STUDY ON ECONOMIC PARTNERSHIP PROJECTS

IN DEVELOPING COUNTRIES IN FY2012

STUDY ON THE IMPROVEMENT OF THE ACCESS ROAD TO NEW INTERNATIONAL AIRPORT

FINAL REPORT

【SUMMARY】

February 2013

Prepared for: The Ministry of Economy, Trade and Industry Ernst & Young ShinNihon LLC Japan External Trade Organization (JETRO)

Prepared by: Pacific Consultants CO., LTD. Japan Expressway International CO., LTD. NIPPO Corporation Oriental Consultants CO., LTD. InterAct Inc. 1. Background and Necessity of the Project

New Ulaanbaatar International Airport, scheduled to become serviceable in 2016 and currently under construction under ODA loans, will be located in the outskirts of Zuunmod, which is 54 km south of Ulaanbaatar. With the airport opening, the demand for transportation is expected to increase on an access road to the new airport from Ulaanbaatar to Zuunmod.

Currently, the surface of the access road from Ulaanbaatar city center to the new airport is in a state of serious disrepair. Also, with only two lanes, it does not have sufficient traffic capacity.

There are two sections on the road with profile grades and sharp curves, identified as being particularly dangerous in winter due to freezing. Further, loading restrictions on this section are regulated to 5 tons per axle, preventing smooth transport of goods and persons.

The section between the Ulaanbaatar city center and the access road to the current airport (from Yarmag Bridge to the Yarmag tollgate) is part of the Ulaanbaatar road improvement plan. The access road from the new airport to main intersection of the current road is scheduled to be upgraded as part of the new airport construction plan.

Thus, there are currently no plans in place for improvement or servicing of the project section, which covers the roughly 32 km of road connecting the Yarmag tollgate and new airport intersection. As part of the access road construction project, this section is of urgent necessity to opening the new airport.

In the Study on City Master Plan and Urban Development Program of Ulaanbaatar City (Formulated in March 2009, State Great Khural (Parliament) of approved), this project is given as UTR-Rd-06 / Development of Highway to Connect Ulaanbaatar City to New Airport and Zuunmod (Target Year 2015) in the long list of the Mongolian Development Program Project List and is shortlisted as a priority project. The same report states that a PPP model may be considered for construction and management of this access road.

2. Basic Policies for Determining Project Content

The following policies will be considered during this study for the purpose of determining the content of the project in question:  Mongolian design standards, nearby road plans, and the intentions of the Mongolian government will be confirmed. Upon confirmation of the relevance of peripheral plans, they will be reflected in the Project plan.  There should be consistency in connecting the target road to the roads currently under construction.  Minimize impact on nomadic peoples and other local residents  The work period should be shortened, aiming for early opening  The driving distance and time will be shortened to improve convenience  The road should be structured taking into account severe midwinter weather conditions  Ensure safety while reducing operation and maintenance costs  Associated facilities (safety facilities, signs, lighting) will be appropriately installed to ensure safety  Periodic maintenance will be implemented

3. Project Outline

(1） Outline of Project Planning

1） Standard cross section This project calls for “Grade 1 roads” according to Mongolian road design standards. The roads will have four lanes and a total width of 25.5 m. Figure 1 Standard cross section drawing

Source: Prepared by Study Team

2） Route Plans The project consists of a Basic Proposal (the new road will run parallel to the present road while considering accessibility from surrounding cities.) and a Bypass Proposal (one segment will be constructed as a bypass, considering speed to the airport) Figure 2 Route location map

N

Airport (current)

Bogd Khan National Park

(1) Basic Proposal

Zuunmod (2) Bypass Proposal

New international airport (Planned for construction)

Source: Prepared by Study Team Below are the results of the comparative route examination:

Table 1 Results of the comparative route examination (1) Basic Proposal (2) Bypass Proposal Total length 34.2km 27.6km

Driving time 20 minutes 20 minutes (current airport to *set at 100 km/h *set at 80 km/h in some bypass new airport) sections Construction Approx. 3 years Approx. 3 years period Merits ・ Convenience for users other than ・Project costs are low. airport passengers is enhanced. ・Since the vertical grade is steep of ・A moderate vertical grade of 5% and a 6.0% yields a design speed of 80 design speed of 100 km/h is possible. km/h Issues ・Toll collection from users other than ・Sections with steep slope of 6.0% airport passengers. are long, significantly affecting the ・Driving time is longer than the other ease of travel for large vehicles proposal. ・Unimproved sections of existing roads remain ・Design speed of the bypass section is 80 km/h Source: Prepared by Study Team

(2） Total Project Cost The Project cost is as follows: Table 2 Project Cost

(Units: 1 million JPY) Basic Proposal Bypass Proposal Overall cost 10,496 9,201 Maintenance and operation cost 296 249 (one year) Source: Prepared by Study Team Financial analysis has led to the consideration of separation system of infrastructure and operation on the Project as shown in the figure below. Based on the calculated overall Project cost, each of the separate construction costs for upper and lower portions is indicated in this section.

・Upper portion: Paving (roadway, shoulder), pavement markings, associated facilities (traffic control facilities), tollgates, maintenance vehicles ・Lower portion: Earthworks, slope (embankment) construction, paving (roadbed, subgrade), bridge construction, culvert construction Figure 3 Illustration of the Upper and Lower Portions

Upper

Lower Source: Prepared by Study Team

Table 3 Estimate of Costs (upper and lower portions separate)

(Units: 1 million JPY) Basic Proposal Bypass Proposal Project cost (Upper portion) 6,865 5,771 Project cost (Lower portion) 3,631 3,430 Source: Prepared by Study Team

(3） Summary of the Results of the Preliminary Financial and Economic Analysis

1） Financial Analysis Results

Several scenarios will be compared in order to verify if this Project is financially valid. ・Will the Project route be the Basic Proposal or Bypass Proposal? ・Will the Project procedure be Separation System of Infrastructure and Operation or Integration System of Infrastructure and Operation? ・Will the usage fees (tolls) be standardized for the entire Project period or revised in the 11th year?

The following table shows the 8 scenarios that include various permutations of the above.

Table 4 8 Scenarios Route Basic Proposal Bypass Proposal Project Integration of Separation of Integration of Separation of Procedure Infrastructure and Infrastructure and Infrastructure and Infrastructure and Operation Operation Operation Operation Fee No Revised No Revised No Revised No Revised revision revision in 11th year revision in 11th year revision in 11th year revision in 11th year Scenario I II III IV V VI VII VIII № Source: Prepared by Study Team

The financial analysis calculated the user fee (toll; MNT/vehicle) that satisfies the financial demands of the private investors, financial institutions, and other stakeholders. The financial analysis of each of the 8 scenarios based on the aforementioned preconditions. The results are below.

Table 5 Summary of the Financial Analysis Scenario Method of Project Min.D User fee Route Fee revision E-IRR P-IRR № procedure SCR （MNT/vehicle） I Integration of No revision 31.00％ 23.24％ 1.49 20,500 Infrastructure and Revision in (Stage 1) 19,500 II 30.32％ 23.33％ 1.43 Basic Operation 11th year (Stage 2) 27,300 III Proposal Separation of No revision 30.37％ 22.86％ 1.49 13,500 Infrastructure and Revision in (Stage 1) 13,000 IV 30.19％ 23.19％ 1.44 Operation 11th year (Stage 2) 18,200 V Integration of No revision 31.12％ 23.29％ 1.50 18,000 Infrastructure and Revision in (Stage 1) 17,000 VI 30.13％ 23.24％ 1.43 Bypass Operation 11th year (Stage 2) 23,800 VII Proposal Separation of No revision 30.95％ 23.10％ 1.50 11,500 Infrastructure and Revision in (Stage 1) 11,000 VIII 30.40％ 23.28％ 1.44 Operation 11th year (Stage 2) 15,400 Source: Prepared by Study Team

2） Economic Analysis Results The calculations for Cost-Benefit Ratio (CBR: B/C), current Net Profit Value (NPV: B – C), and Economic Internal Rate of Return (EIRR) for each of the two cases are shown below. These calculations showed that the project would by and large be economically feasible in both cases.

Table 6 Calculations of Economic Evaluation Indicators Benefit (current value) Cost (current value) CBR：B/C NPV：B - C EIRR (hundred million (hundred million (hundred million

dollars) dollars) dollars) Basic 1.35 1.11 1.21 0.24 12.9% Proposal Bypass 1.55 0.97 1.59 0.58 17.5% Proposal Source: Prepared by the Study Team

(4） Environmental and Social Considerations Environmental impact assessment based on the Law of Mongolia on Environmental Impact Assessment must be conducted during the next stage of this survey since such an assessment concerning the implementation of the Project has not yet been conducted.

Below are environmental and social issues that require needful attention during the upcoming environmental impact assessment:

1） Pollution Control Measures Salt will probably be sprinkled on the surfaces of existing roads to remain open during construction to prevent them from freezing and keep them safe for driving during winter. Thus, Mongolian road maintenance standards concerning the spreading of salt, regulatory standards for water quality and conditions for spreading salt on existing roads must be thoroughly considered for conformity to Mongolian wastewater standards.

2） Natural Environment The proposed route passes through steppes on the outer edge of Bogd Khan Uul National Park, and those steppes are also used as grazing lands for the livestock of nomadic peoples. Thus, measures to mitigate impediments to the mobility of wild animals and livestock must be taken. Also measures to mitigate the stripping of steppes must be taken since steppe land will be reformed under the Project.

3） Social Environment Areas surrounding the proposed route feature ovoo based on traditional Mongolian beliefs. Thus, the project requires an investigation relating to avoidance/easing measures in road designs and thorough discussion with related local stakeholders.

4. Implementation schedule

The time schedule for completion of four –lane road targeting with the expected opening of the new air port is formulated.

Although the project implementation period is mainly in 2015 and 2016, construction work needs to be conducted also in winter because bridge construction requires one year, which makes the schedule very tight. Some arrangements, including launch of preparatory work before the completion of detailed design, are also necessary in order to secure a good progress of the entire work. Figure 4 Implementation Schedule

Source: Prepared by Study Team

5. Feasibility

The following elements are necessary for the project to be realized:

(1） Appropriate user fee standard The setting of the user fee must be regarded as a matter of course not only from the viewpoint of recovery of the Project costs but also must consider of users capability to pay. In this survey, we determined based on several interviews in Mongolia that the Project would be viable if the user fee was set at approximately 10,000 MNT. Since there are currently no toll roads in Mongolia, it is difficult to determine the appropriate user fee. However, as this is an important index for selecting the best realistic scenario, and in order to carry out accurate investigations in the future, it will be necessary to both carry out further detailed surveys regarding the issue of user fee and ensure consensus of the Mongolian government. In addition, this financial analysis concluded that revising the user fee in stages during the Project period (shifting the rise in cost-of-living – 1.4 times the fee in the initial fiscal year – in the 11th year) was not a feasible choice.

(2） Separation of Infrastructure and Operation As indicated in the financial in this document, financially viable scenarios could be those that Separate Infrastructure and Operation. Both the Basic Proposal and the Bypass Proposal could be financially viable by applying this separation scheme.

Article 30 of the Mongolian Concession Law provides particular stipulations for financial assistance by state and local authorities. According to these stipulations, when the fees based on the concession agreement are lower than the costs, payment may be made from the national or local budgets with a request for advance third-party payment from the concessionaire. In addition, in an interview with the Ministry of Roads and Transportation, who responded to indicate the possibility of utilization of Separation scheme of Infrastructure and Operation and the Mongolian government sharing some burden of cost. This survey indicated that Separation of Infrastructure and Operation (with the Mongolian government sharing a burden equivalent to 35% of the initial investment) is essential to Project realization and therefore details of Separation of Infrastructure and Operation (financial burden allotment and amount of financial burden) must be discussed with the Mongolian government.

(3） Utilization of Government Policy Financing A precondition of the financial analysis is that the financial condition for the SPC borrowing rate be set at 18% per annum, which is equivalent to the rate at Mongolian private commercial banks. Thus, the interest rate accounts for a large portion of the project cash outflow, which has a negative effect on feasibility. In addition, the normal cash outflow period in Mongolia is a maximum of 5 years, meaning that there is no long-term market. As other actual problems, private commercial banks in Mongolia have no experience with long-term financing of large-scale infrastructure projects and cannot provide the necessary financing for this Project by themselves due to regulations on the amount of loans in Mongolia. However, if long-term and low-interest loans are available via funding by government policy, project profitability will improve and it may be possible to reduce the user fee. In consideration of the additional cost of hedging the exchange risk, it will be necessary to utilize funding by government policy that reduces the cost of fund procurement. This funding by government policy is presumed to take the form of loans from the Mongolian Development Bank and JICA Overseas Loans and Investments.

(4） Detailed examination of the Project risks A highly-detailed examination of the risks borne by the private company will be conducted and must be reflected to the financial analysis. In particular, with regards to the risk of fluctuations in income, it is necessary to improve the accuracy of the predictions of future traffic volume and a detailed investigation of the method of collecting user fees and the target users must be carried out.

6. Technical Advantages of Japanese Company

(1） Construction technology The Project area is situated inland at high latitudes and high altitudes, and has a considerable difference in temperature ranging from -40 ℃ in winter to +35 ℃ in summer. Though a freezing due to snow coverage is expected in winter, the anti-freezing asphalt technology, which was originally designed for Hokkaido and other snow covered regions in Japan, can be applied.

The anti-freezing asphalt technology contributes toward ensuring the safety of travelling vehicles by preventing roads from freezing and effectively removing snow in the snowy cold season. In Japan, this technology has become rapidly popular practice since the enactment of “Studded Tires Regulation Act.”

(2） Environmental technology As far as consideration for reduction of environmental load is concerned, Japanese construction companies established better construction technology.

Recycling discarded asphalt materials, which is already common in Japan, leads to reduced amount of industrial wastes. In fact, when Shin-Tomei Expressway was constructed, adoption of warm mix compounds has made a considerable contribution to decrease of CO2 emission.

Below are examples of specific techniques: ・Reduction in amount of industrial wastes through recycling of discarded asphalt materials ・Warm mix asphalt

(3） Operation

1） Traffic safety measures The expressways in Japan demonstrate higher safety; the number of car accidents involving loss of life and injury on expressways is about 1/15 of that on all roads including ordinary roads. In introducing an expressway like the Project road first in Mongolia, taking traffic safety measures is one of the most important issues. In light of this, Japanese highway companies can provide effective measures and technologies.

2） Traffic control technology To ensure safety, high speed, and punctuality on expressways, traffic control teams are organized in Japan to prevent unusual conditions before they happen, collect traffic information, and take adequate countermeasures for securing quick recovery.

They go round expressways periodically or as needed to collect information on traffic conditions such as traffic jam, road conditions such as fallen object, and weather conditions. Once an abnormal condition occurs, they will rush to the site to remove any fallen object, take proper action preventing accident in cooperation with local police and fire department, and provide support for disabled cars.

Since these works have to be done on unsafe expressways, prompt and accurate judgment as well as sufficient knowledge and experience are essential elements to accomplish them. In light of this, Japan’s accumulated know-how becomes an advantageous technology.

3） Toll collection technology The toll collection work should be conducted accurately and promptly while “opening necessary lanes based on traffic condition,” and “identifying a variety of vehicle types.” Further, should be taken against “illegally travelling vehicles” and “abnormal conditions” .

To accomplish these works, sufficient knowledge and experience are required. In light of this, Japan’s accumulated know-how becomes an advantageous technology.

4） Road management technology in winter Below are examples of specific winter road management techniques: ・Snow removal work (removal of new snow) ・Anti-freezing agent sprinkling work ・Self-illuminating snow pole ・New technology for snow and ice control

7. Specific Schedule to realize the Project and Risk Prevention

(1） Environment Although the period for the procedures based on the Act for Assessment of Environmental Impacts is assumed to be approximately one year, it can take longer period of time for such reasons as the results of stakeholder meetings because of the judgment of general EIA by the Ministry of Environment. Revisions of the act impose another risk of delay in the schedule.

(2） PPP and SPC Based on the precondition that a certain level of feasibility study results become available around the end of 2013, a period of approx. three months is allowed for contract negotiations. Although it is reasonable as a period for general PFI projects in Japan, there is less sufficient expertise knowledge on road construction under PPP in Mongolia.

(3） Risk of delay in Project implementation Work implementation in winter is limited because of the climate in the Project site. Although work can be carried out from April to October, it can, however, be shorter depending on the weather condition.

8. Maps of Project Implementation Location in Host Country

The project scope is as shown below: Figure 5 Proposed Project Location

Uvs Hovsgol Bayan-Olgiy Sel enge Mongolia Zavhan Ul aanbaatar Arhangay Hentiy Dornod Hovd Tov Suhbaatar Govi-Altay Ovorhangay Dondgovi Bayanhongor Dornogovi

Omnogovi

N Ulaanbaatar city

Existing airport Yarmag toll gate (Tov Province -> Ulaanbaatar)

Project scope: extension = approx. 32 km)

Zuunmod

：Scope of Project

Scale New airport 1 2 3 4 5 10ｋｍ Source: Prepared by Study Team based on a commercially available map