Railway Sector Assessment for Mongolia The report summarizes the findings of the railway sector assessment for Mongolia, based on a country visit conducted on 23–29 September 2019. The purpose of this assessment is to examine the setting, characteristics, performance and prospects of railways, and identify promising investment opportunities, commercialization and reform actions that could be considered for support through the ADB technical assistance for Railway Sector Development in CAREC countries. About the Central Asia Regional Economic Cooperation Program The Central Asia Regional Economic Cooperation (CAREC) Program is a partnership of 11 member countries and development partners working together to promote development through cooperation, leading to accelerated economic growth and poverty reduction. It is guided by the overarching vision of “Good Neighbors, Good Partners, and Good Prospects.” CAREC countries include: Afghanistan, Azerbaijan, the People’s Republic of China, Georgia, Kazakhstan, the Kyrgyz Republic, Mongolia, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan. RAILWAY SECTOR ASSESSMENT FOR MONGOLIA MARCH 2021 RAILWAY SECTOR ASSESSMENT FOR MONGOLIA MARCH 2021 Note: In this publication, “$” refers to United States dollars. Cover design by Edith Creus. Photo credits on the cover, from left to right. Passenger train at Ulaanbaatar railway passenger railway station. Transferring goods from railway wagon to truck at UBTZ-owned freight terminal in Ulaanbaatar. Changing locomotive on the Ulaanbaatar Railway (photo by TA Consultants). Map: The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of ADB, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information. CONTENTS TABLES AND FIGURES v ACKNOWLEDGMENTS vii ABBREVIATIONS viii CURRENCY EQUIVALENTS viii 1 INTRODUCTION AND BACKGROUND 1 A. Introduction 1 B. Railway network and rolling stock 1 1. Existing railway 1 2. Plans for railway network expansion 4 C. Institutional responsibilities for railways 9 D. Routes relevant for cross-border freight and transit traffic 10 E. Relevant CAREC corridors 13 2 TRENDS IN RAILWAY TRAFFIC 14 A. Introduction 14 B. Background 14 C. Railway freight traffic 17 1. Export freight 18 2. Import freight 20 3. Domestic freight 21 4. Transit traffic 22 5. Container traffic 22 D. Traffic growth scenario 23 3 MARKET COMPETITIVENESS 25 A. Introduction 25 B. Market feedback 26 C. Problems affecting rail competitiveness 27 4 RAILWAY OPERATING AND FINANCIAL PERFORMANCE 29 A. Introduction 29 B. Commercial orientation 29 C. Financial performance 30 D. Operational benchmarking 32 iii iv CONTENTS 5 PROPOSALS FOR INVESTMENT, COMMERCIALIZATION AND REFORM 35 A. Introduction 35 B. Policy setting 35 C. Commercialization and reform 36 D. Proposals for support from CAREC Railway Sector Development 36 1. Prefeasibility studies 36 2. Knowledge products and events 37 E. Main opportunities for support under CAREC Railway Sector Development TA 38 APPENDIX: CAREC DESIGNATED RAIL CORRIDORS 40 REFERENCES 42 TABLES AND FIGURES TABLES 1.1 Age of UBTZ Wagon Fleet 3 1.2 Phases of Investment Envisaged by the National Railway Policy 7 2.1 Freight Volume, Turnover and Haul Distance by Transport Mode, 2014–2019 15 2.2 Passenger Volume, Turnover and Trip Distance by Mode, 2014–2019 17 2.3 Domestic, Export, Import and Transit Railway Freight, 2015–2019 18 2.4 Railway Export Freight Volume by Commodity, 2014–2018 19 2.5 Railway Export Freight Volume and Market Share by Mode 19 2.6 Import Freight Volume by Commodity, 2014–2018 20 2.7 Import Freight Volume and Market Share by Mode 20 2.8 Domestic Freight Volume by Commodity, 2015–2018 21 2.9 Domestic Freight Volume and Market Share by Mode 21 2.10 Railway Export, Import and Transit Container Traffic, 2014–2018 22 2.11 Transit Rail Container Traffic Direction, 2014–2018 23 2.12 Number of Block Trains by Interchange Gateway, 2018 23 2.13 UBTZ Base Case Traffic Growth Scenario, 2020–2030 24 3.1 Market feedback on UBTZ Competitiveness for Different Traffic Types 26 4.1 Selected Indicators of UBTZ Financial Performance 2014–2018 31 5.1 Promising Opportunities for Mongolia to Obtain Support under CAREC Railway Sector Development TA 39 FIGURES 1.1 Existing Railway Network 2 1.2 Mining Production, 2010–2019 4 1.3 Line of Coal Trucks Waiting to Cross into PRC at Gashuun Sukhait 5 1.4 Planned Mongolia Railway Network and Transit Corridors 6 1.5 Transshipment and Regional Logistics Center, Zamiin-Uud 7 1.6 Construction of Tavan Tolgoi–Zuunbayan Railway 8 1.7 Organization Chart of Ulaanbaatar Railway 10 1.8 Regional Rail Links and Ports Serving Cross-border and Transit Traffic 11 1.9 CAREC Corridor 4: Russian Federation – East Asia 13 2.1 Long Term Trends in Freight Traffic by Railway and Road Transport, 1960–2019 14 2.2 Trends in Passenger Traffic by Mode, 1960–2019 16 2.3 Trends in Railway Freight Volume and Turnover, 2000–2019 17 2.4 Forecast Railway Freight Volume Forecast Until 2022 (ton ‘000) 23 3.1 Mongolian Trucks Waiting for Cargo Near Erenhot Border Crossing 25 4.1 UBTZ Annual Revenue and Expenditure, 2006–2010 30 v vi TABLES AND FIGURES 4.2 UBTZ Inflation-Adjusted Revenue and Freight Turnover, 2014–2019 31 4.3 Comparison of Railway Length and Staff Size in Mongolia, Other CAREC Member Countries and Other Leading Railway Countries 32 4.4 Comparison of Railway Rolling Stock Fleet in Mongolia, Other CAREC Member Countries and Other Leading Railway Countries 33 4.5 Comparison of Annual Railway Freight and Passenger Traffic Turnover in Mongolia, Other CAREC Member Countries and Other Leading Railway Countries 33 4.6 Comparison of Railway Track and Staff Productivity in Mongolia, Other CAREC Member Countries and Other Leading Railway Countries 34 4.7 Comparison of Locomotive and Wagon Productivity in Mongolia, other CAREC Member Countries and Other Leading Railway Countries 34 ACKNOWLEDGMENTS This country railway sector assessment is part of an Asian Development Bank (ADB) technical assistance (TA) project on Railway Sector Development in Central Asia Regional Economic Cooperation (CAREC) Countries. The project has been assisting CAREC member countries to identify promising opportunities for investment in cross-border railways and develop railway commercialization and reform measures to strengthen railway performance in accordance with the CAREC Railway Strategy approved by CAREC ministers in 2017. Preparation and supervision of the project was led by Jurgen Sluijter, Senior Transport Specialist, and overseen by Dong-Soo Pyo, Director, Transport and Communication Division, Central and West Asia Department. Administrative support was provided by Krisanta Carissa Vila, Associate Project Analyst. The Mongolia railway sector assessment was prepared by a team of TA consultants. Country-level consultations and research were carried out by Andy Sze, Railway Market and Logistics Specialist and Otgonbaatar Dorjgotov, Transport Specialist. Report preparation was led by Tyrrell Duncan, Team Leader/Railway Specialist. Valuable insights and information were provided by the Ulaanbaatar Railway, the Mongolian Railway Joint Stock Company, the Ministry of Road and Transport Development, other government departments, international development partners and representatives of the private sector. Useful comments were provided by ADB staff. vii ABBREVIATIONS ADB – Asian Development Bank BRI – Belt and Road Initiative BTEG – Bold Tumur Eruu Gol CAREC – Central Asia Regional Economic Cooperation CIS – Commonwealth of Independent States CRC – China Railway Corporation EEU – Eurasian Economic Union FSU – former Soviet Union IFRS – International Financial Reporting Standards JSC – joint stock company km – kilometer kph – kilometers per hour MC – Member Country MRTD – Ministry of Road and Transport Development MTZ – Mongolian Railway Joint Stock Company PPP – public-private partnership PRC – People’s Republic of China RZD – Russian Railways TA – technical assistance TEU – twenty-foot equivalent TIR – Transports Internationaux Routiers TSR – Trans-Siberian Railway UIC – International Union of Railways UBTZ – Ulaanbaatar Railway CURRENCY EQUIVALENTS (as of 8 June 2020) Currency unit – Tugruk (MNT) MNT1.00 = $0.000357 $1.00 = MNT2,802 viii 1 INTRODUCTION AND BACKGROUND A. Introduction of railways, and identify promising investment opportunities, and commercialization and reform 1. In 2017, the eleven Member Countries (MCs) actions, that could be considered for support through of the Central Asia Regional Economic Cooperation the TA. This short report summarizes the findings (CAREC) program approved the CAREC Railway of the railway sector assessment for Mongolia, Strategy with a view to expanding the role of railway drawing upon the findings of a country visit during transport in the region.1 The strategy aims to accelerate 23–29 September 2019. the identification, preparation and financing of feasible railway investment projects and, at the same time, advance the commercialization and reform of railways B. Railway network and to improve their performance (ADB 2017). rolling stock 2. In 2018, the Asian Development Bank (ADB) approved a $2 million regional technical 1. Existing railway assistance (TA) project for CAREC Railway Sector 4. Mongolia is a lower-middle income country Development to assist MCs in implementation of with a population of 3.23 million and a per capita the CAREC Railway Strategy (ADB 2018a).2 The TA gross