Technical Assistance Report Project Number: 41192 August 2008 Mongolia: Preparing the Regional Logistics Development Project CURRENCY EQUIVALENTS (as of 24 July 2008) Currency Unit – togrog (MNT) MNT1.00 = $0.00086 $1.00 = MNT1,155 ABBREVIATIONS ADB – Asian Development Bank EA – executing agency IEE – initial environmental examination MRTT – Ministry of Road, Transport, and Tourism PPTA – project preparatory technical assistance PRC – People’s Republic of China TA – technical assistance TECHNICAL ASSISTANCE CLASSIFICATION Targeting Classification – General intervention Sector – Transport and communications Subsector – Multimodal transport and sector development Themes – Sustainable economic growth, regional cooperation, capacity development Subthemes – Fostering physical infrastructure development, institutional development NOTE In this report, “$” refers to US dollars. Vice-President C. Lawrence Greenwood, Jr., Operations Group 2 Director General K. Gerhaeusser, East Asia Department (EARD) Officer-in-Charge C. S. Chin, Transport Division, EARD Team leader M. Parkash, Senior Transport Specialist (Railways), EARD 96o 00'E 111o 00'E MONGOLIA R U S S I A N F E D E R A T I O N REGIONAL LOGISTICS DEVELOPMENT PROJECT Hanh o 50 o 00'N 50 00'N Ulaanbayshint Ulaangom Hatgal UVS Altanbulag HOVSGOL Tsengel Nogoonnuur Naranbulag Tes Ereentsav Tsagaan-Uul Moron Suhbaatar Dayan BULGAN SELENGE Olgiy Olgiy BAYAN- Selenge Darhan OLGIY Hutag-Ondor DARHAN-UUL Bayan-Uul Tudevtey Erdenet DORNOD Havirga Hovd ZAVHAN Bulgan ORHONSumber HENTIY Choybalsan ARHANGAY ULAANBAATAR Hishig Ondor Tsahir Lun ULAANBAATAR Manhan Battsengel Batnorov Uliastay Baganuur Dariv Nalayh Zuunmod Maanit Tamsagbulag HOVD Tsetserleg Ondorhaan Monhhaan Tayshir TOV Matad Harhorin Yarant GOVISUMBER Baruun-Urt Uyench Altay Bayanhongor Choyr Arvayheer Erdenetsagaan Togrog Buutsagaan Bichigt Mandalgovi Nariynteel SUHBAATAR GOVI-ALTAY OVORHANGAY DUNDGOVI Saynshand Burgastay BAYANHONGOR Tsogt-Ovoo DORNOGOVI Zamyn-Uud Dalanzadgad 42 o 00'N OMNOGOVI Bayan-Ovoo National Capital 42 o 00'N Provincial Capital Gashuun Suhayt City/Town ADB-Financed Road N National Road PEOPLE'S REPUBLIC OF CHINA Other Road Railway 0 50 100 150 200 250 River Provincial Boundary Kilometers International Boundary 0 Boundaries are not necessarily authoritative. 8 - 2 2 9 1 H 96o 00'E 111o 00'E R I. INTRODUCTION 1. The Government of Mongolia has requested the Asian Development Bank (ADB) for project preparatory technical assistance (PPTA) for preparing the Regional Logistics Development Project. ADB considered this request, and a fact-finding mission visited the project area in June 2008. The mission carried out an initial poverty and social assessment and a rapid environmental assessment, and discussed technical and socioeconomic issues with representatives of the Government, the Ministry of Road, Transport, and Tourism (MRTT), and the Railway Authority of Mongolia. This paper is based on the Government’s concurrence with the impact, outcome, outputs, activities, implementation arrangements, cost, financing arrangements, and terms of reference for the PPTA.1 The PPTA is included in ADB’s country assistance program for 2008.2 II. ISSUES 2. Mongolia is a historical land bridge between the People’s Republic of China (PRC) to the south and the Russian Federation to the north. The transport sector, which consists mainly of roads and railways, is a key driver of economic development in Mongolia. The road network, including both state and local roads, totals approximately 49,250 kilometers (km), connecting 21 major cities and towns and 160 smaller villages. The Mongolian railway system is 1,810 km long and carries over 90% of the country's freight. The main line connects the PRC rail system in the south with the Russian Trans-Siberian line in the north. The north–south railway transport link, developed in 1949, is the lifeline of the economy and most of the economic development in the country during the last 60 years has taken place along this corridor. The strategic location of Mongolia as a transit country between the PRC and the Russian Federation has helped increase the transport demand, as has high economic growth in the country in recent years. Even though the transport capacity has risen in recent years, the transport sector in Mongolia is unable to meet this increasing demand, and this is seriously impacting economic growth. 3. Since 2002, Mongolia’s economy has been growing at a healthy rate, reaching 9.9% in 2007. A large part of this has been due to growth in the mining sector. The discovery of huge mineral and coal reserves in Mongolia, particularly in the South Gobi, are expected to stimulate the mining industry in the coming years, and this will contribute to high gross domestic product (GDP) growth (some estimates suggest GDP will increase by 4.7 times between 2007 and 2030). The mining industry and the development of the secondary and tertiary sector are dependent on efficient transportation and logistics. Most of the mining products are expected to be exported to the PRC or to international markets through Tianjin port in the PRC. These shipments will have to go through Zamyn Uud, the only gateway to the south. 4. Mongolia is also a landlocked country and as such faces greater transportation challenges than countries with their own seaports. Mongolia relies on its two large neighbors, the Russian Federation and the PRC, for access to seaports. In recent years, trade flows have been reoriented from the Russian Federation and most imports (over 80%) now come from the PRC, through the Zamyn Uud border point in the southeast of Mongolia. The bulk of Mongolia’s exports also travel through Zamyn Uud en route to Tianjin port, the only port in the PRC available to Mongolia for international trade. As a consequence, the traffic handled at Zamyn Uud has expanded rapidly in 1 The technical assistance (TA) first appeared in the business opportunities section of ADB’s website on 7 July 2008. 2 This PPTA is included in the 2008 TA program as a replacement for the South Gobi Infrastructure Development Project ($800,000) now split into two projects: ADB. 2008. Technical Assistance to Mongolia for Preparing the Regional Logistics Development Project. Manila; and ADB. 2008. Technical Assistance to Mongolia for Preparing the South Gobi Urban and Border Town Development Project. Manila. 2 recent years, to the point where Zamyn Uud is now badly congested,3 which affects imports, exports, and transit traffic. Although delays have several causes (such as nonavailability of rolling stock, change of rail gauge, and delays at customs), the main one is the grossly inadequate logistics capability in Mongolia in general and at Zamyn Uud in particular. 5. Efficient and well-developed logistics are identified as the key to cost-effective and competitive transportation. Trade logistics, or the capacity to connect to international markets to ship goods, is critical for developing countries if they are to improve their competitiveness, reap the benefits of globalization, and fight poverty more effectively in an increasingly integrated world. A World Bank-funded study,4 based on a world survey of international freight forwarders and express carriers, indicates that facilitating the capacity to connect firms, suppliers, and consumers are crucial in a world where predictability and reliability are becoming even more important than costs. A country's ability to connect to global markets is fast becoming a key aspect of its capacity to compete, grow, attract investment, create jobs, and reduce poverty. For those countries unable to connect, the costs of exclusion are large and growing. Unfortunately, Mongolia’s performance in all indicators of logistics management is at the bottom end. Based on a worldwide survey completed by more than 800 logistics professionals, the World Bank developed a comprehensive assessment of logistics performance in 150 countries and developed a logistics performance index.5 Mongolia has an overall logistics performance index ranking of 129–150 (1 is the best and 150 is the worst);6 its ranking for customs procedures is 131, for logistics costs (including freight rates) 144, infrastructure quality 129, ability to track and trace shipments 136, and timeliness in reaching a destination 142. Mongolia’s ranking clearly indicates serious issues in logistics development; this situation is hurting the country’s competitiveness and has serious repercussions for its economic performance. 6. Zamyn Uud, a town with a population of about 10,000 on the Mongolian–PRC border, is the historic intermodal interchange point for transport coming from the PRC to Mongolia, the Russian Federation, and Europe, and vice versa. It handles road to rail, rail to rail, and road to road traffic. For import traffic into Mongolia and the transit traffic to the Russian Federation, the bulk of the traffic coming from the PRC or Tianjin by rail is transshipped to rail. In recent years, the volume of traffic coming by road from the PRC is increasing and it is transshipped to rail at Zamyn Uud. A very small proportion of the traffic coming by road is directly transported by road, as no paved road currently exists between Zamyn Uud and Ulaanbaatar or to the Russian Federation border in the north.7 Most of the goods coming into Mongolia are destined for Ulaanbaatar, with construction material and foodstuffs accounting for the bulk of the cargo. Due to the limited logistics facilities available at Zamyn Uud, it can sometimes take 50–60 days to get shipments into Ulaanbaatar, which adversely affects the Mongolian people. In addition, the development of the mining sector is resulting in a huge demand for transporting coal and minerals. 7. To handle the traffic at Zamyn Uud, two facilities were created, one of which was financed by the Japan Bank for International Cooperation in 1995. A temporary facility was also opened on 3 Discussions with different stakeholders revealed that import cargoes could take anywhere between 10 and 60 days for clearance at Zamyn Uud. 4 World Bank. 2007. Connecting to Compete: Trade Logistics in the Global Economy.