Building Mongolia’s railway of hope 

2021-01-22 11:55

E.Odjargal

Trucks with some cover over their cargo of coal move at speed in a seemingly unending line along the road to Gashuunsukhait.  Not all make it to the border, though, as accidents are common on the often potholed road, but the overturned or otherwise affected trucks are quickly moved to a side so as not to impede the flow. There is a similar flow in the reverse direction of empty trucks returning from the southern border. The road is kept clear for the economically important traffic, but there is garbage of all kinds on the sides, with the lighter stuff blown in all directions by the wind. Everything is made dark by the dust from the coal and the soil dispersed by the heavily laden trucks. This is how the lifeline of our coal export has been like for the past several years, as we have watched in dismay a decade pass by with much talk and more politics but no progress on the ground on building the TT-GS railway. 

Now at long last things are moving with the railway project. Just when coal trains would leave the mines for Gashuunsukhait would depend on how Tavantolgoi Railway Company performs its supervisory role in the construction process in the coming months. That, in turn, would depend on how Bodi International company progresses with the construction and fulfils its responsibilities. Tavantolgoi Railway recently organized a field trip for journalists to see for themselves how things are going and how they are expected to go in the months ahead. I was in that team and heard N. Udaanjargal, Executive Director of the company, talk about a number of issues related to development of the railway, covering several aspects of the project that are little known. 

Before I go on to what he said and my comments on his statements and claims, I must give a little background. Tavantolgoi Railway is actually involved in two railway projects. It is the contractor company of the 414.6-km Tavantolgoi-Zuunbayan (TT-ZB) railway and as such is solely responsible for its construction and all other work. As far as the 267-km Tavantolgoi-Gashuunsukhait railway project is concerned, its construction is the responsibility of Bodi International, and the role of Tavantolgoi Railway in this is limited to supervision of Bodi’s work. However, it is responsible for all other work related to development and timely completion of the project. The company also expects to be allotted the task of building the proposed Khoot-Bichigt railway and has also expressed its formal interest in building the 34-km railway planned at Oyutolgoi. 

Tavantolgoi Railway was formally established in August 2018 to render supervisory consultancy services to the TT-ZB railway project. It started work in June 2019 with an initial funding of MNT3 billion. One month later, the government announced that 66 percent of Tavantolgoi Railway would be owned by the state and ETT LLC would finance the project. 

The total cost of the TT-GS Railway Project is $1.3 billion, which includes $280 million previously spent. Apart from the construction work including earthwork and laying of tracks, the money would go towards establishing a maintenance service centre, and buying 816 wagons and 16 locomotives. Tavantolgoi Railway thus needs to raise $900 million and has in the past nine months reported signing financing agreements, though not much is known about their contents. It has also entered into an Engineering, Procurement, and Construction EPC) contract with Bodi International under which the latter is responsible for preparing a feasibility study for its work, and do the construction with its own resources. On completion, the finished railway would be “sold” to Tavan Tolgoi Railway but there would be no direct cash payment. Instead, Bodi – likely to end up spending $350 million for the construction -- would receive 10 percent of the total coal mined by ETT every year at the price then prevalent at the mine site, which it would be free to sell at any price to anybody to recoup its investment.  
This appears a convoluted way of getting an important work done, but the Government, working through Tavan Tolgoi Railway, has severe financial constraints at the moment. If  the choice of Bodi, which has no experience in the field, as contractor for a complicated construction project of this magnitude was puzzling, more eyebrows were raised when it was clear that Bodi would invest in the work money that was Golomt Bank’s, which is actually citizens’ savings. We do not yet know the ownership structure of Bodi and its business links with Golomt Bank, nor is it clear if the bank’s customers’ agreement is mandatory before their savings are used to fund a project with inherent political risks. The project is one of supreme national importance and people are justified when they demand more transparency. 
N. Udaanjargal claimed to explain away some popular perceptions but was at times not quite accurate. I am giving below what he said on certain issues and then what I think about them. We did not have a chance to seek clarifications from Udaanjargal.  


How and why Bodi was selected

Udaanjargal said the government did not have the financial capacity to implement the project on its own, and so approached commercial banks for support. No bank was interested. Then Bodi International, the parent company of Golomt Bank, made an offer which was accepted and it was decided to implement the project as a state-and-private sector partnership. The agreement says that if Bodi fails to maintain the cash flow, Golomt Bank and State Bank would jointly step in to provide the funds and the Government of Mongolia would not be involved. 
What Udaanjargal did not explain was why Bodi expressed interest when Golomt Bank had not and why a company with no experience of railway construction was so quickly selected as the general contractor of the project. Was any effort made to look for other investors and was due diligence followed before accepting Bodi’s offer? Very little is known about the terms of the agreement between Tavan Tolgoi Railway and Bodi, and all these unanswered questions merely raise doubts in people’s mind. 

The matter of the gauge of the railway

Udaanjargal said China had nothing to do with the gauge width of the railway. Its official position was that its interest was limited to buying coal and what gauge Mongolia chose for transporting this coal was entirely its business. The railway gauge will be the usual Mongolian 1520 mm. Some in Mongolia had rooted for the narrower gauge used in China, saying that would make for quicker movement of coal for export but others had seen a threat to national security in this. Defending the decision to use the Mongolian wider gauge, Udaanjargal noted that this was in line with the State Policy on Railway Transportation, and with decisions made by Parliament and the Constitutional Court. He also said the dispute is a dead issue.

Udaanjargal is right on facts, though he kept silent on the decisions about the gauge of the TT-ZB or the Khoot-Bichigt railway, both of which are seen by many as being not so compliant with the Parliamentary will or the railway policy. 

The meeting point of the two countries’ railways

Udaanjargal explained that China has laid railway tracks close to the Mongolian border and has proposed on six different occasions that the railway from Mongolia should be connected with it near Border Pole #703. Mongolia would like this link near Border Pole #699 or #700 and has proposed this on four occasions. It has been put on record that the two sides have failed to agree on this point. However, TT Railway told the National Council of Border Crossing Point as far back as March 2019 that there is no technical or construction problem with accepting the Chinese proposal and the latest thinking is that the two countries’ railways should meet near the Mongolian Border Pole #703. This point is to the left of the Gashuunsukhait-Gantsmod border crossing. It is the same as when connecting the wide-gauge TT-GS railway with the narrow-gauge tracks built by Shenhua of China at a point 12 km from the Zamyn-Uud-Ereen border crossing, except that there the Mongolian railway goes 12 km inside China.

From this we understood that an agreement is close at hand and that is good as over the years various options on where the two railways should meet have been discussed and discarded. Incidentally, Shenhua owns 87 percent of the railways over a length of 200 km from the Gantsmod border while four other companies own the remaining 13 percent. This would be useful when and if it is decided to take the railway to Bugat.

At the moment, the Zamyn-Uud-Ereen railway port is unable to handle any big load as all the coal has to be unloaded from wide-gauge wagons and reloaded on to narrow-gauge ones. A transport and logistics centre is likely to come up there to facilitate quicker unloading-and-reloading and thus increase the flow of transit transport. According to international practice, China would have to install the facilities while Mongolian exporters would have to pay higher fees for the services. That would add at least $5/t to the cost of the coal transported on the TT-GS railway. Apart from technical and mechanical improvements China is likely to go for an environment-friendly system at high cost which would mean increased fees and thus a rise in carrying costs for our exporters.  

Exporting to third markets

Udaanjargal reminded us that at the moment Mongolian coal’s journey ends at the border where 100% of it is unloaded. Following the strict environment laws in China, the coal from Mongolia, before being taken to different destinations, is separated into at least 8 types, each earmarked for different users in different areas. It is transported in containers open at the top and washed and processed before delivery to customers. Udaanjargal told us that the gauge issue of the TT-GS railway road is thus of little actual significance as all the coal would be unloaded, no matter how it came.  

Udaanjargal noted that transporting Mongolian coal to Chinese sea ports is not as attractive as some think. The cost of this per tonne is $41 though the Chinese have said they would bring it down to $25. The Russians, too, are offering to charge $25/t for transporting Mongolian coal 3000 km to Russia’s Far East ports to be exported to India from there. Other markets might not be so easy to capture as Australian coal could be sold in Japan and South Korea with transport cost of $5/t, which makes Mongolian coal uncompetitive.

Udaanjargal might not be right that Gashuunsukhait-Gantsmod is not the best place for Tavantolgoi coking coal to cross the border if it is to reach sea ports in China, as he forgot to mention four China-Mongolia agreements signed six years ago when President Xi visited Mongolia. According to these, China would reduce transport tariff by not less than 40 percent, and would let Mongolian coal into China at four border ports -- Gashuunsukhait-Gantsmod, Shiveekhuren-Sekhee, Bichigt-Zuun Khatavch and Sumber-Rashaan. It would also allow Mongolia the right to reach 7 sea ports in China -- Dalian, Jinzhou, Yingkou, Qinhuangdao,  Huangdao,  Dandong, and Tianjin. It might be quite competitive for our coal to cross at Gashuunsukhait-Gantsmod and then head for Huanghua on its way to third countries.  

China offered transit tariff discount in 2014, only if it got Tavantolgoi

Udaanjargal revealed that during a visit to Mongolia last September by China’s Foreign Minister Wan Yi, memorandums were exchanged on making amendment to the existing Intergovernment Agreement on the Border of the Two Countries and Their Regime. Among the changes being considered are identifying different areas where the border can be crossed by pedestrians, by those in a vehicle, by planes, and by trains. Also to be identified are crossing points that would be permanent and others that would be open only during certain seasons. The Agreement dating from 2014 would soon include the following sentence: “The two countries will allow round the clock crossing of the border by a railway train.” All this is likely to come about in the near future, but Udaanjargal lobbed a bombshell when he spoke of the past. He said that during the 2014 talks on cross-border movement, China had offered a 40 percent discount on transit transport fees, but only if it was given total ownership of the Tavantolgoi ownership as also of the railway and a coal processing plant. 

There is no official confirmation of what Udaanjargal said about China’s conditional offer of tariff discount, but since nothing came of it, we can treat is as just a footnote in history. What is undeniable is the blatant disregard shown by successive governments for national interests as, time after time, they blocked work on construction of the Tavantolgoi-Gashuunsukhait railway. Happily, politics seems to have taken a back seat now, and coal exporters are looking forward to quicker, cleaner and further business for many years to come starting from when the railway starts operating in 2022, with an annual capacity of transporting 30 million tonnes of coal. Progress on this railway has been possible only because the current President made it his, and the Government’s, priority and resisted reported and perceived pressures from China and those in Mongolia who wanted it to run on a narrow gauge. The only major issue still outstanding is determining the meeting point of the two countries’ railways and as Udaanjargal has hinted, an agreement is expected soon. Then will come issues of more points where the railway can cross the border, transit transport and selling Tavantolgoi coal to third markets. 

In 2014, M. Enkhsaikhan, an economist and a former minister, told MMJ that a railway would inevitably see a surge in the growth of mining. At a time when we are all hoping that he was right, we must overlook all the missed chances, all the wrong steps taken – deliberately or not – and let bygones be bygones. As the pandemic recedes, we look forward to a thriving mining sector, a growing national economy, and a prosperous Mongolia. 

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