Economic Policy Reform                                                                                                 and...
Project:           Mongolia Economic Policy Reform and Competitiveness Project (EPRC)Report Title:      Demand analysis fo...
ABBREVIATIONS AND ACRONYMSADB      Asian Development BankBGT      Breusch-Godfrey Lagrange MultiplierTestBOT      Build-Op...
TABLE OF CONTENTSABBREVIATIONS AND ACRONYMS .................................................................................
EXECUTIVE SUMMARYThis report provides a demand and revenue analysis for the Zamyn Uud Logistics Park(ZULP)PPP project, bas...
SECTION I: INTRODUCTIONA. BackgroundThe relationship between economic growth and infrastructure has been broadly studied s...
Economic Policy Reform and Competitiveness ProjectB. Mongolia’s poor competitiveness in infrastructureThe lack of basic in...
Economic Policy Reform and Competitiveness ProjectOnce trucks finish the inspection control process, they must continue on...
Economic Policy Reform and Competitiveness Project   •   Computerizing and linking the General Agency for Specialized Insp...
Economic Policy Reform and Competitiveness ProjectMongolian authorities must finalize the location for the project and det...
Economic Policy Reform and Competitiveness Project       Areas covered in Questionnaire 2Source: EPRC/USAIDThe survey used...
Economic Policy Reform and Competitiveness Project  Segment 2: Weight Scale to the                                        ...
Economic Policy Reform and Competitiveness Project                       Total Accumulated 2004- 2008                     ...
Economic Policy Reform and Competitiveness Project                                           (Annual USD)                 ...
Economic Policy Reform and Competitiveness ProjectCapital markets: Capital markets in Mongolia are still small, so it’s hi...
Economic Policy Reform and Competitiveness Project                         Graph 3. Services Structure at Zamyn Uud       ...
Economic Policy Reform and Competitiveness Project                                     Transshipment Services             ...
Economic Policy Reform and Competitiveness Project                                        Graph 4. Flow of Revenues    Roa...
Economic Policy Reform and Competitiveness ProjectSECTION IV: DEMAND ANALYSIS: ESTIMATION OF CARGO FLOWS ANDREVENUESA. Obj...
Phase 1: Understanding          Phase 2: Identifying existing      Phase 3: Forecasting future              Mongolia´s Cur...
Economic Policy Reform and Competitiveness ProjectGiven that road-to-rail and rail-to-rail transshipment services for impo...
Economic Policy Reform and Competitiveness Project                Table 9. Growth in Total Cargo (Tons) Processed Yearly b...
Economic Policy Reform and Competitiveness ProjectIn the time series below it can be observed that February has the lowest...
Economic Policy Reform and Competitiveness Projectcombined response to seasonality and natural annual growth in cargo flow...
Economic Policy Reform and Competitiveness ProjectB.1.2 Total Import Cargo Handled by Road-to-Rail TransshipmentThe table ...
Economic Policy Reform and Competitiveness Project                      Table 12. Volume of Truck Import Cargo Processed  ...
Economic Policy Reform and Competitiveness Project                     Graph 9. Truck Cargo (Tons) Processed Monthly      ...
Economic Policy Reform and Competitiveness Project                          Graph 10. Cargo (Tons) processed by Truck     ...
Economic Policy Reform and Competitiveness ProjectB.1.3 Total Railway Import Cargo Processed in Zamyn Uud at Rail-to-RailT...
Economic Policy Reform and Competitiveness Project      Table 14. Annual Growth Rate of Railway Cargo (Tons) Processed 200...
Economic Policy Reform and Competitiveness ProjectThe growth rate shows several jumps over the analysis period, two of the...
Economic Policy Reform and Competitiveness Project                      Graph 14. Railway Import Cargo (Tons) Processed   ...
Economic Policy Reform and Competitiveness ProjectB.2.1 Export Cargo moved through Zamyn Uud by railway (Transshipped inEr...
Economic Policy Reform and Competitiveness Project Average         1,766.281       1,665.343      1,991.930       3,719.29...
Economic Policy Reform and Competitiveness ProjectC. Center of Business Revenues in Zamyn UudThis section explains the met...
Economic Policy Reform and Competitiveness Project                       40´ rail-to-rail                              900...
Economic Policy Reform and Competitiveness ProjectD. Forecasting Future Demand and Revenues for the ProjectThis section fo...
Economic Policy Reform and Competitiveness ProjectRate of earned revenue at Zamyn Uud was estimated by calculating a weigh...
Patricio Mansilla - Zamyn Uud logistic park demand analysis for PPP
Patricio Mansilla - Zamyn Uud logistic park demand analysis for PPP
Patricio Mansilla - Zamyn Uud logistic park demand analysis for PPP
Patricio Mansilla - Zamyn Uud logistic park demand analysis for PPP
Patricio Mansilla - Zamyn Uud logistic park demand analysis for PPP
Patricio Mansilla - Zamyn Uud logistic park demand analysis for PPP
Patricio Mansilla - Zamyn Uud logistic park demand analysis for PPP
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Patricio Mansilla - Zamyn Uud logistic park demand analysis for PPP

  1. 1. Economic Policy Reform and Demand analysis for the Zamyn Uud Logistics Park Public-Private Partnership: Estimation of cargo flows and revenues July 2009 Ulaanbaatar, MongoliaThis publication was produced for review by the United States Agency for International Development. The viewsexpressed in this publication do not necessarily reflect the views of the United States Agency for InternationalDevelopment or the United States Government.
  2. 2. Project: Mongolia Economic Policy Reform and Competitiveness Project (EPRC)Report Title: Demand analysis for the Zamyn Uud Logistics Park Public-Private Partnership: Estimation of cargo flows and revenuesMain Author: Patricio MansillaContract No. 438-C-00-03-00021-00Submitted by: EPRC/Chemonics International Inc., Tavan Bogd Plaza, Second Floor, Eronhii Said Amar Street. Sukhbaatar District, Ulaanbaatar, MongoliaTelephone and fax: (976-11) 32 13 75 Fax: (976-11) 32 78 25Contact: Fernando Bertoli, Chief of PartyE-mail address: fbertoli@eprc-chemonics.biz
  3. 3. ABBREVIATIONS AND ACRONYMSADB Asian Development BankBGT Breusch-Godfrey Lagrange MultiplierTestBOT Build-Operate-TransferBOO Build-Own-OperateCDS Credit Default SwapDBOT Design-Build-Operate-TransferEPRC Economic Policy Reform and Competitiveness ProjectFPT Fractional Power TransformationGASI General Agency for Specialized InspectionsGDP Gross Domestic ProductGoM Government of MongoliaIFFC International Freight Forwarding Center of Mongolian RailwaysMDM Multiplicative Decomposition ModelMFFA Mongolian Freight Forwarders AssociationMNCCI Mongolian National Chamber of Commerce and IndustryMNT Mongolian TogrogMOU Memorandum of UnderstandingMRA Mongolian Railway AuthorityMRTCUD Ministry of Road, Transport, Construction and Urban DevelopmentMTZ Mongolian Tumur ZamNSO National Statistical OfficeNTTCF National Trade and Transport Facilitation CommitteeOLS Ordinary Least SquaresPRC People´s Republic of ChinaPPP Public Private PartnershipQRVD Quartic Root Dummy VariableRESET Ramsey´s Regression Specification Error TestSEW Single Electronic WindowSIP Specialized Inspection ProcessSPC State Property CommitteeSPV Special Purpose VehicleUBTZ Ulaanbaatar Tumur ZamUSD United States DollarVAT Value Added TaxWATT Weighted Average Tariff of TransshipmentWEF World Economic ForumYOY Year on YearZULP Zamyn Uud Logistics Park
  4. 4. TABLE OF CONTENTSABBREVIATIONS AND ACRONYMS ........................................................................................ i TABLE OF CONTENTS ............................................................................................................. i EXECUTIVE SUMMARY ........................................................................................................... i SECTION I: INTRODUCTION .................................................................................................. 3  A. Background.....................................................................................................................................3  B. Mongolia’s poor competitiveness in infrastructure .........................................................................4 SECTION II: THE PROJECT AND ITS CONTEXT ................................................................... 4  A. Zamyn Uud: Mongolia’s gateway ...................................................................................................4  B. Objectives and Project Description.................................................................................................5 SECTION III: A PPP STRUCTURE FOR THE ZAMYN UUD LOGISTICS PARK .................. 11  A. Proposed company structure .......................................................................................................11  B. Services ........................................................................................................................................12 SECTION IV: DEMAND ANALYSIS: ESTIMATION OF CARGO FLOWS AND REVENUES 16  A. Objectives and Methodology of the demand analysis ..................................................................16 SECTION V: CONCLUSIONS AND RECOMMENDATIONS ................................................. 35 
  5. 5. EXECUTIVE SUMMARYThis report provides a demand and revenue analysis for the Zamyn Uud Logistics Park(ZULP)PPP project, based on estimated cargo flow through the proposed Logistics Park, andestimated basic revenues that the Park could generate for the use of its services.The proposed project is located on the Mongolian side of the border with China, between twoto six kilometers northwest of current Zamyn Uud border facilities. The site would occupy aspace of around 400 Ha (4km in length, and 1km in width), and lay between the existingrailway and the access road to Zamyn Uud soum.The main objectives of this PPP are to: reduce congestion and processing time at the road-to-rail transshipment area for cargo coming from China into Mongolia or cargo continuing on toRussia and other countries; to reduce freight inventory costs and vehicle operation costs; andto contribute to the efficiency of the Trans-Asian integrated Railway connecting Europe withAsia.This study estimated the overall economic costs incurred due to the lack of infrastructureinvestment in Zamyn Uud range from $5.7 million to $8.3 million annually, under threedifferent scenarios.The methodology for the demand analysis consisted of three main steps; first, to examine theeconomics of what triggers demand for transshipment services at Zamyn Uud. Second, toconsider the potential services the project could offer. Third to compile statistics on currentdemand for transshipment services at Zamyn Uud in order to run several statistical andeconometric models predicting future demand and revenues generated by the proposed ZamynUud Logistics Park (ZULP) facility.A time series analysis found statistical and graphical evidence of seasonality. Specifically,from March to October, Zamyn Uud sees high demand for transshipment services, andNovember to February demand is lower. Those periods correspond with the warm and coldseasons in Mongolia.To remove seasonality from the time series two models were used, a dummy variable model(Model 1) and a multiplicative decomposition model (Model 2). Both models were used toestimate the seasonal factors of the series so that ultimately the monthly data could be adjustedto exclude the seasonal influence. By removing seasonality from the time series, the overallseries trend was revealed.Rate of earned revenue at Zamyn Uud was estimated by calculating a weighted average tariffof transshipment (WATT) considering the types of products transshipped in Zamyn Uud. TheWATT came to $1.73/ton. Revenues for additional services such as parking, commercialservices, gas stations, and warehouses were estimated at a conservative $1/truck.The estimation of total revenues under both models were relatively similar. For example, usingmodel 1, the present value of total revenues came to $38 million using a discount rate of 15%,and $50 million when discounting at 12%. Using the model 2 a range of $32 million to $38million was found, considering a growth rate of 0.5% or 2%, respectively, in annual incomeper household at a 15% discount rate. If the discount rate is 12%, the range increases from $39million to $50 million.The results of this analysis finds that the ZULP would be a profitable venture. Considering theimportance of the project to Mongolia’s economic development, the recommendation is tocontinue with the next steps of project planning, which would be to investigate investmentcosts in addition to project operation and maintenance costs and to prepare the financial model.
  6. 6. SECTION I: INTRODUCTIONA. BackgroundThe relationship between economic growth and infrastructure has been broadly studied sincethe works of Aschauer (1989) and Barro (1990). It is largely understood that investment intransport infrastructure can indirectly reduce poverty. Recently, Fan and Chan Kang (2005)discovered a positive relationship between the investment in roads and the impact on povertyin China.Recent literature reviews show that transport infrastructure investment and maintenance hasthe power to increase incomes for the poor by increasing their productivity, improving theiraccessibility to economic activities, reducing input costs, and reducing transaction costs andtime of travel. Finally, transport infrastructure investment presents the possibility of betteraccess to social services.While increased investment in infrastructure can help to reduce poverty and improve quality oflife, real economic development at the community level requires participation andcommitment from the local residents, companies and the public sector. If one of these criticalparts of the system is absent, the objectives of any social or economic program will not beachieved as fast as they could be.Public and private sector cooperation on the Zamyn Uud Logistic Park project is imperative torealize the project’s full range of benefits for Mongolia. The project requires investment oftime and money on the part the public and private sectors.A preliminary study prepared by USAID/EPRC 1 showed that investment in the Zamyn UudLogistics Park Project, located on the Mongolian side of the border with China, will result inhuge net economic benefits. These benefits will be realized by addressing the lack of adequateinfrastructure, which requires cargo (principally imported goods) coming from Northern Chinain the direction of Mongolia and Russia to wait many hours or, in cases of huge congestion, towait days, just to unload cargo from trucks and to load it onto the railways for the trip fromZamyn Uud across Mongolia and on to Russia.The necessity of cargo transshipment at Zamyn Uud is twofold: first because of theincompatibility between the Mongolian Gauge (follows the Russian Wide Gauge of 1520 mmgauge) and Chinese Standard Gauge (1435 mm gauge), and second because of the absence of apaved road connecting Mongolia with Russia.USAID estimates the Economic Internal Rate of Return for the Zamyn Uud Logistics Parkproject to be between 18% and 43%. The main economic benefits of the project emerge fromsavings in vehicle (trucks) operating costs, freight inventory costs and the reduction of the timespent on the transshipment process. Total savings per lorry are estimated at $43.74 per day.The ZULP project would solve the problems presented by the lack of a proper road connectionto the Russian border, poor maintenance of the vehicle yard, lack of load unitization,inefficient manual transshipment and a shortage of mechanical lifting equipment.This study estimates that costs incurred due to insufficient infrastructure and lack ofinvestment range from $5.7 million to $8.3 million annually. The details of this estimation arepresented in this study.1 Pre-Feasibility Analysis to Establish Logistics Facilities in Zamyn Uud in Mongolia. April, 2008 USAID-EPRC
  7. 7. Economic Policy Reform and Competitiveness ProjectB. Mongolia’s poor competitiveness in infrastructureThe lack of basic infrastructure is clearly a major factor constraining economic growth andpoverty alleviation in Mongolia. According to the Competitiveness Index for infrastructure ofthe World Economic Forum, Mongolia ranks 133 among 134 countries, the second worstinfrastructure stock in the world. It is clear that the Mongolian government is not investingenough. This persistent under-investment in infrastructure is having a negative impact oneconomic growth, living standards, and private sector development.In recent years, developing countries faced with the same fiscal and capacity constraints asMongolia have turned to the private sector as a partner in the provision of infrastructureservices to help reduce the serious investment gaps. Well structured and competitivelyimplemented PPPs are an effective and efficient tool not only to mobilize private capital todevelop badly needed, economically-viable, public infrastructure, but also to ensure theefficient provision of operation and maintenance (O&M) financing and services over timewhich is essential to guarantee the long term sustainability of these major capital investments.SECTION II: THE PROJECT AND ITS CONTEXTA. Zamyn Uud: Mongolia’s gatewayThe main goal of logistics parks around the world is to provide services for cargotransportation and transshipment of cargo. Logistics parks, as a facilitator of transport cargo,need to be efficient and minimize transit time and opportunity costs. Best practice holds thatpassenger and cargo flows be segregated, and that special types of passengers and cargo (VIP,international, transit, national) receive different treatment (transit, import, exports, fragile andothers).At the Zamyn Uud border crossing, import cargo enters Mongolia by rail or truck. For cargoentering on rail, it must be transshipped from the Chinese railway to the Mongolian railway(because of the gauge differences), and then it typically continues on to customs andinspections clearance, which includes paying taxes and fees. In some cases, cargo entering insealed containers undergoes inspections and fee processing in Ulan Bator. Once the cargoentering by rail is authorized by Mongolian authorities and loaded onto the Mongolianrailway, it can continue to the Ulan Bator Terminal. From the capital city, cargo eithercontinues on the trip to Russia, or is unloaded for final delivery to different areas of Mongolia.The flow of cargo coming from China in a “shuttle truck” that leaving Erlian, China, travelseight kilometers to the Zamyn Uud border area. After crossing the border, every truck needs tofirst be weighed. Once the weight scale process is complete, trucks continue to the police,inspections and customs building to complete required documentation and to obtainauthorization to enter Mongolia. Next, trucks diverge to take two different paths through theinspection process depending to the type of cargo they carry. Trucks transportinghomogeneous cargo, which is feasible to inspect with a scanner, continue to the scannerinspection area. Alternatively, trucks carrying mixed or heterogeneous cargo continue to themanual inspection area.Section I Page 4 Demand and Revenue estimation for PPP “ Zamyn Uud Logistics Park”
  8. 8. Economic Policy Reform and Competitiveness ProjectOnce trucks finish the inspection control process, they must continue on to the last procedureat Zamyn Uud; transshipment. After crossing railroad tracks without any special securitymeasures, trucks arrive at the unpaved road-to-rail transshipment parking area. During peaktimes, drivers wait several hours or several days to complete the transshipment process thatinvolves unloading cargo from trucks and loading it onto railway wagons. Actual movement ortransshipment of cargo in this area is completed manually or with a gantry crane.In April 2008, EPRC conducted several interviews with drivers in Zamyn Uud. Driversreported the main problems at Zamyn Uud as: slow cargo processing, inefficiencies intransshipment, an insufficient number of rail wagons, the occasional closure of the Mongolianborder requiring drivers to stay overnight in Zamyn Uud, lack of or poor condition of roads,and lack of adequate space in parking areas, among others.As reported by drivers in April 2008, the average time drivers spent in the transshipment areawas around 135 hours. Total time spent at the all four points of control in Zamyn Uud reached195 hours. The points of control included in the survey were: weight scale, manual inspection,scanner inspection and road-to-rail transfer.B. Objectives and Project Description • ObjectivesThe main objectives of the Zamyn Uud Logistics Park project are to: a) Reduce congestion and processing time for transshipment b) Reduce freight inventory costs c) Reduce vehicle operation costs d) Reduce cargo losses e) Contribute to the efficiency of the Trans-Asian integrated Railway connecting Europe with Asia. f) Create a logistics zone with different commercial services and a business center g) Protect investment in the zone by executing project development in several steps to account for the short, medium and long-term h) Encourage private sector participation to accelerate investment and assure adequate management and the efficient delivery of services. • Project description 2The project will be located in Zamyn Uud, Mongolia’s border town with Erlian, China. ZamynUud is the gateway into Mongolia, Russia and beyond for the neighboring Chinese city ofErenhot 3 (or Erlian—as referred to in Chinese) 4 . Erlian is part of China’s Inner MongoliaAutonomous Region.The project’s objectives are to expand the capacity and improve the efficiency of the borderfacilities at Zamyn Uud, principally through: • Segregating freight from passenger traffic; • Expanding physical facilities for inspections;2 This section is based on the reports USAID-EPRC Pre-Feasibility Analysis to Establish Logistics Facilities inZamyn Uud (April 2008), and Zamyn Uud Gateway Logistics Park Pre-Feasibility Analysis (October 2008).3 In Mongol4 In Chinese Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 5
  9. 9. Economic Policy Reform and Competitiveness Project • Computerizing and linking the General Agency for Specialized Inspection (GASI) with Customs, consistent with the requirements of the Single Electronic Window (SEW) for trade facilitation project; • Implementing risk management systemsSpecific physical infrastructure components could include: • A new cross-border entry road reserved for trucks; • A second weight scale for lorries; • An expanded and reorganized parking / inspection area; • Platforms for laying out and inspecting freight; • A rerouted traffic flow with designated lanes, including escape lanes; • A dedicated internal road corridor to the scanner facility; and • Perhaps not initially, but as traffic grows over time, the introduction of a second scanner.The Mongolian Authorities still need to define the final project location and the final projectspecifications. However it is estimated that the project could include the following facilities: a) A road-to-rail transshipment yard accommodating trains; b) A rail-to-rail transfer yard; c) Cross dock road-to-rail consolidation centers for the consolidation of Chinese goods arriving by train and moving to Russia by rail; d) Road-to-road consolidation facilities for road trains to Ulaanbaatar; e) Warehousing facilities; f) Logistics service facilities; and g) Parking areas to accommodate 300 trucks simultaneously - equivalent to 300 wagons.Currently wagon loading times using manual methods stretch up to twelve hours. Usingunitized methods, it should be possible to achieve a maximum cycle time of six hours. Withtwo overlapping shifts, each 40-wagon line should be able to handle 80 wagons per day, so, toreduce loading times, four lines will be needed.Some preliminary design principles for the project, according to a feasibility study prepared byEPRC/USAID, could be: a) The land adjacent to the railway must be reserved for train assembly sidings, the road- to-rail transshipment center, and a relocated and modernized rail-to-rail transshipment centre. This arrangement will simplify the rail layout, reduce costs and allow more flexible planning for remaining sections of the Logistics Park, allowing space for turnouts, train assembly sidings and the transshipment facilities. b) The second principle is to provide a simple “ladder” primary road system using twin four-lane spine roads about 400m apart along the length of the Logistics Park. The spine roads should be connected by cross roads at about 400m intervals. This ensures maximum flexibility, allowing sites from 16 hectares downwards in the central strip to be leased to individual operators. Local roads can be provided as needed to offer smaller development sites. c) A third principle is to locate the main vehicle service areas between the road and the point where trucks enter the transshipment, warehousing and value-added logistics areas. d) The fourth principle is to separate services such as the motel / restaurant / coffee bar complex and cash and carry center, in a second 200m wide landscaped corridor on the side of the road away from the railway. The corridor should be parallel with the road.Section I Page 6 Demand and Revenue estimation for PPP “ Zamyn Uud Logistics Park”
  10. 10. Economic Policy Reform and Competitiveness ProjectMongolian authorities must finalize the location for the project and determine the availabilityand registration of the proposed land. This will help to define the specifications of the publicsector’s participation as either a participant in the joint venture company, or as provider of theinitial assets of the Special Purpose Vehicle (SPV).The picture below shows the proposed project site, situated 5.5 kilometers northeast of thecurrent Zamyn Uud facilities.C. Cost of lack of investment in Zamyn UudTo estimate the cost of investment shortfalls in Zamyn Uud, the EPRC project designed asurvey for cargo truck drivers that go through the processes and utilize the existing facilities atZamyn Uud. EPRC identified four points of control that truck drivers must clear and surveyeddrivers at each point.EPRC’s objective was to estimate the time spent on clearing goods at the Chinese andMongolian borders and on the physical transfer of goods from road-to-rail. EPRC also soughtthe opinions of lorry drivers on the current situation.The survey covered the whole transport process, beginning from the point where goods areloaded in Erlian and ending with the transshipment of goods from lorries or cargo trucks to railwagons and containers at the road-to-rail transshipment point in Zamyn Uud.The survey’s four points of control include (represented in the graph below): 1. Weight Scale 2. Manual Inspection 3. Scanner inspection 4. Road-rail transferDemand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 7
  11. 11. Economic Policy Reform and Competitiveness Project Areas covered in Questionnaire 2Source: EPRC/USAIDThe survey used 3 different types of questions: • Identifying questions related to the date of the interview, type of lorry and goods being carried; • Quantitative questions regarding the length of time spent at different stages of border clearance and transshipment; • Qualitative questions mainly focused on obtaining drivers’ views on the current situation at Zamyn Uud and collecting suggestions for improvements.MCGA and GASI’s Zamyn Uud branches supported the interviews by providing space toconduct interviews and by encouraging drivers to participate. The survey included over 550interviews conducted from 16-19 April 2008. The distribution of surveys conducted across thefour points of control follows: • 152 interviews at the weight scale, • 126 interviews in the manual inspection area, • 153 interviews in the scanner inspection area, and • 122 interviews in the road-rail transshipment areaThe table below shows the average time spent by the drivers in the three segments at ZamynUud. Total time spent in the complete network averaged 195.1 hours. For transshipment, theaverage time spent is 135.1 hours. Excluding Segment 1 (estimating time at the borderbetween China and Mongolia), the total time is 160.9 hours, displaying that the bulk of waitingtime occurs on the Mongolian side of the border. Table 1. Average Time Spent by Cargo Trucks Segment and Point of Control Average time Minimum Time Maximum Time Segment 1: China to Weight Scale 32.4 3.5 96Section I Page 8 Demand and Revenue estimation for PPP “ Zamyn Uud Logistics Park”
  12. 12. Economic Policy Reform and Competitiveness Project Segment 2: Weight Scale to the 25.8 1.7 14.1 end of Custom Clearance Segment 3: End of Customs Clearance to road-to-rail 135.1* 25.0 363* transshipment area Total Hours Spent 195.1* 30.2 600Source: EPRC Survey at Zamyn Uud (*) GASI normally limits the waiting time of the lorries to 72 hours.In terms of days, the average waiting time for the complete process is 8.1 days and waitingtime for the last two segments is 6.7 days. This means that in peak periods drivers must waitfor approximately one week to complete the procedures of inspection and customs clearance,transportation across the border and transshipment. Table 2. Days Spent by Cargo Trucks Segment and Point of Control Average days Minimum Days Maximum Days Segment 1: China to Weight Scale 1.4 0.1 4 Segment 2: Weight Scale to the end 1.1 0.1 5.9 of Custom Clearance Segment 3: End of Customs 5.6* 1.0 15.1 Clearance to road-to-rail transshipment area Total Hours Spent 8.1 1.3 25Source: EPRC Survey at Zamyn Uud.(*) GASI normally limits the waiting time to 72 hours for lorries.Most of the trucks (80.8%) participating in the survey were Mongolian and 19.2% wereChinese. Of the total trucks, 70.5% carried construction materials, 20.2% carried food, and theremaining 9.3% carried electronic appliances, furniture, clothes and other items.The most prominent complaints by interviewed drivers include overnight stays in Erlian forcedby the closure of the Mongolian border, slow transshipment to railway, poor condition ofroads, and long waiting times for customs processing.After establishing waiting time estimations through the survey, the next step in estimatingfuture losses for the Mongolian economy in the absence of investment at Zamyn Uud is tostudy the value of cargo imported by truck and processed in Zamyn Uud. By analyzing pastcargo movement from a representative year, future losses to the Mongolia economy can bepredicted in the case no infrastructure improvements are made.The value of imported goods entering Zamyn Uud by truck has increased seven times over thepast five years from $54 million in 2004 to $368.2 million in 2008. This significant increasecan likely be attributed at least in part to Mongolia’s relatively new open market. This growthtrend is expected to continue for the next few years. Table 3. Value of Import Cargo processed in Zamyn Uud by Truck (Million USD) 2004-2008 Year Value (Million US$) 2004 54.2 2005 72.3 2006 96.0 2007 208.0 2008 368.2 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 9
  13. 13. Economic Policy Reform and Competitiveness Project Total Accumulated 2004- 2008 798.7 Source: Mongolian Customs OfficeThe value of monthly import cargo in 2008 displays a growth period from March to June,followed by a period of decline from July to February. The peak in terms of the monthly valueof cargo in 2008 was in May at $48 million and the minimum value was in February at $10.3million.Three alternatives to calculate the weekly value of import cargo are presented here. The firstalternative considers the average for the entirety of 2008, which results in a value of $7.6million per week.The second alternative uses the average of only nine months, excluding November, Decemberand January. The excluded months experience low traffic and have a low probability ofbacklogs. The nine month average weekly value of import cargo is $9.1 million.The third alternative considers peak months, normally May, June and July. Using thisalternative the average weekly value is $11.1 million. Table 4. Value of Import Cargo Processed by Truck In Millions of USD (2008) Period Average Monthly Value Average weekly Value Average 2008 30,686,883.2 7,671,720.8 Average 9 months 2008 36,480,003.2 9,120,000.8 (excluding Nov-Dec-Jan) Average May-Jun-July 44,512,630.6 11,128,157.6Source: EPRC/USAIDWith an estimated average time delay in Zamyn Uud of around one week, the estimated cost ofdelays in cargo movement (calculated as the opportunity cost of the cargo stopped at theborder) is 20% of profits over the weekly value of import cargo.An additional 5% loss in the value of weekly cargo should be considered for indirect costsresulting from: damage to fruits and vegetables; broken bricks; robbery; additional cost forsalaries of drivers and guards; opportunity cost for construction material; transportationopportunity cost and others. Table 5. Cost of Cargo Delays for Trucks Transporting Cargo through Zamyn Uud in 2008 (Weekly USD) 20% (Opportunity Total Weekly Cost Period 5% (Indirect Costs) Cost) Due to Delays Average 2008 1,534,344.1 383,586 1,917,930.2 Average 9 months 2008 1,824,000.1 456,000 2,280,000.2 (excluding Nov-Dec-Jan) Average May-Jun-July 2,225,631.5 556,407 2,782,039.4 Source: EPRC/USAIDThe following table shows a conservative estimate of the total annual cost of cargo delays atZamyn Uud. According to the calculations, in peak periods this figure can reach $8.3 millionper year. The great scale of this estimated loss shows the urgent need to improve infrastructureand eliminate inefficiencies at Zamyn Uud. Table 6. Cost of Cargo DelaysSection I Page 10 Demand and Revenue estimation for PPP “ Zamyn Uud Logistics Park”
  14. 14. Economic Policy Reform and Competitiveness Project (Annual USD) Period Total Cost of Cargo Delays per Year Average 2008 5, 753,790 Average 9 months 2008 6,840,000 (excluding Nov-Dec-Jan) Average May-Jun-July 8,346,118 Note: Assumes one week of delayed cargo processing three months per year.SECTION III: A PPP STRUCTURE FOR THE ZAMYN UUD LOGISTICS PARKA. Proposed company structureA Build-Operate-Transfer (BOT) process would take at least two years because the legalstructure and bidding process must be established. Because of the time delay in preparing aBOT arrangement, public authorities plan to immediately start the PPP process by creating aPPP company. Project stakeholders envision a wide range of participants from the non-profit,private and public sectors; below is a brief description of each party’s proposed role in theZULP PPP project.Government of Mongolia: Governmental agencies representing the GoM in the LPDC willinclude the Ministry of Finance, Ministry of Roads, Transport, Construction and UrbanDevelopment, the State Property Committee and UBTZ. The GoM will contribute 400 ha ofvacant land to the LPDC.Mongolian Freight Forwarders (MFFA): This private association formed by privatetransport companies operating in Zamyn Uud will be part of LPDC and will contribute equityto the company.Strategic Investors: Once GoM and MFFA sign an MOU to establish the PPP company,USAID/EPRC will provide technical assistance. USAID/EPRC will complete studiesexamining the business conditions of the ZULP, and the prospect for participation ofadditional LPDC private shareholders.Construction companies: The LPDC will directly hire construction companies to buildspecific project zones. Alternatively the LPDC will appoint operator(s) that have the right tohire construction companies and manage the concession.Operation companies: Operation companies will have a contract with LPDC, most likely as aresult of a bidding process. The LPDC will be the party to establish the principal requirementsthat a company must fulfill as an LPDC operator. Operation companies will eventuallymaintain day-to-day relations with logistics park users.Users: Users will principally be transport companies and cargo owners (import companies).Zamyn Uud workers and drivers will use the commercial services provided by the logisticspark.Regulation agency: Competition and tariff regulation must be provided by an independentagency or through a contract with LPDC operators, with the approval of the Agency for FairCompetition and Customers. The LPDC could also be a self-regulated company consideringthat GoM representatives will be on the board of directors.Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 11
  15. 15. Economic Policy Reform and Competitiveness ProjectCapital markets: Capital markets in Mongolia are still small, so it’s highly probable that theproject will be funded by a combination of equity from shareholders and debt and equity fromoperators. The LPDC also could obtain debt against assets (land and potential revenues) in themedium to long-term. Project stakeholders should explore the possibility of IFC participationas a company shareholder with investment equity.A graphic representation of the project’s business model is as follows: Graph 2. Business Model for ZULP Private Min.Finance MFFA Contributes Min. Road, Transport Shareholders Contributes SPC-UBTZ Equity Land Dividends Contributes Dividends Dividends Tariffs Equity Operation Company Payment for Regulatory Operation Services: Agency or Logistic Park Contract services Parking Regulation by Development Co. Road-Rail contract Rail-Rail Tariff Regulation Fee Payment Consolidation Warehouse Regulation Bond Coupon Issue Payments (i + p) Construction Specific contract Capital Users Company MarketsB. ServicesA specialized operator could be selected through a bidding process to conduct non-corebusiness functions such as a warehouse facilities business or parking services. ZULP couldprepare a bid and select a candidate based on displayed capacity to earn the highest level offees for ZULP in exchange for a set of adequate and accessible user tariffs.ZULP could offer facility space to other private companies to work in the commercial servicesarea. ZULP could establish a rental tariff for each m2 and/or require a percentage of grossrevenues generated from the commercial services area.Finally, ZULP could enter into an additional area of business related to several possible realestate opportunities.In summary, the project could have three clearly defined groups of services under the umbrellaof general PPP services, as shown in the following figure:Section I Page 12 Demand and Revenue estimation for PPP “ Zamyn Uud Logistics Park”
  16. 16. Economic Policy Reform and Competitiveness Project Graph 3. Services Structure at Zamyn Uud PPP Services Basic Basic Non Mandatory Complementary Commercial Commercial Services Services Services • The first group could consist of basic non-commercial services (building and concession areas maintenance, cleaning services, parking for public transport service and others mentioned below). • The second group of services could include basic mandatory commercial services (parking services, warehousing, transshipment cargo and others). • The last group could consist of complementary services, including the food court area, financial services and all additional activities to support the land port (cargo transfer, fumigation, spraying, cargo incineration and cooling services).Complementary Services, described above, are the following: • Support of port activities: cargo transfer, fumigation, spraying, cargo incineration, cooling service. • Financial Services area • Food Court • Others allowed by the legal framework • Core Services to be RegulatedLogistics parks developed under a concession or PPP scheme normally identify a group oftariffs that should be regulated as services are often operated by a monopolistic organization.When setting regulations, government officials identify which of the logistic park services facecompetition in markets in or around the logistics park and the potential of contestable markets.The services that do not face competition or are not subject to contestability must be regulatedby setting a maximum tariff.On a preliminary basis, the services listed below, divided between transshipment services andbasic and commercial services, have been identified for regulation in the proposed Zamyn UudLogistics Park. However, final tariff rates should be determined based on the parameters of thebusiness model and financial analysis. Table 7. Regulated Tariffs for Transshipment Services in Zamyn UudDemand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 13
  17. 17. Economic Policy Reform and Competitiveness Project Transshipment Services Road to Rail (Imports) Rail to Rail (Imports) Rail to Road (Exports) Transit Cargo (to Russia) Transit Cargo (To China) Table 8. Regulated Tariffs for Basic and Commercial Services in Zamyn Uud Basic and Commercial Services Access to the Logistics Park and use of infrastructure Parking over 24 hours Time overrun for use of decks and customs inspection Public parking per hour Monthly parking Office rent per m2 Public transportation between Logistics Park and Zamyn Uud WarehousingB. Main flow of Projected PPP RevenuesBased on the identification of services and tariffs, the scheme for potential concessionairerevenues could be the following:Section I Page 14 Demand and Revenue estimation for PPP “ Zamyn Uud Logistics Park”
  18. 18. Economic Policy Reform and Competitiveness Project Graph 4. Flow of Revenues Road to Rail Rail to Road Rail to Rail Imports Exports Imports Fee Fee Fee Fee Fee Logistic Park Warehouse Gas Station Development Co. Revenues from the Tariff for rent m2 Revenues from the Business or fee and % of business Business or fee Commercial Real Estate Development Parking ServicesOne important advantage of the ZULP project is the potential for large land extensions intoareas presently under GoM ownership. 5 One fundamental difference between the proposedZULP project and other similar international projects is that the land is “clean,” implying thatproject stakeholders will not incur new costs for land expropriation or for the application of theeminent domain, (the right of the public sector to acquire land in order to execute projects ofpublic interest).As soon as possible, the GoM should create a strategy to develop not only the project’s MasterPlan but also a Master Plan for the city of Zamyn Uud. The starting point for such a plan is tocreate a land inventory, noting whether land lies in public or private hands. Following theinventory, land that is not yet registered should be registered on behalf of the GoM. Thisprocedure will avoid the occupation of land by people speculating on possible future benefitswhen the GoM might expropriate land to start a project and need to compensate landoccupants accordingly.The strategy must also include value capture via the sale of future land to the private sectoronce the GoM has improved utilities services and several projects are operating in ZamynUud. This will help the GoM to recover public costs.5 It is important to confirm before launching the project that the land included in the project proposal is actuallyGoM property, as assumed in this study. Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 15
  19. 19. Economic Policy Reform and Competitiveness ProjectSECTION IV: DEMAND ANALYSIS: ESTIMATION OF CARGO FLOWS ANDREVENUESA. Objectives and Methodology of the demand analysisThe methodology for estimating and forecasting future demand for the proposed services to beprovided by the Zamyn Uud logistics park consists of three phases, each of which includeseveral activities. The phases are the following:Section I Page 16 Demand and Revenue estimation for PPP “ Zamyn Uud Logistics Park”
  20. 20. Phase 1: Understanding Phase 2: Identifying existing Phase 3: Forecasting future Mongolia´s Current or current demand and Project demand and revenues transport system revenues •Competitiveness and investment •Mongolian Macroeconomic •Selecting models to predict the in infrastructure in Mongolia Performance as a source of demand •Cost of lack of investment in project dynamism •Forecast of demand for the Zamiin Uud •Mongolian international project •Identification of the main public trade •Estimation of revenues institutions involved in logistics •Analysis of Zamiin Uud´s •Present value of revenues for services in Mongolia current demand the project •Identification of main private •Identification and •Simulation of revenues companies operating in the quantification of the current transport system in Zamiin Uud center of business and •Identification of the cross border revenues in Zamiin Uud public institutions currently •Economic Situation of the working in the transport system main commercial partners and their main responsibilities of Mongolia: China and •Relevance of international Russia donors and cooperation in •Identification and Mongolia quantification of current Customs revenues in Zamiin UudB Demand Analysis at Zamyn Uud 6Data on cargo tonnage was obtained from MCGA as registered at the Zamyn Uud office. Boththe cargo and the truck carrying the cargo must receive clearance from MCGA, after which thetruck travels to the UBTZ transshipment area. There the cargo is unloaded from the truck andloaded onto the railway wagons to be transported to Ulaanbaatar or other cities in Mongolia.The graph below shows the organization of information received on the total amount of cargoprocessed in Mongolia from MCGA. First, the data was organized and processed to includeonly information from the Zamyn Uud MCGA office. Once the total cargo for Zamyn Uudwas derived, the team worked on dividing the information between rail-to-rail and road-to-railtransshipment in the case of both imports and exports. Once this data was organized, the teamseparated each group of information by type of product and by month for the period of 2004-2008. Graph 5. Organization of Statistical Information6 This section uses statistical information from MCGA. Given that the team received partial information from theMRA, the team created an additional section to do adjustments to the estimation of revenues. However, trends inboth data sets are similar. The data from MCGA, though, is conservative in comparison to that provided by theMRA, likely due to the fact that not all cargo is processed directly in Zamyn Uud. In some cases, cargo will betransshipped in Zamyn Uud, but will register with MCGA in Ulaanbaatar.
  21. 21. Economic Policy Reform and Competitiveness ProjectGiven that road-to-rail and rail-to-rail transshipment services for import cargo are the coreservices for the proposed project, this analysis focuses primarily on the movement of thiscargo and then, secondarily, on export cargo as it relates to rail-to-road transshipment. Thissecond service moves low levels of cargo compared with the transshipment levels of importcargo, but it must be considered because of it would utilize core services of the proposed PPPproject.The analysis will also focus on the diagnostic of the time series to identify behaviors and/orpatterns of cargo transshipment in Zamyn Uud. This analysis allows prediction of futuredemand for the PPP project. Understanding the pattern of the cargo series helps to makedecisions regarding how to adjust the series in the case of seasonality, for example, and also todetermine which econometric model is optimal for this analysis.B.1 Total Import Cargo Processed at Zamyn UudOver the past four years, the average annual growth of total import cargo processed at ZamynUud was 33%, growing from around 524,000 tons in 2004 to 1.5 million tons in 2008. ZamynUud is Mongolia’s main border control point, and according to estimations made during thecourse of this study, cargo flows through Zamyn Uud will continue to grow over the nextcouple of years.Annex G Page 18 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park”
  22. 22. Economic Policy Reform and Competitiveness Project Table 9. Growth in Total Cargo (Tons) Processed Yearly by Road and Railway 2004-2008 Year Tons by Truck Tons by Railway Total Growth Rate 2004 311,627 212,664 524,292 - 2005 362,563 222,957 585,520 11.7% 2006 416,260 228,300 644,561 10.1% 2007 698,593 293,589 992,182 53.9% 2008 1,189,794 350,744 1,540,539 55.3%Source: EPRC and Mongolian Customs Office – May 2009The following table shows information on total import cargo moved through Zamyn Uud bymonth. This information will be used for the econometric model for prediction and forecasting.The table shows that the monthly average of total import cargo moved through Zamyn Uudgrew from 2004 to 2008, reaching 128,000 tons per month in 2008 compared to 43,000 tons in2004.Zamyn Uud’s cargo processing peaks in July. During the course of the five years examined inthis analysis, the top three months in terms of cargo processing traffic were: July with anaverage of 101,000 tons; June with an average of 94,000 tons; and May with an average of90,000 tons.Because of harsh weather conditions in December, January and February, these monthsexperience the lowest average activity levels. Table 10. Monthly Cargo Processing Rates Total Cargo (Tons) Processed in Zamyn Uud by Road and Railway 2004-2008 2004 2005 2006 2007 2008 AverageJanuary 23,866.153 29,277.436 30,225.754 31,966.569 87,333.419 40,533.866February 19,207.254 22,397.425 32,065.066 29,440.064 81,379.371 36,897.836March 36,015.163 43,184.018 43,636.150 48,330.923 165,170.691 67,267.389April 53,873.209 62,905.096 57,763.667 78,421.236 187,587.026 88,110.047May 57,468.028 57,914.687 62,581.153 86,671.477 189,039.761 90,735.021June 67,266.459 62,716.385 74,825.930 104,834.253 160,690.731 94,066.751July 47,856.327 67,932.232 69,396.434 152,588.527 169,283.233 101,411.351August 49,986.145 64,283.940 75,185.164 130,501.745 117,651.584 87,521.716September 55,643.238 59,210.501 67,203.198 96,206.249 129,331.700 81,518.977October 46,706.214 46,979.934 59,773.490 97,003.042 125,471.351 75,186.806November 33,835.384 39,840.188 39,919.603 66,490.841 68,038.323 49,624.868December 32,568.693 28,879.147 31,986.077 69,727.999 59,561.815 44,544.746Total 524,292.268 585,520.989 644,561.685 992,182.925 1,540,539.007Average 43,691.022 48,793.416 53,713.474 82,681.910 128,378.251Source: EPRC and Mongolian Customs Office – May 2009The graph below shows that the level of cargo processed at Zamyn Uud peaked in May 2008at around 189,039 tons. April 2008 also processed unprecedented levels of cargo, reaching187,587 tons for the first time in Zamyn Uud’s history. In 2008, the lowest cargo level was inDecember at 59,561 tons. Yet, in spite of the global financial crisis, the December 2008average was higher than the average for December of the previous four years. This couldindicate that Mongolia is experiencing a structural change in consumption and growth ofdisposable household income. If this is true the next years will realize higher growth ofimports and commercial trade, which will increase the level of cargo traveling through ZamynUud.Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 19
  23. 23. Economic Policy Reform and Competitiveness ProjectIn the time series below it can be observed that February has the lowest levels of cargo traffic.Specifically, in 2004 cargo processed in February totaled only 19,207 tons, 22,397 tons in2005, 32,065 tons in 2006 and 29,440 tons in 2007. The series shows very clear seasonalitywith low levels of cargo from November to February and higher levels of cargo from March toOctober.Time series normally have both trend and seasonality. Trend is represented, for example, as aplateau followed by a period of exponential growth; technically defined as systematicallylinear, meaning that it changes over time and does not repeat over the range of the data underanalysis. In the case of seasonality, the difference is that the pattern is repeated in systematicintervals over time. This is exactly the case in the below statistical series. Graph 6. Total Import Cargo (Tons) Processed Monthly by Railway and Road, 2004-2008The graph below shows the growth rates of total import cargo transshipped from road-to-railfrom 2004 to 2008. March and April are the months with the highest growth rates because theyfollow periods of low activity (November, December, January and February). Graph 7. Growth Rate of Total Import Cargo (Tons) Processed by Road and Railway 2004-2008Growth rates for the months of January, March, May, July, October and November alwaysshow positive growth compared to the same months of previous years (YOY basis) - aAnnex G Page 20 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park”
  24. 24. Economic Policy Reform and Competitiveness Projectcombined response to seasonality and natural annual growth in cargo flows through ZamynUud. Table 11. Growth Rate of Total Import Cargo (Tons) by Railway and Road YOY 2005-2008 2005 2006 2007 2008 January 22.7% 3.2% 5.8% 173.2% February 16.6% 43.2% -8.2% 176.4% March 19.9% 1.0% 10.8% 241.7% April 16.8% -8.2% 35.8% 139.2% May 0.8% 8.1% 38.5% 118.1% June -6.8% 19.3% 40.1% 53.3% July 42.0% 2.2% 119.9% 10.9% August 28.6% 17.0% 73.6% -9.8% September 6.4% 13.5% 43.2% 34.4% October 0.6% 27.2% 62.3% 29.3% November 17.7% 0.2% 66.6% 2.3% December -11.3% 10.8% 118.0% -14.6% Source: EPRC and Mongolian Customs Office – May 2009Zamyn Uud’s high congestion period includes May, June and July, representing around 33%of total import cargo. For the years of 2004-2008, if the low level period is excluded(November-December-January-February), the eight remaining months comprise 80% of totalcargo movement in a year. Graph 8. Import Cargo (Tons) Processed by Road and Railway Monthly Comparison 2004-2008Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 21
  25. 25. Economic Policy Reform and Competitiveness ProjectB.1.2 Total Import Cargo Handled by Road-to-Rail TransshipmentThe table below shows the total amount of cargo processed monthly entering Zamyn Uud bytruck. Annual truck cargo grew from 310,972 tons in 2004 to 415,034 tons in 2006. 2007 is atransition year between the relatively homogeneous period of 2004-2006 and the explosivegrowth shown in 2008. Truck cargo transshipped in 2008 grew approximately two-fold from2007 and around three-fold from 2006.Over the five-year analysis period, the volume of cargo grew from 311,627 tons in 2004 to 1.1million tons in 2008. In terms of monthly averages, volume grew from 25,914 tons in 2004 to98,877 tons in 2008 and the annual average of cargo processed throughout the five-year periodis 590,970 tons.The total cargo processed at Zamyn Uud over the five-year period is 2,954,852.28 tons; 2008represents 40% of the total five years (2004-2008) in cumulative terms. If 2007 and 2008 areconsidered together, cumulatively they represent 63% of cargo for the period under analysis.Annex G Page 22 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park”
  26. 26. Economic Policy Reform and Competitiveness Project Table 12. Volume of Truck Import Cargo Processed Truck Import Cargo (Tons) Processed in Zamyn Uud 2004-2008 2004 2005 2006 2007 2008 Average January 11,360.639 20,725.408 15,698.180 17,396.220 61,849.336 25,405.956 February 12,740.343 7,287.958 12,452.393 14,436.693 56,605.670 20,704.611 March 22,041.652 27,372.116 26,397.417 36,837.066 138,254.854 50,180.621 April 30,071.710 37,688.315 37,452.227 54,490.459 155,317.133 63,003.969 May 36,782.140 35,327.338 43,647.077 56,582.080 147,456.771 63,959.081 June 40,278.487 43,387.474 51,723.106 78,720.959 128,959.126 68,613.830 July 29,178.032 35,204.603 44,500.234 114,867.118 114,453.334 67,640.664 August 26,805.884 40,245.462 52,259.097 90,118.278 97,032.705 61,292.285 September 33,241.660 40,146.613 46,450.417 73,930.079 109,165.652 60,586.884 October 28,750.397 30,775.180 42,079.980 73,235.513 101,470.659 55,262.346 November 20,742.959 25,989.484 24,042.354 41,577.759 43,923.360 31,255.183 December 19,633.645 18,413.124 19,558.292 46,400.943 35,306.264 27,862.454 Total 311,627.547 362,563.076 416,260.775 698,593.166 1,189,794.863 Average 25,968.962 30,213.590 34,688.398 58,216.097 99,149.572Source: National Customs Office (2009)The graph below displays monthly behavior of the cargo statistics presented in the previoustable. 2004-2006 display a very clear upward trend with evident concavity and maximum andminimum points. The graph’s three low level “mountains” represent this concavity.A certain regularity from 2004 to 2006 is observed in cargo levels increasing beginning inMarch, and decreasing beginning in the third and fourth quarters each year.The graph shows that the maximum cargo level was in April 2008 at around 155,317 tons.The steepest slope occurs between May and December 2008, showing a rapid decrease fromthe April 2008 peak to only 35,285 tons in December 2008.Interestingly, 2008’s minimum is similar to 2004’s maximum. This could indicate real growthand stabilization of future cargo flows at this level as normal, notwithstanding 2009, which isthe period that reflects the largest negative impact of the global financial crisis.February reflects the minimum levels of the statistical series. For example in 2004, Februaryprocessed 12,735 tons of truck cargo, 7,287 tons in 2005 (the smallest volume for the entireperiod from 2004-2008), 12,435 in 2006 and 14,433 in 2007. Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 23
  27. 27. Economic Policy Reform and Competitiveness Project Graph 9. Truck Cargo (Tons) Processed Monthly 2004-2008Graph 12 below shows a different representation of the seasonality of the statistical series ofcargo. The bar chart shows cumulative monthly demand for cargo processing in Zamyn Uudover the five year analysis period; June and July experience the highest traffic of the series.The demand in April, May, August, September and October is important for understandingseasonality in a normal year in Zamyn Uud. The months with the lowest levels of demand in ayear are November, December, January and February. Finally, March is a “bridge month”linking the low-demand and high-demand months.The series’ regularity is confirmed by the total accumulated movement presented in the graphbelow. The cumulative cargo movement shows a minimum in February with 103,357 tons anda maximum in June with 341,622 tons, followed very closely by July with 337,202 tons.Total cargo movement over five years reached 2.9 million tons. Cumulative movement in Juneand July over the five year period represents 23% of the total period, around 0.67 million tons,and March to October represent 82% of total movement for the period, which totals around 2.4million tons.Another interesting finding is that the months from April to September each have a monthlyaverage higher than 60,000 tons, which represents 64.5% or 1.9 million tons in cumulativeterms.Annex G Page 24 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park”
  28. 28. Economic Policy Reform and Competitiveness Project Graph 10. Cargo (Tons) processed by Truck Monthly Comparison 2004-2008Source: EPRC with information of National Customs Office (2009)The next table shows annual truck cargo movement through Zamyn Uud. The figure startswith 311,627 tons in 2004 and finishes in 2008 with impressive annual growth of 70% over2007. The growth rate for the period 2004-2008 was 281%, and between 2006 and 2008 thegrowth rate was 185%, highlighting the importance of the last two years of the statisticalseries. Table 13. Table Growth Rate - Import Cargo (Tons) Processed Yearly by Truck 2004-2008 Year Tons Growth Rate 2004 311,627 2005 362,563 16% 2006 416,260 14.8% 2007 698,593 67.8% 2008 1,189,794 70% Source: EPRC with information of National Customs Office (2009)The table below shows the monthly growth rate for the analysis period. From the data, cyclesof increasing and diminishing growth can be observed.The graph below shows that the greatest level of negative growth was seen in November2008, at -57.37%. This downturn could be the result of high levels of positive growth seen inMarch of the same year. The largest month-to-month growth during the period was fromFebruary to March 2005 with 275.33% in March as a result of the low level of cargo inFebruary 2005. Graph 11. Graph Growth Rate - Cargo (Tons) processed by Truck 2004-2008 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 25
  29. 29. Economic Policy Reform and Competitiveness ProjectB.1.3 Total Railway Import Cargo Processed in Zamyn Uud at Rail-to-RailTransshipmentThe average annual rail-to-rail transshipment growth rate is 13.7% lower than the that of road-to-rail transshipment. One of the reasons for this substantial difference is because the data wasobtained directly from MCGA, not MRA. This means that some cargo is not represented inthis data analysis because a percentage of container cargo can bypass MCGA in Zamyn Uudand go directly to transshipment. This cargo will be registered with MCGA in Ulan Bator.A section of this report adjusts the yearly statistics for rail-to-rail transshipment to include thehigher real numbers. However, this initial analysis did not have access to MRA’s monthly dataand therefore modeled the econometric system using data obtained from MCGA.Annex G Page 26 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park”
  30. 30. Economic Policy Reform and Competitiveness Project Table 14. Annual Growth Rate of Railway Cargo (Tons) Processed 2004-2008 Year Tons Growth Rate 2004 212,664 - 2005 222,957 4.8% 2006 228,300 2.3% 2007 293,589 28.5% 2008 350,744 19.5% Source: EPRC with information of National Customs Office (2009)The statistical series for railway import cargo processed in Zamyn Uud indicates that themonthly average grew from 17,722 tons in 2004 to 29,228 tons in 2008. Rail cargo monthlyaverages shows the same tendencies as truck cargo; growing from April to July and thendeclining from October to February. Table 15. Volume of Transshipped Rail Import Cargo Rail Import Cargo (Tons) Processed 2004-2008 2004 2005 2006 2007 2008 Average January 12,505.514 8,552.029 14,527.573 14,570.350 25,484.083 15,127.910 February 6,466.911 15,109.467 19,612.673 15,003.371 24,773.702 16,193.225 March 13,973.511 15,811.902 17,238.733 11,493.858 26,915.837 17,086.768 April 23,801.499 25,216.781 20,311.440 23,930.777 32,269.893 25,106.078 May 20,685.888 22,587.348 18,934.076 30,089.396 41,582.990 26,775.940 June 26,987.972 19,328.911 23,102.824 26,113.294 31,731.604 25,452.921 July 18,678.296 32,727.629 24,896.199 37,721.408 54,829.900 33,770.686 August 23,180.261 24,038.478 22,926.067 40,383.467 20,618.879 26,229.430 September 22,401.578 19,063.888 20,752.782 22,276.171 20,166.049 20,932.093 October 17,955.817 16,204.754 17,693.509 23,767.529 24,000.692 19,924.460 November 13,092.424 13,850.704 15,877.249 24,913.082 24,114.963 18,369.684 December 12,935.049 10,466.023 12,427.785 23,327.055 24,255.552 16,682.293 Total 212,664.721 222,957.914 228,300.910 293,589.759 350,744.144 Average 17,722.060 18,579.826 19,025.076 24,465.813 29,228.679Source: EPRC with information of National Customs Office (2009)The graph below shows similar statistical behavior between railway and truck cargo. Thedifferences are in the volume, with higher truck cargo movements than railway, and in two tothree peak months every year in fall, summer and spring. Graph 12. Railway Cargo (Tons) Processed Monthly 2004-2008Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 27
  31. 31. Economic Policy Reform and Competitiveness ProjectThe growth rate shows several jumps over the analysis period, two of the most important beingthe first quarter of 2004 and the second quarter of 2007. Graph 13. Graph Growth Rate - Cargo (Tons) processed by Railway 2004-2008Annex G Page 28 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park”
  32. 32. Economic Policy Reform and Competitiveness Project Graph 14. Railway Import Cargo (Tons) Processed Monthly Comparison 2004-2008B.2 Total Export Cargo Processed in Zamyn Uud by railway and roadMongolian exports continued to grow in 2008 despite the global financial crisis. Exportsproduced in Mongolia are moved by train to Zamyn Uud at which point, cargo transported byrail continues across the border into Erlian-China. China and Mongolia have agreed that exportcargo from Mongolia is to be transshipped to the Chinese railway gauge in Erlian, after whichit continues on to intermediate or final destinations in China or other countries. Thus, rail-to-rail transshipment for export cargo is not part of projected project revenues in this analysis.Data in table 54 in the next section shows that movement of rail-to-road export cargo was verylow in 2008 at around 53,663 tons. This service will be considered in the project revenueanalysis.Approximately 2 million tons of export cargo passed through Zamyn Uud in 2008; nearlytwice the amount of cargo in 2004. No monthly export trend was identified, even for themonths that show lower import movement (November- December- January- April). Table 16. Exports Transshipped Rail-to-Road 2004-2008 Total Export Cargo (Tons) Transshipped from Rail-to-Road 2004-2008 2004 2005 2006 2007 2008 Average January 54,806.301 59,243.596 91,471.519 118,665.508 139780.363 92793.4 February 52,597.285 40,728.925 111,752.430 108,718.671 72679.511 77295.3 March 15,028.479 58,630.509 90,329.039 88,718.375 161257.224 82792.7 April 76,631.147 61,791.621 124,231.134 88,377.967 161898.882 102586.1 May 77,242.114 74,554.465 138,287.379 91,922.616 192966.549 114994.6 June 64,138.412 57,163.041 82,795.963 85,279.732 146280.089 87131.4 July 55,945.294 74,662.602 101,315.890 86,736.598 182222.917 100176.6 August 62,226.702 114,748.507 125,288.567 76,461.653 239158.646 123576.8 September 61,723.633 99,524.806 92,109.323 76,459.678 229107.300 111784.9 October 69,373.309 123,617.854 108,472.282 83,038.005 207980.452 118496.3 November 59,867.940 131,342.046 123,397.934 133,378.754 179738.824 125545.0 December 78,874.154 148,106.570 144,210.284 174,825.780 117609.519 132725.2 Total 728,454.770 1,044,114.544 1,333,661.743 1,212,583.338 2,030,680.281 Average 60704.56421 87009.54537 111138.4786 101048.6115 169223.3567Source: EPRC with information of National Customs Office (2009) Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 29
  33. 33. Economic Policy Reform and Competitiveness ProjectB.2.1 Export Cargo moved through Zamyn Uud by railway (Transshipped inErlian-China)Export cargo moved by railway comprises about 97% of total exports moved through ZamynUud. Rail export cargo growth has been high in the analysis period, but it is not considered asa source of revenue for the study. Table 17. Export Cargo Transshipped from Rail-to-Rail 2004-2008 Export Cargo (Tons) Processed in Zamyn Uud by Railway 2004-2008 2004 2005 2006 2007 2008 Average January 53,733.485 57,519.685 88,820.996 115,411.873 134693.8005 90035.9 February 51,446.329 39,718.978 110,599.808 106,214.428 69,847.186 75565.3 March 11,736.521 56,454.268 88,204.487 84,348.890 157,862.538 79721.3 April 73,947.698 59,926.130 123,130.822 86,049.130 157,072.768 100025.3 May 75,892.811 73,825.290 137,453.135 89,539.742 188,571.557 113056.5 June 63,321.478 54,823.081 81,187.823 81,913.218 142,478.009 84744.7 July 54,849.378 73,876.169 99,736.588 84,359.553 176,888.291 97941.9 August 60,535.612 113,647.568 123,723.731 74,185.989 234,481.283 121314.8 September 59,855.066 97,778.263 89,693.768 73,065.629 223,594.907 108797.5 October 67,294.403 121,522.550 106,496.743 80,317.831 203,607.210 115847.7 November 57,273.119 129,430.165 121,121.237 126,965.277 175,085.657 121975.0 December 77,373.506 145,608.277 139,589.441 165,580.217 112,833.895 128197.0 Total 707,259.404 1,024,130.423 1,309,758.577 1,167,951.776 1,977,017.101 Average 58,938.284 85,344.202 109,146.548 97,329.315 164,751.425Source: EPRC with information of National Customs Office (2009)B.2.2 Export Cargo Transshipped from Rail-to-Road in Zamyn UudRail-to-road export cargo transshipped in Zamyn Uud is just 3% of total exports and basicallyconsists of goods for Erlian and close Chinese cities in the Inner-Mongolia region.The table shows growth in rail-to-road transshipment for exports in Zamyn Uud from 2004 to2008, but the cargo levels are still insignificant. Despite the low volume of cargo transshippedfrom rail-to-road, these flows will be considered in the revenues analysis. In future years withthe addition of a paved road connecting Ulan Bator with Zamyn Uud, an increase in the flowof exports crossing the border by truck is predicted. Table 18. Export Cargo Transshipped from Rail-to-Road Export Cargo (Tons) Transshipped from Rail-to-Road at Zamyn Uud 2004-2008 2004 2005 2006 2007 2008 AverageJanuary 1,072.817 1,723.911 2,650.522 3,253.635 5,086.562 2757.4February 1,150.956 1,009.947 1,152.623 2504.243 2,832.325 1730.0March 3,291.958 2,176.242 2,124.553 4,369.485 3,394.687 3071.3April 2,683.449 1,865.491 1,100.312 2,328.837 4,826.114 2560.8May 1,349.303 729.176 834.244 2,382.874 4,394.993 1938.1June 816.935 2,339.960 1,608.140 3,366.514 3,802.081 2386.7July 1,095.917 786.433 1,579.302 2,377.045 5,334.627 2234.6August 1,691.090 1,100.940 1,564.836 2,275.664 4,677.364 2261.9September 1,868.567 1,746.543 2,415.555 3,394.049 5,512.393 2987.4October 2,078.906 2,095.305 1,975.538 2,720.175 4,373.242 2648.6November 2,594.821 1,911.881 2,276.696 6,413.477 4,653.168 3570.0December 1,500.649 2,498.293 4,620.844 9,245.563 4,775.625 4528.1Total 21,195.367 19,984.121 23,903.166 44,631.562 53,663.180 Annex G Page 30 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park”
  34. 34. Economic Policy Reform and Competitiveness Project Average 1,766.281 1,665.343 1,991.930 3,719.297 4,471.932Source: EPRC with information of National Customs Office (2009)B.3 Import Cargo Processed in Zamyn Uud between January–April 2009In the first four months of 2009, movement of import cargo through Zamyn Uud reached acumulative total of 163,770 tons, which is three times lower than 2008, but still similar to 2007levels. This shows that 1) 2008 had extraordinary levels of cargo movement and 2) that flowsare facing structural change, as seen by high cumulative cargo levels in 2009 compared to2004-2005 and 2006. Table 19. Total Import Cargo (Tons) Transshipped from January-April to Road and Railway 2004-2009 Import Cargo (Tons) Transshipped at Zamyn Uud to Road and Railway January-April 2004-2009 2004 2005 2006 2007 2008 2009 January 23866.2 29277.4 30225.8 31966.6 87333.4 34445.4 February 19207.3 22397.4 32065.1 29440.1 81379.4 25981.1 March 36015.2 43184.0 43636.2 48330.9 165170.7 35359.2 April 53873.2 62905.1 57763.7 78421.2 187587.0 67985.0 Total 132961.8 157764.0 163690.6 188158.8 521470.5 163770.7Source: EPRC with information of National Customs Office (2009)Cargo transshipped from road-to-rail followed the same trend as total cargo for all months of2009 showing higher levels in the same months as 2004, 2005, 2006 and 2007. Table 20. Total Cargo (Tons) Transshipped from Road-to-Rail in January-April 2004-2009 Import Cargo (Tons) transshipped from Road-to-Rail in Zamyn Uud January-April 2004-2009 2004 2005 2006 2007 2008 2009 January 11360.6 20725.4 15698.2 17396.2 61849.3 24363.0 February 12740.3 7288.0 12452.4 14436.7 56605.7 14568.5 March 22041.7 27372.1 26397.4 36837.1 138254.9 22576.5 April 30071.7 37688.3 37452.2 54490.5 155317.1 55954.1 Total 76214.3 93073.8 92000.2 123160.4 412027.0 117462.1Source: EPRC with information of National Customs Office (2009)The data shows a strong decline in imported cargo transshipped from rail-to-rail in 2009. Thetable below shows that 2009 cumulative cargo through April declined to 2004 levels. Thisnegative trend differs dramatically from the strong growth seen in road-to-rail transshippment.Table 21. Total Cargo (Tons) Transshipped from Rail-to-Rail in January-April 2004-2009 Import Cargo (Tons) Transshipped from Rail-to-Rail in Zamyn Uud January-April 2004-2009 2004 2005 2006 2007 2008 2009January 12505.5 8552.0 14527.6 14570.3 25484.1 10082.5February 6466.9 15109.5 19612.7 15003.4 24773.7 11412.6March 13973.5 15811.9 17238.7 11493.9 26915.8 12782.7April 23801.5 25216.8 20311.4 23930.8 32269.9 12030.9Total 56747.4 64690.2 71690.4 64998.4 109443.5 46308.7Source: EPRC with information of National Customs Office (2009) Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 31
  35. 35. Economic Policy Reform and Competitiveness ProjectC. Center of Business Revenues in Zamyn UudThis section explains the methodology used to identify and quantify Zamyn Uud’s main centerof business in 2008. The table below shows total revenues for the railway system in 2008, witha maximum level in November of around MNT 21.258 million, and a minimum of MNT13.895 million in March. The average monthly revenue in 2008 was MNT 17.380 million. Table 22. Revenues, Passengers and Cargo of the Mongolian Railway System in 2008 Revenues Passengers Cargo Month (Million MNT) (Thousand) (Thousand tons) January 17300.0 347.4 1327.5 February 14507.7 364.8 1179.6 March 13895.0 344.8 1266.6 April 18120.3 355.8 1226.1 May 17544.5 368.6 1121.2 June 15053.5 369.8 1072.5 July 16198.8 404.4 1121.2 August 19840.3 453.8 1197.5 September 15748.4 372.6 1321.1 October 20800.8 362.5 1388.2 November 21258.8 340.2 1258.0 December 18295.8 272.2 1118.9 Total 208563.9 4356.9 14598.4 Average 17380.325 363.075 1216.533 Source: National Statistical Office of Mongolia (2009)Total revenue for 2008 was MNT 208.563 million, which is equivalent to $179 million usingthe actual exchange rate for each month of 2008.Assuming that 50% of total passengers pay a tariff of $10 and the remaining 50% pay a tariffof $20 it can be estimated that total revenue coming from passengers is $65 million.Total revenue received by the Mongolian railway system from cargo can be calculated as totalsector revenue minus passenger revenue. Using this methodology, 2008 cargo revenue isestimated at $114 million. 2008 estimates for average monthly cargo revenue is $9.5 million,and $5.5 million for passengers.The revenue from Zamyn Uud transshipment facilities is estimated as a sub-group of totalcargo revenues. To calculate this estimate, transshipment services in Zamyn Uud arecategorized as a different business than cargo transportation.To calculate transshipment business revenues, the team used 2008 information gathered fromMCGA. MCGA data showed quantity of imports entering Mongolia by both road and rail andoutlined the amount of cargo transshipped using road-to-rail and rail-to-rail transshipment,respectively. The data was further organized by type of product in tons,The team inquired with actual railway system users to determine transshipment tariff rates.The reported tariff system as follows: Table 23. Transshipment Tariffs for Import Cargo 2009 (MNT) Tariff Service of Transshipment (Togrogs) 20´ road-to-rail 45000 20´ rail-to-rail 45000 40´ road-to-rail 90000Annex G Page 32 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park”
  36. 36. Economic Policy Reform and Competitiveness Project 40´ rail-to-rail 90000 Bulks & Equipment rail-to-rail or 3500 road-to-rail (per ton per bulk) Construction material (per ton) 1200 Note: All covered wagons have a total capacity of 66 tons Table 24. Transshipment Tariffs for Exports 2009 (MNT) Tariff Service of Transshipment (Togrogs) 20´ road-to-rail 30000 20´ rail-to-rail 30000 40´ road-to-rail 90000 40´ rail-to-rail 90000 Bulks & Equipment rail-to-rail or 3000 road-to-rail (per ton per bulk) Table 25. Storage Tariffs in 2009 (MNT) Tariff Storage (Togrogs) 20´ per day 6500 20´ per day 6500 40´ per day 6500 40´ per day 6500 Bulks per day/per ton 300Finally, estimated 2008 revenues for the total center of business, including rail-to-rail, road-to-rail and rail-to-road (exports) transshipment in Zamyn Uud, is around $2.8 million.Below is a summary of the main findings for revenue of the entire proposed transshipmentbusiness center in Zamyn Uud: Table 26. Transshipment Revenues Revenues Item (Million $) Road to Rail 2 Rail to Rail 0.67 Rail to Road 0.13 Total Transshipment Revenues 2.8Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 33
  37. 37. Economic Policy Reform and Competitiveness ProjectD. Forecasting Future Demand and Revenues for the ProjectThis section focuses on the demand and revenue analysis for the PPP project. The analysislooks closely at estimates of the cargo that would pass through the Logistic Park in ZamynUud and the basic potential revenues that the project could generate in the form of a PPP.First, data from MCGA was compiled and tabulated to yield monthly statistical information.Calculations showed current demand for transshipment facilities separated by road-to-rail andrail-to-rail for the case of import cargo and rail-to-road for the case of export cargo.The team then visited the Zamyn Uud facilities to observe the current situation first-hand andbetter understand logistics processes for cargo, trucks and people entering Mongolia fromChina.The third activity involved collecting, compiling and tabulating statistical information of cargoprocessed by type of product, primarily to assist in identifying 2008’s composition of demandand to calculate estimated revenues for transshipment facilities in 2008 using current tariffrates.Total revenues for transshipment facilities in 2008 were estimated at $2.8 million. Of this,$2.67 million was earned from import cargo transshipment, $2 million was collected fromroad-to-rail and $0.67 million from rail-to-rail. The GoM collected $0.13 million for exportcargo transshipment using rail-to-road facilities.Upon receiving annual information from MRA, the team adjusted the estimations because dataacquired from MCGA underestimated revenues earned from the rail-to-rail component. Withthis new source, the team revised revenue estimates upward to $3.8 million for 2008. Of thisnew figure, $3.67 million was earned from import cargo transshipment, where $2.11 millionoriginated from road-to-rail services, $1.56 million was earned from rail-to-rail services and$0.13 million was earned for export cargo transshipped from rail-to-road.In the demand forecast, the team used MCGA data. MCGA collects monthly data, which isuseful for conducting econometric tests that yield valid results.In the time series depicting the transshipment of cargo on a monthly basis in Zamyn Uud, itcan be observed see that the series has statistical and graphical seasonality. Specifically,transshipment experiences high-demand from March to October, and low-demand fromNovember to February. These periods correspond to the warm and cold months of the year inMongolia.In order to isolate seasonality from the time series two models were used: a dummy variablemodel and a second multiplicative decomposition model. Both models estimate seasonalfactors to adjust every month, and ultimately de-seasonalize the time series. Once we adjustthe months for seasonality, we can then see the series trend.After this adjustment the Quartic Root Dummy Variable (QRDV) model and a Log-LinearModel were used. The first model uses time as the dependent variable and dummy variables tomodel seasonality. The second model was chosen from several models as the best choice toaccurately estimate the impact of a one Togrog change in income per household in Mongolia.The model showed that a one Togrog change will induce a change of approximately 0.05% inthe demand of cargo transshipment at Zamyn Uud.The demand of cargo transshipment, using both models, was forecasted for the period 2011-2040, considering a PPP period of 30 years beginning in January 2011. An anticipated projectstart date of January 2011 would allow sufficient time to complete feasibility studies, issue theinternational tender, and complete construction.Annex G Page 34 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park”
  38. 38. Economic Policy Reform and Competitiveness ProjectRate of earned revenue at Zamyn Uud was estimated by calculating a weighted average tariffof transshipment (WATT), considering the types of products transshipped at Zamyn Uud.After adjusting for underestimation due to the rail-to-rail annual gap, the WATT came to $1.73per ton. Revenues for additional services such as parking, commercial services, gas stations,and warehouses were estimated at a conservative $1 per truck.Estimations of total revenues under both models were relatively similar. For example, usingthe QRVD model the present value of total revenues came to $38 million using a discount rateof 15%, and $50 million when discounting at 12%. Using the Log-linear model the range ofrevenue was from $32 million to $38 million, using a growth rate of 0.5% or 2%, respectively,in annual income per household at a 15% discount rate. At the discount rate of 12%, the rangebecame $39 million to $50 million.Finally, different scenarios were simulated based on changes in the WATT and using adiscount rate of 15%. Using the QRVD model, if the WATT is lower, for instance bye $1.2 perton, the present value of total revenues is $26.9 million. However if the WATT is higher, forexample $1.91 per ton, the present value of revenues grows substantially to $41.7 million.For the second model, results fluctuate between $22 million and $27 million for the firstWATT ($1.2 per ton) and between $35 million and $42 million for the second WATT ($1.91per ton).The details of the forecast of demand and revenues are shown in Annex A: ForecastingDemand and Revenues in ZULP.SECTION V: CONCLUSIONS AND RECOMMENDATIONSAccording to the results of the study, the present value of revenues of the business is enoughto have a successful bidding process. However in order to get positive results, Mongoliagovernment will need to prepare a well-structured and bankable PPP transaction.Our recommendation is to follow a systematic life-cycle approach in two phases: • Phase A. Transaction Design: Preparation of the technical, financial, economic, institutional and legal framework. This will includes the following: o Due diligence. Collection and analysis of all available technical, economic, and financial feasibility studies, traffic/cargo demand projections, tariff analysis, and other relevant existing documents. o Technical project design. Analysis of engineering studies to define the technical scope of the project, the amount of initial capital investment required to achieve realistic levels of service, in accordance with cargo levels, during the Engineering and architectural studies will be essential to define which civil works should be included in the project and to determine the total required investment and future operational costs. These studies will be prepared once the location of the project is defined and they will outline the equipment needed in addition to the necessary horizontal and vertical infrastructure. It will also be necessary to plan the future sources of energy and water for the facilities in strict coordination with government authorities. Based on these studies, project managers will be able to estimate the operation and maintenance costs under a PPP business model.Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 35

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