Keith Marshall doesn’t like going out of his fence

Of course, there are other investors, who most willingly run outside of their fences. This category of investors includes those from China and Russia. Their interests go beyond the predetermined directions and they do not bother planning and are not concerned about income and expenditure and they wholeheartedly indulge in cash stinking politics.

A campaign of pitching fence poles has started on the territory of the Mongolian Gobi. Out of total 15 deposits of current strategic importance, 4 are located in the Gobi. An investment agreement to deploy two of them is in the stage making it a deal and the precursory stage of a deal respectively. Politicians tell that Oyu Tolgoi investment agreement is to be approved tentatively in April and May, while the prospective investors spread out a word that investment agreement on Tavan Tolgoi coal deposit is to be discussed at the spring Parliament session. Agreement is a policy document. However, there is limitless work and great construction ahead. In one word, we are facing a huge work load in front of us waiting.

The head of the Mongolian cabinet is traversing Russia, China and Europe in an attempt to finish off some portions of all scattered around construction work. A general idea on how the Gobi territory will be divided can be seen from visit outcomes. At end of guarding the fence for the last five years, Ivanhoe Mines Mongolia  Inc was engaged to Australian and British giant Rio Tinto when the company joined in its management team. They repeatedly say “Let’s start working; we have been talking for a long time.” Let’s elaborate on what kind of work they were referring to. If the investment agreement was approved, does that mean that Alladin would lay his magic carpet, a silver town would be constructed, mines would be booming and bags of money would pile up on our side? A fine fog of imagination has started vanishing.

Now, it is time to delineate where the fence will be located, who will do what and where the bottlenecks are likely to be. Let us leave aside the folk tale book of Alladin and let’s get realistic to the great construction work facing towards us.
 
Keith Marshall is busy sitting inside the fence and calculating the expenses. Is there anything else other than this that the investor has to spend his whole time for? Only Mongolian government has to have a vision and plan outreaching the whole territory of the Gobi. The general construction agenda can be divided into several outlines.

Energy

Mongolia is in the brink of falling into deep scarcity of energy, the main economic foundation. Not to mention the demand in the Gobi, it is very difficult to meet the demand of Ulaanbaatar. In order to resolve the issue there has been an ongoing talk to construct the 5th power plant a few years ago. The location has been set in general. At the end of being silent for some time, China actively started preparing for the bid of Ulaanbaatar’s fifth power plant construction. There is no clue why other potential participants and competitors are not there. Anyway, families started to pitch their fences on the planned spot for the power plant and interested bidders are still rare and there is only one so far.

The capacity of the fifth power plant is planned to be at 300MW. It may not only supply Ulaanbaatar, but also renowned Oyu Tolgoi in the south. In that sense, the fifth power plant is no doubt one of the great construction agendas in coming few years. Seems the bid is to take a longer time. As there is no such thing as one bidder.

The great champion of construction work in the energy sector is a power plant based on Shivee-Ovoo brown coal. It is not only a great construction work, but also it is to take a great responsibility in the energy sector. It will produce 3600 MW. Compare its capacity with the fifth power station to be built in the east of Ulaanbaatar. The facility which has much more capacity is to export energy to China. It seems that also the Chinese will build the Shivee Ovoo power plant. I did not draw the boundaries of fences mentioned above accidentally. Mining, energy and railway construction sectors require enormous funding and the only countries which are not terrified by the funding size are Russia and China. They are not only interested in mining the major mineral deposits on the territory of Mongolia, but they do not object funding the infrastructure construction as well.

It is a picture of the great construction work which is to start after the approval of investment agreement, which we keep debating among ourselves by sending back and forth. It can become a route connecting the great Gobi land and the capital city. In addition, there is a very long energy route connecting Shivee Ovoo and the southern neighbor. There is no need to suspect that Shivee Ovoo has the purpose of supplying only the Chinese. It will not only supply the central region, but it has capacity to become the major source of the Gobi regional energy consumption. The Mongolian Government has a vision to build liquid fuel plant based on Choir-Nyalg coal basin. Shivee Ovoo belongs to this basin. The reason I mentioned these two power stations at the beginning of my article is that some of the commercial loans of China could be used for constructing the above. The Prime Minister is having talks with the Chinese authority on building a power complex in Shivee Ovoo.

The complex is likely to be built by 2016. Conditions of USD 1.5 billion commercial loan being ratified these days are effective for more than 10 years. One of the conditions of the loan is likely that Chinese workers will be outsourced in Mongolian mining and construction sectors. Only Mongolian mining and construction sectors have the potential to absorb such a loan. However, from the security point of view, we have to be cautious to build major energy sources by Chinese investment. The vast territory of the Gobi is being pictured with these series of energy lines. There is also a plan to build a power station with capacity of 600 MW based on Tavan Tolgoi coking coal deposit. Mongolian scholars estimate that the capacity can be upgraded to 2000MW. There is no information so far with regard who will build this power plant. The fact that there is a potential to produce great amount of energy from “waste“ of Tavan Tolgoi is a chance to supply the energy needs of the Gobi residents and mines for a long time. Of course, the Government is to announce a bid and select a contractor. Mongolian scholars have submitted a budget proposal to the Government stating that only the cost of a feasibility study of a large power plant by an international team of experts will be around USD300,000 and when the project proves successful a total cost will be USD1-2 million.  

We are facing a pile of projects with huge numbers. Mongolian Government doesn’t have any resources to fund infrastructure projects. Some people proposed to an idea to fundraise this lacking money by barter. This will entail an issue of a payment guarantee based on mineral products. The Government will put forward Erdenes MGL company. A state owned Erdenes MGL company with its director B.Enebish is going to be a ‘live‘ payment guarantee, to put in a humoristic term, lol.

The resolution was made by an irregular Cabinet meeting last week. In other words, Tavan Tolgoi licenses owned by the state owned Erdenes MGL company will be used as payment guarantees in major projects. Furthermore, some portion of a newly set up Mongolian railway company will go to the ownership of Erdenes MGL.

The above is a brief account of power plants to be built in the near 3-7 years in Mongolia. Now all these proposals are in paper form. The most needed one is a power plant to be built on Tavan Tolgoi deposit. In case of Oyu Tolgoi, it will receive energy from China while its mine construction under progress. Initially the mine will operate in a low capacity and power consumption will be around 50 MW, therefore, Oyu Tolgoi project is not worried about energy supply. In its peak operation Oyu Tolgoi mine will need around 300 MW energy. Till then Keith Marshall will build a power plant “inside his fence” or will import energy from China and will not experience a bottleneck in the production line.

The term “outside and inside of fence” is a metaphor which I use illustrate that Mongolian Government has a lot of work waiting to be performed. For example, although there is only a discussion on building huge power plants, there are so many other attendant issues to it such as who will build transmission lines, how they will be funded, how will be responsible for maintenance. The Mongolian Government has to become a subject, which has to function with a comprehensive vision, planning and coordination on the Gobi regional development. The investors are most likely to shut their doors inside their fences; the Government is to become a coordinator to work on how to attract the investors to the regional development projects.

ROAD
 
While energy is the pivotal issue of security, the road on which to transport the products is the main money vein to feed Mongolians. In this sense, whoever builds a road from the deposit location to the market place is likely to become the main player in the scenario. I need to cite Keith’s name again and annoy his ears saying he doesn’t need railway. According to him, the copper concentration can be transported on paved road. However, the Tavan Tolgoi coking coal with no less value than gold will be transported only by railway. That’s why Mr.Yakunin’s name, an owner of Trans Siberian railway and 50% stakeholder of Trans Mongolian railway is very familiar to many Mongolians. In order not to divert the Tavan Tolgoi coal only to the southern neighbor, Mongolia has made a very decision in its history. The Mongolian society is not fully aware of this decision yet. To put a long railway connecting Tavan Tolgoi and Zuunbayan, further Choibalsan is in fact an overwhelming project. Just a imagine 920 km long road. The longer it stretches the more it becomes expensive. Only an “insane” person will dare to work on this project.

A research on the Gobi regional infrastructure has been made by experts of the World Bank at the request of Mongolian Government. They research results have been reported four times since last year. The project team introduced initial results in May, September and October respectively last year and the final version of the research results was presented during April 13-14 this year to the Mongolian state organizations, which raised  hot discussion among stakeholders. Proposals made during the discussion will be incorporated and the final research results are likely to be ready by June and July of this year. At the time when senior specialist of the World Bank James Reihert was introducing research results on a new transport route it happened that Cabinet irregular session was taking place. The session made a resolution to build the second railway route  or in a way similar to  Baikal-Amur railway of Mongolia. The World Bank specialist made six alternative routes of transporting coal and compared their expenses and the one which was chosen by Mongolians was the longest and costly among them.

Foreign specialists made a research on connecting the northern direction of the railway from Tavan Tolgoi directly to Airag-Choibsalsan. However, Mongolian side made a decision on the longest route, stretching from Tavan Tolgoi going through copper deposit of Tsagaan suvarga and further to Zuunbayan and Sainshand to reach Choibalsan. This is the option which has the farthest vision of the future of the Gobi region deposits. This very long route has been generally agreed by the Government of Mongolia with Russian and Korean sides since last autumn. The cost is going to be very high. The funding will be provided by a consortium of 11 Korean companies. The payment guarantee is the coking coal of Tavan Tolgoi. There is a tendency to resolve the payment issue by barter method by providing raw materials to meet the energy demand of Korea. Another participant of ambitious Mongolian railway construction in Mongolian history is a new Mongolian-Russian joint railway company. It will go from Choibalsan through Solovyov border point a long way towards Vladivostok. Mongolian dream railway is now being named as a new competitor of Trans Siberian railway. It means it has future.

For those who studied and saw the energy needs of North East Asia it is hard to ignore the project. Mongolia has an intention to make this route to supply the coal demand of North Eastern Asian market. Of course, there is no money. Enebish’s company will serve as the guarantee and render an advance payment service.

It is time for Erdenes MGL to perform its magic. Alladin’s fairy tale is over. Now, it is time of doing business and making real deals. In that sense, the transport agreement which is being ratified between Mongolian and Chinese governments in China is closely related to Mongolia’s purse. This is an amendment to China and Mongolia transport agreement made in 1991. The deeper meaning is that Mongolia’s side started “attempting” to seek a more favorable condition in transport through China. If transit and entrance is not “opened” Tavan Tolgoi resources will not be the resources, but will become no more than as raw material base of China. The aim is to reach a border point by traversing through the territory of China and the real meaning of selling the products in outside sea regions is to clear the transit thoroughfare. Such transport issue is also relevant to the northern direction railway. Although Mongolia is planning to set up a joint venture with Russian “Russia Railway” LLC, the Russian railway may offer three time more expensive tariff than the Chinese for transporting one tonne of coking coal. This alternative is not only more expensive, but also more risky. Although we may agree with V.Yakunin here, Russian businessmen of sea ports may have already delineated their respective ownership and may ask for more tariffs. The World Bank experts made detailed description of this potent problem in their project report.

I briefly mentioned about only one railway route here. I also have to say a few words on Government’s resolution which allowed the subject entitled to build the railway to conduct operations on mineral deposits as well. The Government made this resolution on its April 13 session. Although the resolution did not mention Yakunin’s company name, it gave a permission to the subsidiary of a new Mongolian-Russian joint railway company to participate in mining of mineral deposits. Due to this decision, many mining “subsidiaries” are likely to be born in Mongolia. More importantly, it is clear that Russian companies are strong competitors in Tavan Tolgoi bid. There is a caution that mining and railway companies may not be two servants of one master and in that case there will be a difficulty in a relation to deploy the railway by the third party.

The picture in the Gobi is thus changing. Who will own what is gradually taking a shape. While there is a picture of an investor working inside a fence and regulation, there are also some other depictions of interests jumping everywhere. Therefore, the public has to be aware of not only the southern part of Mongolia, but realistic information on deals and negotiations defining the future of Mongolia in a more general sense.

It is too early to be afraid of one or two types of flags swinging in the air. Railway consortium of Germany is to participate in a project to build a railway from Ukhaa Hudag to Gashuun Suhait. It is expected to deploy German technology in oil-chemical complex in Tavan Tolgoi deposit. The fact that European Bank of Reconstruction Development has taken a stake in Energy Resources is adding a positive harmony in colors of fences pitched around the Gobi. Energy Resources also has a subsidiary, Energy Resources Rail LLC which will implement a project to build a railway to reach Chinese border point through Gashuun Suhait. It will cooperate with Chinese Xinhua on the project.

Operator
 
It is pre-estimated that the total cost of building infrastructure of the Gobi until 2015 will be USD 1.5 billion. A lot of work has to be done. My article did not mention any details on town building, water research, exploration, and energy transmission lines, but only some of the railways and power plants. Mongolian state is now responsible to coordinate all these construction projects. It means that now it is time not to talk, but work. Many issues, especially future of the economy and national security will depend on how these projects will be handled. The only clear issue at the moment is that the state solely cannot afford the funding and expertise. It will be resolved by a private investment. The infrastructure projects are highly risky and costly. Therefore, the more the state is involved, and takes responsibility in everything, the more it is bearing risks.

In other words, it is time now for cooperation between the state and private businesses in its real meaning. A draft law to coordinate this new relation is being made by a working group in the Parliament. A legislative environment based on PPP principle is being created newly in Mongolia. There is a discussion going on an option to coordinate the issue based on concession law. There will not be only law, but also a new organization is likely to be born.

Now it is just in the beginning stage of talking about who will be an operator or coordinator of infrastructure projects in the southern region. A research is being made on setting up a “frame“, which involves whether it will be an independent organization, or under the Ministry of Finance, under the national development restoration commission and what will be the competence of the decision making. The national development and restoration commission has been assigned to do research on it and make it clear.

Investors have started working inside their fences. There is a need for not only a legislative environment, but a real management or coordinator to consolidate and facilitate everything. It is feasible to have it once an agreement of two Tolgois is passed, now there is a talk to have naadam festivals and holidays. Now, the public has to understand that the work had started and now it is in a complex stage. The fine end of deals being made abroad these days are determining the destiny of projects to be implemented in the southern Gobi in coming 20-30 years at minimum, in other words, the future of our descendants. Hope it is also being constantly discussed, judged and reviewed at the sessions of the national security commission.

Somehow, we hotly debate on superficial issues locally and we do not consider where the real essence came from. Why Canadian Western Prospector made a deal with a Chinese state owned company to sell its license of Gurvanbulag uranium deposit, Dornod province? The answer is simple. Since Prime Minister of Mongolia signed an agreement of cooperation on uranium sector during an official visit to Russia last March, the Canadian company has started imagining the future of its operation in Mongolia in a different way. This is a sign of a competition has started on uranium which will be enthroned as the new emperor of the world energy from 2025. Therefore, every issue ratified by the Mongolian state today shall reach every ear of the society.

Yellow map of the great southern Gobi soil is ready for myriads of colors of future imaginations. This is a part of our organism. Only Mongolians shall be the landlords,   taking responsibility. Mongolians themselves have to be the landlords of the fence and the main operator consolidating all the work happening inside the small fence with the comprehensive energy policy of Mongolia, with the regional development policy, with the state policy program on developing the minerals sector until 2015, with the millennium road and internationals trasses connecting Asia and Europe.

17 April, 09