational metro in the capital city by 2020.

Levelling Off

The aviation sub-sector has been particularly active; however, the airlines have also suffered along with the rest of the economy. In May 2014 Eznis Airways announced it would stop flying, effective immediately. The company was formed in 2006 by the Newcom Group, and until recently was flying six aircraft to five domestic destinations and one international destination, Inner Mongolia. At one point it was the country’s largest domestic carrier, with flights to 12 destinations, including Khuvsgul, Khovd and Gobi-Altai, and two international destinations, Hailar, China and Ulan-Ude, Russia. The company said it was unable to finance its operations given the tough economic situation. Aero Mongolia has stepped in to handle some of the routes abandoned by Eznis. MIAT also announced it might take over some of the services.

In addition, Hunnu Air ended its Hong Kong service in November 2014. According to local press, the airline was unable to pay its aircraft lease. By the end of 2014 the company had ended all international services, as well as most of its domestic flights. At one time, it flew to Shanghai, Bangkok, Tokyo and Paris, and was the largest domestic carrier in Mongolia, with almost half of all available seat capacity, according to the Centre for Asia Pacific Aviation. The airline had ambitious plans, such as flying to the US and purchasing an A330-200 for longer-haul routes; it had used an A319 to fly to Paris, which required a technical stop in Russia. In late 2013 Hunnu said it would be replacing its two Fokker 50s and was considering acquiring newer ATR72s, ATR42s or Bombardier Q400s as replacements.

As the sector struggles with economic difficulties, MIAT, the national carrier, continues to develop as an airline. In September 2014 it began flying twice a week to Singapore via Beijing. It has a number of other onward rights from the Chinese capital, including Shanghai, Hanoi and Bangkok. However, the Singapore route was cancelled effective March 1, 2015, as it generated losses of MNT3.7bn ($2.22m) in five months of operation.

MIAT has started serving Tokyo’s Haneda Airport and Frankfurt twice per week each. While the carrier already had a connection to Berlin via Moscow, Frankfurt has the advantage of abundant same-terminal connections to non-Schengen countries. The airline also has its eye on Busan, Suvarnabhumi, London and New York, and is launching summer flights to Siberia in June 2015. MIAT is also working to improve its network and attractiveness to international passengers, and already enjoys codeshare agreements with Aeroflot and Korean Air, as well as a special pro-rate agreement with Air Berlin.

Jet Financing

MIAT has been adding to its fleet, and in May 2013 made its first direct purchase of a Boeing aircraft, a 767-300. The deal was part of an agreement signed in 2011 when Mongolian President Ts. Elbegdorj visited Washington. It committed to buying three Boeings: two 737s and one 767. The carrier acquired a new 737 under lease in 2014, but delivery of the two 737s has been delayed from 2016 until 2019-20.

The carrier’s fleet now totals five aircraft: three 737s and two 767s. The $114m purchase of the 767 was financed first through proceeds from the Chinggis bond. It was then refinanced in late 2013 in a threetranche $121.4m deal, with 10-year notes guaranteed by the US Export-Import Bank, a seven-year junior note and a five-year commercial note. The entire package is guaranteed by the Ministry of Finance.

The airline has big plans, but it notes that what it does will be dependent upon the economy and the ability of the government to finance expansion. The national government raised its debt ceiling in January 2015, which could create more space to issue sovereign debt. MIAT said it is considering substituting the two 737s for a 737 MAX, and is in discussions to acquire a Dreamliner for long-haul routes in the next three to four years.

The company expected traffic to be down slightly in 2014, but it was optimistic that the situation would quickly improve. Visa-free travel for Russians (since September 2014) as well as for a number of European and other nations (from June 2014 through the end of 2015) should result in an increase in tourist traffic. The new airport is helping as well. The current airport – Chinggis Khaan International – only has a single runway, surrounded on three sides by hills and mountains. Many flights are unable to make safe landings due to weather and pollution-induced visibility issues.

The new airport is forecast to reduce that number to about 2% while at the same time increase capacity. The New Ulaanbaatar International Airport (NUBIA), as it is currently known, will have six passenger boarding bridges and have the capacity to handle 3m passengers per year. Ultimately, it will be able to expand to 20 passenger boarding bridges and 12m passengers. The airport will also provide guaranteed landing and takeoff slots for direct and transit flights.

Nubia

By the end of 2014 the airport was ahead of schedule, with more than 25% of the work complete. It is set to open by 2017 and is expected to transform the aviation sector. In terms of cargo, Ulaanbaatar is well situated for trans-shipment to other points within the region. This is especially true for European carriers, as Ulaanbaatar is on the Great Circle between Europe and Beijing. In terms of passenger traffic, MIAT sees the new airport bringing potential opportunities. The airline might be able to pick up passengers from Europe bound for destinations in other parts of Asia, though some analysts doubt whether Mongolia could ever become a major passenger hub despite the new airport and its convenient position.

MIAT’s financial situation could improve in the coming years, allowing it to buy more equipment and expand services. Privatisation has been much discussed, and the carrier says such plans are in the works.

Outlook

The significant investments made in transportation in Mongolia in recent years are set to pay off in the near and medium term. The connections will make travel and transport easier and cheaper, and the links to the rest of the world will improve. Questions remain about balance and focus, and the international community is still encouraging Mongolia to focus more on logistics and key infrastructure, but the right pieces are being put in place and country will soon find itself better integrated with international transport networks.