Patricio Mansilla - Zamyn Uud logistic park demand analysis for PPP

Economic Policy Reform
and

Demand analysis for the Zamyn Uud
Logistics Park Public-Private
Partnership: Estimation of cargo flows
and revenues

July 2009
Ulaanbaatar, Mongolia

This publication was produced for review by the United States Agency for International Development. The views
expressed in this publication do not necessarily reflect the views of the United States Agency for International
Development or the United States Government.

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 revenues
Main Author: Patricio Mansilla
Contract No. 438-C-00-03-00021-00
Submitted by: EPRC/Chemonics International Inc., Tavan Bogd Plaza, Second Floor, Eronhii
Said Amar Street. Sukhbaatar District, Ulaanbaatar, Mongolia
Telephone and fax: (976-11) 32 13 75 Fax: (976-11) 32 78 25
Contact: Fernando Bertoli, Chief of Party
E-mail address: fbertoli@eprc-chemonics.biz

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank
BGT Breusch-Godfrey Lagrange MultiplierTest
BOT Build-Operate-Transfer
BOO Build-Own-Operate
CDS Credit Default Swap
DBOT Design-Build-Operate-Transfer
EPRC Economic Policy Reform and Competitiveness Project
FPT Fractional Power Transformation
GASI General Agency for Specialized Inspections
GDP Gross Domestic Product
GoM Government of Mongolia
IFFC International Freight Forwarding Center of Mongolian Railways
MDM Multiplicative Decomposition Model
MFFA Mongolian Freight Forwarders Association
MNCCI Mongolian National Chamber of Commerce and Industry
MNT Mongolian Togrog
MOU Memorandum of Understanding
MRA Mongolian Railway Authority
MRTCUD Ministry of Road, Transport, Construction and Urban Development
MTZ Mongolian Tumur Zam
NSO National Statistical Office
NTTCF National Trade and Transport Facilitation Committee
OLS Ordinary Least Squares
PRC People´s Republic of China
PPP Public Private Partnership
QRVD Quartic Root Dummy Variable
RESET Ramsey´s Regression Specification Error Test
SEW Single Electronic Window
SIP Specialized Inspection Process
SPC State Property Committee
SPV Special Purpose Vehicle
UBTZ Ulaanbaatar Tumur Zam
USD United States Dollar
VAT Value Added Tax
WATT Weighted Average Tariff of Transshipment
WEF World Economic Forum
YOY Year on Year
ZULP Zamyn Uud Logistics Park

TABLE OF CONTENTS

ABBREVIATIONS 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

EXECUTIVE SUMMARY

This 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, and
estimated 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 two
to six kilometers northwest of current Zamyn Uud border facilities. The site would occupy a
space of around 400 Ha (4km in length, and 1km in width), and lay between the existing
railway 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 to
Russia and other countries; to reduce freight inventory costs and vehicle operation costs; and
to contribute to the efficiency of the Trans-Asian integrated Railway connecting Europe with
Asia.
This study estimated the overall economic costs incurred due to the lack of infrastructure
investment in Zamyn Uud range from $5.7 million to $8.3 million annually, under three
different scenarios.
The methodology for the demand analysis consisted of three main steps; first, to examine the
economics of what triggers demand for transshipment services at Zamyn Uud. Second, to
consider the potential services the project could offer. Third to compile statistics on current
demand for transshipment services at Zamyn Uud in order to run several statistical and
econometric models predicting future demand and revenues generated by the proposed Zamyn
Uud 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, and
November to February demand is lower. Those periods correspond with the warm and cold
seasons 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 to
estimate the seasonal factors of the series so that ultimately the monthly data could be adjusted
to exclude the seasonal influence. By removing seasonality from the time series, the overall
series trend was revealed.
Rate of earned revenue at Zamyn Uud was estimated by calculating a weighted average tariff
of transshipment (WATT) considering the types of products transshipped in Zamyn Uud. The
WATT came to $1.73/ton. Revenues for additional services such as parking, commercial
services, gas stations, and warehouses were estimated at a conservative $1/truck.
The estimation of total revenues under both models were relatively similar. For example, using
model 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 $38
million was found, considering a growth rate of 0.5% or 2%, respectively, in annual income
per household at a 15% discount rate. If the discount rate is 12%, the range increases from $39
million to $50 million.
The results of this analysis finds that the ZULP would be a profitable venture. Considering the
importance of the project to Mongolia’s economic development, the recommendation is to
continue with the next steps of project planning, which would be to investigate investment
costs in addition to project operation and maintenance costs and to prepare the financial model.

SECTION I: INTRODUCTION

A. Background
The relationship between economic growth and infrastructure has been broadly studied since
the works of Aschauer (1989) and Barro (1990). It is largely understood that investment in
transport infrastructure can indirectly reduce poverty. Recently, Fan and Chan Kang (2005)
discovered a positive relationship between the investment in roads and the impact on poverty
in China.
Recent literature reviews show that transport infrastructure investment and maintenance has
the power to increase incomes for the poor by increasing their productivity, improving their
accessibility to economic activities, reducing input costs, and reducing transaction costs and
time of travel. Finally, transport infrastructure investment presents the possibility of better
access to social services.
While increased investment in infrastructure can help to reduce poverty and improve quality of
life, real economic development at the community level requires participation and
commitment from the local residents, companies and the public sector. If one of these critical
parts of the system is absent, the objectives of any social or economic program will not be
achieved as fast as they could be.
Public and private sector cooperation on the Zamyn Uud Logistic Park project is imperative to
realize the project’s full range of benefits for Mongolia. The project requires investment of
time and money on the part the public and private sectors.

A preliminary study prepared by USAID/EPRC 1 showed that investment in the Zamyn Uud
Logistics Park Project, located on the Mongolian side of the border with China, will result in
huge net economic benefits. These benefits will be realized by addressing the lack of adequate
infrastructure, which requires cargo (principally imported goods) coming from Northern China
in the direction of Mongolia and Russia to wait many hours or, in cases of huge congestion, to
wait days, just to unload cargo from trucks and to load it onto the railways for the trip from
Zamyn Uud across Mongolia and on to Russia.

The necessity of cargo transshipment at Zamyn Uud is twofold: first because of the
incompatibility between the Mongolian Gauge (follows the Russian Wide Gauge of 1520 mm
gauge) and Chinese Standard Gauge (1435 mm gauge), and second because of the absence of a
paved road connecting Mongolia with Russia.

USAID estimates the Economic Internal Rate of Return for the Zamyn Uud Logistics Park
project to be between 18% and 43%. The main economic benefits of the project emerge from
savings in vehicle (trucks) operating costs, freight inventory costs and the reduction of the time
spent 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 connection
to 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 of
investment range from $5.7 million to $8.3 million annually. The details of this estimation are
presented in this study.

1
Pre-Feasibility Analysis to Establish Logistics Facilities in Zamyn Uud in Mongolia. April, 2008 USAID-EPRC

Economic Policy Reform and Competitiveness Project

B. Mongolia’s poor competitiveness in infrastructure

The lack of basic infrastructure is clearly a major factor constraining economic growth and
poverty alleviation in Mongolia. According to the Competitiveness Index for infrastructure of
the World Economic Forum, Mongolia ranks 133 among 134 countries, the second worst
infrastructure stock in the world. It is clear that the Mongolian government is not investing
enough. This persistent under-investment in infrastructure is having a negative impact on
economic growth, living standards, and private sector development.

In recent years, developing countries faced with the same fiscal and capacity constraints as
Mongolia have turned to the private sector as a partner in the provision of infrastructure
services to help reduce the serious investment gaps. Well structured and competitively
implemented PPPs are an effective and efficient tool not only to mobilize private capital to
develop badly needed, economically-viable, public infrastructure, but also to ensure the
efficient provision of operation and maintenance (O&M) financing and services over time
which is essential to guarantee the long term sustainability of these major capital investments.

SECTION II: THE PROJECT AND ITS CONTEXT

A. Zamyn Uud: Mongolia’s gateway
The main goal of logistics parks around the world is to provide services for cargo
transportation 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 that
passenger and cargo flows be segregated, and that special types of passengers and cargo (VIP,
international, transit, national) receive different treatment (transit, import, exports, fragile and
others).
At the Zamyn Uud border crossing, import cargo enters Mongolia by rail or truck. For cargo
entering 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 and
inspections clearance, which includes paying taxes and fees. In some cases, cargo entering in
sealed containers undergoes inspections and fee processing in Ulan Bator. Once the cargo
entering by rail is authorized by Mongolian authorities and loaded onto the Mongolian
railway, it can continue to the Ulan Bator Terminal. From the capital city, cargo either
continues 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, travels
eight kilometers to the Zamyn Uud border area. After crossing the border, every truck needs to
first be weighed. Once the weight scale process is complete, trucks continue to the police,
inspections and customs building to complete required documentation and to obtain
authorization to enter Mongolia. Next, trucks diverge to take two different paths through the
inspection process depending to the type of cargo they carry. Trucks transporting
homogeneous cargo, which is feasible to inspect with a scanner, continue to the scanner
inspection area. Alternatively, trucks carrying mixed or heterogeneous cargo continue to the
manual inspection area.

Section I Page 4 Demand and Revenue estimation for PPP “ Zamyn Uud Logistics Park”


Once trucks finish the inspection control process, they must continue on to the last procedure
at Zamyn Uud; transshipment. After crossing railroad tracks without any special security
measures, trucks arrive at the unpaved road-to-rail transshipment parking area. During peak
times, drivers wait several hours or several days to complete the transshipment process that
involves unloading cargo from trucks and loading it onto railway wagons. Actual movement or
transshipment 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. Drivers
reported the main problems at Zamyn Uud as: slow cargo processing, inefficiencies in
transshipment, an insufficient number of rail wagons, the occasional closure of the Mongolian
border 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 area
was around 135 hours. Total time spent at the all four points of control in Zamyn Uud reached
195 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
• Objectives
The 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 2
The project will be located in Zamyn Uud, Mongolia’s border town with Erlian, China. Zamyn
Uud is the gateway into Mongolia, Russia and beyond for the neighboring Chinese city of
Erenhot 3 (or Erlian—as referred to in Chinese) 4 . Erlian is part of China’s Inner Mongolia
Autonomous Region.

The project’s objectives are to expand the capacity and improve the efficiency of the border
facilities 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 in
Zamyn Uud (April 2008), and Zamyn Uud Gateway Logistics Park Pre-Feasibility Analysis (October 2008).
3
In Mongol
4
In Chinese

Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park” Section I Page 5


• 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 systems
Specific 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 project
specifications. 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. Using
unitized methods, it should be possible to achieve a maximum cycle time of six hours. With
two overlapping shifts, each 40-wagon line should be able to handle 80 wagons per day, so, to
reduce loading times, four lines will be needed.
Some preliminary design principles for the project, according to a feasibility study prepared by
EPRC/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.



Mongolian authorities must finalize the location for the project and determine the availability
and registration of the proposed land. This will help to define the specifications of the public
sector’s participation as either a participant in the joint venture company, or as provider of the
initial assets of the Special Purpose Vehicle (SPV).
The picture below shows the proposed project site, situated 5.5 kilometers northeast of the
current Zamyn Uud facilities.

C. Cost of lack of investment in Zamyn Uud
To estimate the cost of investment shortfalls in Zamyn Uud, the EPRC project designed a
survey for cargo truck drivers that go through the processes and utilize the existing facilities at
Zamyn Uud. EPRC identified four points of control that truck drivers must clear and surveyed
drivers at each point.
EPRC’s objective was to estimate the time spent on clearing goods at the Chinese and
Mongolian borders and on the physical transfer of goods from road-to-rail. EPRC also sought
the opinions of lorry drivers on the current situation.
The survey covered the whole transport process, beginning from the point where goods are
loaded in Erlian and ending with the transshipment of goods from lorries or cargo trucks to rail
wagons 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 transfer



Areas covered in Questionnaire 2

Source: EPRC/USAID
The 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 to
conduct interviews and by encouraging drivers to participate. The survey included over 550
interviews conducted from 16-19 April 2008. The distribution of surveys conducted across the
four 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 area
The table below shows the average time spent by the drivers in the three segments at Zamyn
Uud. Total time spent in the complete network averaged 195.1 hours. For transshipment, the
average time spent is 135.1 hours. Excluding Segment 1 (estimating time at the border
between China and Mongolia), the total time is 160.9 hours, displaying that the bulk of waiting
time 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 96



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* 30.2 600
Source: 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 waiting
time for the last two segments is 6.7 days. This means that in peak periods drivers must wait
for 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 25
Source: 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% were
Chinese. Of the total trucks, 70.5% carried construction materials, 20.2% carried food, and the
remaining 9.3% carried electronic appliances, furniture, clothes and other items.
The most prominent complaints by interviewed drivers include overnight stays in Erlian forced
by the closure of the Mongolian border, slow transshipment to railway, poor condition of
roads, and long waiting times for customs processing.
After establishing waiting time estimations through the survey, the next step in estimating
future losses for the Mongolian economy in the absence of investment at Zamyn Uud is to
study the value of cargo imported by truck and processed in Zamyn Uud. By analyzing past
cargo movement from a representative year, future losses to the Mongolia economy can be
predicted in the case no infrastructure improvements are made.
The value of imported goods entering Zamyn Uud by truck has increased seven times over the
past five years from $54 million in 2004 to $368.2 million in 2008. This significant increase
can likely be attributed at least in part to Mongolia’s relatively new open market. This growth
trend 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



Total Accumulated 2004- 2008 798.7
Source: Mongolian Customs Office
The 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 value
of cargo in 2008 was in May at $48 million and the minimum value was in February at $10.3
million.
Three alternatives to calculate the weekly value of import cargo are presented here. The first
alternative considers the average for the entirety of 2008, which results in a value of $7.6
million per week.
The second alternative uses the average of only nine months, excluding November, December
and January. The excluded months experience low traffic and have a low probability of
backlogs. 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 this
alternative 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 11,128,157.6
Source: EPRC/USAID
With an estimated average time delay in Zamyn Uud of around one week, the estimated cost of
delays in cargo movement (calculated as the opportunity cost of the cargo stopped at the
border) 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 costs
resulting from: damage to fruits and vegetables; broken bricks; robbery; additional cost for
salaries of drivers and guards; opportunity cost for construction material; transportation
opportunity 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
Average May-Jun-July 2,225,631.5 556,407 2,782,039.4
Source: EPRC/USAID
The following table shows a conservative estimate of the total annual cost of cargo delays at
Zamyn Uud. According to the calculations, in peak periods this figure can reach $8.3 million
per year. The great scale of this estimated loss shows the urgent need to improve infrastructure
and eliminate inefficiencies at Zamyn Uud.

Table 6. Cost of Cargo Delays



(Annual USD)

Period Total Cost of Cargo Delays per Year
Average 2008 5, 753,790
Average 9 months 2008
6,840,000
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 PARK

A. Proposed company structure
A Build-Operate-Transfer (BOT) process would take at least two years because the legal
structure and bidding process must be established. Because of the time delay in preparing a
BOT arrangement, public authorities plan to immediately start the PPP process by creating a
PPP 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 the
ZULP PPP project.
Government of Mongolia: Governmental agencies representing the GoM in the LPDC will
include the Ministry of Finance, Ministry of Roads, Transport, Construction and Urban
Development, the State Property Committee and UBTZ. The GoM will contribute 400 ha of
vacant land to the LPDC.
Mongolian Freight Forwarders (MFFA): This private association formed by private
transport companies operating in Zamyn Uud will be part of LPDC and will contribute equity
to 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 studies
examining the business conditions of the ZULP, and the prospect for participation of
additional LPDC private shareholders.
Construction companies: The LPDC will directly hire construction companies to build
specific project zones. Alternatively the LPDC will appoint operator(s) that have the right to
hire construction companies and manage the concession.
Operation companies: Operation companies will have a contract with LPDC, most likely as a
result of a bidding process. The LPDC will be the party to establish the principal requirements
that a company must fulfill as an LPDC operator. Operation companies will eventually
maintain 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 logistics
park.
Regulation agency: Competition and tariff regulation must be provided by an independent
agency or through a contract with LPDC operators, with the approval of the Agency for Fair
Competition and Customers. The LPDC could also be a self-regulated company considering
that GoM representatives will be on the board of directors.



Capital markets: Capital markets in Mongolia are still small, so it’s highly probable that the
project will be funded by a combination of equity from shareholders and debt and equity from
operators. The LPDC also could obtain debt against assets (land and potential revenues) in the
medium to long-term. Project stakeholders should explore the possibility of IFC participation
as 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 Markets

B. Services
A specialized operator could be selected through a bidding process to conduct non-core
business functions such as a warehouse facilities business or parking services. ZULP could
prepare a bid and select a candidate based on displayed capacity to earn the highest level of
fees 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 services
area. ZULP could establish a rental tariff for each m2 and/or require a percentage of gross
revenues generated from the commercial services area.
Finally, ZULP could enter into an additional area of business related to several possible real
estate opportunities.
In summary, the project could have three clearly defined groups of services under the umbrella
of general PPP services, as shown in the following figure:



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 Regulated
Logistics parks developed under a concession or PPP scheme normally identify a group of
tariffs 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 face
competition 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 regulated
by setting a maximum tariff.
On a preliminary basis, the services listed below, divided between transshipment services and
basic and commercial services, have been identified for regulation in the proposed Zamyn Uud
Logistics Park. However, final tariff rates should be determined based on the parameters of the
business model and financial analysis.

Table 7. Regulated Tariffs for Transshipment Services in Zamyn Uud



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
Warehousing

B. Main flow of Projected PPP Revenues
Based on the identification of services and tariffs, the scheme for potential concessionaire
revenues could be the following:



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
Services

One important advantage of the ZULP project is the potential for large land extensions into
areas presently under GoM ownership. 5 One fundamental difference between the proposed
ZULP project and other similar international projects is that the land is “clean,” implying that
project stakeholders will not incur new costs for land expropriation or for the application of the
eminent domain, (the right of the public sector to acquire land in order to execute projects of
public interest).
As soon as possible, the GoM should create a strategy to develop not only the project’s Master
Plan but also a Master Plan for the city of Zamyn Uud. The starting point for such a plan is to
create a land inventory, noting whether land lies in public or private hands. Following the
inventory, land that is not yet registered should be registered on behalf of the GoM. This
procedure will avoid the occupation of land by people speculating on possible future benefits
when the GoM might expropriate land to start a project and need to compensate land
occupants accordingly.
The strategy must also include value capture via the sale of future land to the private sector
once the GoM has improved utilities services and several projects are operating in Zamyn
Uud. 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 actually
GoM property, as assumed in this study.



SECTION IV: DEMAND ANALYSIS: ESTIMATION OF CARGO FLOWS AND
REVENUES

A. Objectives and Methodology of the demand analysis

The methodology for estimating and forecasting future demand for the proposed services to be
provided by the Zamyn Uud logistics park consists of three phases, each of which include
several activities. The phases are the following:


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 Uud

B Demand Analysis at Zamyn Uud 6

Data on cargo tonnage was obtained from MCGA as registered at the Zamyn Uud office. Both
the cargo and the truck carrying the cargo must receive clearance from MCGA, after which the
truck travels to the UBTZ transshipment area. There the cargo is unloaded from the truck and
loaded 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 cargo
processed in Mongolia from MCGA. First, the data was organized and processed to include
only information from the Zamyn Uud MCGA office. Once the total cargo for Zamyn Uud
was derived, the team worked on dividing the information between rail-to-rail and road-to-rail
transshipment in the case of both imports and exports. Once this data was organized, the team
separated each group of information by type of product and by month for the period of 2004-
2008.
Graph 5. Organization of Statistical Information

6
This section uses statistical information from MCGA. Given that the team received partial information from the
MRA, the team created an additional section to do adjustments to the estimation of revenues. However, trends in
both data sets are similar. The data from MCGA, though, is conservative in comparison to that provided by the
MRA, likely due to the fact that not all cargo is processed directly in Zamyn Uud. In some cases, cargo will be
transshipped in Zamyn Uud, but will register with MCGA in Ulaanbaatar.


Given that road-to-rail and rail-to-rail transshipment services for import cargo are the core
services for the proposed project, this analysis focuses primarily on the movement of this
cargo and then, secondarily, on export cargo as it relates to rail-to-road transshipment. This
second service moves low levels of cargo compared with the transshipment levels of import
cargo, but it must be considered because of it would utilize core services of the proposed PPP
project.
The analysis will also focus on the diagnostic of the time series to identify behaviors and/or
patterns of cargo transshipment in Zamyn Uud. This analysis allows prediction of future
demand for the PPP project. Understanding the pattern of the cargo series helps to make
decisions regarding how to adjust the series in the case of seasonality, for example, and also to
determine which econometric model is optimal for this analysis.

B.1 Total Import Cargo Processed at Zamyn Uud

Over the past four years, the average annual growth of total import cargo processed at Zamyn
Uud was 33%, growing from around 524,000 tons in 2004 to 1.5 million tons in 2008. Zamyn
Uud is Mongolia’s main border control point, and according to estimations made during the
course of this study, cargo flows through Zamyn Uud will continue to grow over the next
couple of years.

Annex G Page 18 Demand and Revenue Estimation for PPP “Zamyn Uud Logistics Park”


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 2009
The following table shows information on total import cargo moved through Zamyn Uud by
month. 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 Uud
grew from 2004 to 2008, reaching 128,000 tons per month in 2008 compared to 43,000 tons in
2004.
Zamyn Uud’s cargo processing peaks in July. During the course of the five years examined in
this analysis, the top three months in terms of cargo processing traffic were: July with an
average of 101,000 tons; June with an average of 94,000 tons; and May with an average of
90,000 tons.
Because of harsh weather conditions in December, January and February, these months
experience 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 Average
January 23,866.153 29,277.436 30,225.754 31,966.569 87,333.419 40,533.866
February 19,207.254 22,397.425 32,065.066 29,440.064 81,379.371 36,897.836
March 36,015.163 43,184.018 43,636.150 48,330.923 165,170.691 67,267.389
April 53,873.209 62,905.096 57,763.667 78,421.236 187,587.026 88,110.047
May 57,468.028 57,914.687 62,581.153 86,671.477 189,039.761 90,735.021
June 67,266.459 62,716.385 74,825.930 104,834.253 160,690.731 94,066.751
July 47,856.327 67,932.232 69,396.434 152,588.527 169,283.233 101,411.351
August 49,986.145 64,283.940 75,185.164 130,501.745 117,651.584 87,521.716
September 55,643.238 59,210.501 67,203.198 96,206.249 129,331.700 81,518.977
October 46,706.214 46,979.934 59,773.490 97,003.042 125,471.351 75,186.806
November 33,835.384 39,840.188 39,919.603 66,490.841 68,038.323 49,624.868
December 32,568.693 28,879.147 31,986.077 69,727.999 59,561.815 44,544.746
Total 524,292.268 585,520.989 644,561.685 992,182.925 1,540,539.007
Average 43,691.022 48,793.416 53,713.474 82,681.910 128,378.251
The graph below shows that the level of cargo processed at Zamyn Uud peaked in May 2008
at around 189,039 tons. April 2008 also processed unprecedented levels of cargo, reaching
187,587 tons for the first time in Zamyn Uud’s history. In 2008, the lowest cargo level was in
December at 59,561 tons. Yet, in spite of the global financial crisis, the December 2008
average was higher than the average for December of the previous four years. This could
indicate that Mongolia is experiencing a structural change in consumption and growth of
disposable household income. If this is true the next years will realize higher growth of
imports and commercial trade, which will increase the level of cargo traveling through Zamyn
Uud.



In 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 in
2005, 32,065 tons in 2006 and 29,440 tons in 2007. The series shows very clear seasonality
with low levels of cargo from November to February and higher levels of cargo from March to
October.
Time series normally have both trend and seasonality. Trend is represented, for example, as a
plateau followed by a period of exponential growth; technically defined as systematically
linear, meaning that it changes over time and does not repeat over the range of the data under
analysis. In the case of seasonality, the difference is that the pattern is repeated in systematic
intervals over time. This is exactly the case in the below statistical series.

Graph 6. Total Import Cargo (Tons) Processed Monthly
by Railway and Road, 2004-2008

The graph below shows the growth rates of total import cargo transshipped from road-to-rail
from 2004 to 2008. March and April are the months with the highest growth rates because they
follow periods of low activity (November, December, January and February).
Graph 7. Growth Rate of Total Import Cargo (Tons) Processed
by Road and Railway 2004-2008

Growth rates for the months of January, March, May, July, October and November always
show positive growth compared to the same months of previous years (YOY basis) - a



combined response to seasonality and natural annual growth in cargo flows through Zamyn
Uud.
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%

Zamyn 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 total
cargo movement in a year.
Graph 8. Import Cargo (Tons) Processed by Road and Railway
Monthly Comparison 2004-2008



B.1.2 Total Import Cargo Handled by Road-to-Rail Transshipment
The table below shows the total amount of cargo processed monthly entering Zamyn Uud by
truck. Annual truck cargo grew from 310,972 tons in 2004 to 415,034 tons in 2006. 2007 is a
transition year between the relatively homogeneous period of 2004-2006 and the explosive
growth shown in 2008. Truck cargo transshipped in 2008 grew approximately two-fold from
2007 and around three-fold from 2006.
Over the five-year analysis period, the volume of cargo grew from 311,627 tons in 2004 to 1.1
million tons in 2008. In terms of monthly averages, volume grew from 25,914 tons in 2004 to
98,877 tons in 2008 and the annual average of cargo processed throughout the five-year period
is 590,970 tons.
The total cargo processed at Zamyn Uud over the five-year period is 2,954,852.28 tons; 2008
represents 40% of the total five years (2004-2008) in cumulative terms. If 2007 and 2008 are
considered together, cumulatively they represent 63% of cargo for the period under analysis.



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 99,149.572
Source: National Customs Office (2009)
The graph below displays monthly behavior of the cargo statistics presented in the previous
table. 2004-2006 display a very clear upward trend with evident concavity and maximum and
minimum 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 in
March, 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 from
the 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 growth
and stabilization of future cargo flows at this level as normal, notwithstanding 2009, which is
the 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, February
processed 12,735 tons of truck cargo, 7,287 tons in 2005 (the smallest volume for the entire
period from 2004-2008), 12,435 in 2006 and 14,433 in 2007.



Graph 9. Truck Cargo (Tons) Processed Monthly
2004-2008

Graph 12 below shows a different representation of the seasonality of the statistical series of
cargo. The bar chart shows cumulative monthly demand for cargo processing in Zamyn Uud
over 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 understanding
seasonality in a normal year in Zamyn Uud. The months with the lowest levels of demand in a
year 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 graph
below. The cumulative cargo movement shows a minimum in February with 103,357 tons and
a 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 June
and 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 2.4
million tons.
Another interesting finding is that the months from April to September each have a monthly
average higher than 60,000 tons, which represents 64.5% or 1.9 million tons in cumulative
terms.



Graph 10. Cargo (Tons) processed by Truck

Source: EPRC with information of National Customs Office (2009)

The next table shows annual truck cargo movement through Zamyn Uud. The figure starts
with 311,627 tons in 2004 and finishes in 2008 with impressive annual growth of 70% over
2007. The growth rate for the period 2004-2008 was 281%, and between 2006 and 2008 the
growth rate was 185%, highlighting the importance of the last two years of the statistical
series.
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%
The table below shows the monthly growth rate for the analysis period. From the data, cycles
of increasing and diminishing growth can be observed.
The graph below shows that the greatest level of negative growth was seen in November
2008, at -57.37%. This downturn could be the result of high levels of positive growth seen in
March of the same year. The largest month-to-month growth during the period was from
February to March 2005 with 275.33% in March as a result of the low level of cargo in
February 2005.
Graph 11. Graph Growth Rate - Cargo (Tons) processed
by Truck 2004-2008



B.1.3 Total Railway Import Cargo Processed in Zamyn Uud at Rail-to-Rail
Transshipment
The 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 was
obtained directly from MCGA, not MRA. This means that some cargo is not represented in
this data analysis because a percentage of container cargo can bypass MCGA in Zamyn Uud
and 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 the
higher real numbers. However, this initial analysis did not have access to MRA’s monthly data
and therefore modeled the econometric system using data obtained from MCGA.



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%
The statistical series for railway import cargo processed in Zamyn Uud indicates that the
monthly average grew from 17,722 tons in 2004 to 29,228 tons in 2008. Rail cargo monthly
averages shows the same tendencies as truck cargo; growing from April to July and then
declining 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 29,228.679
The graph below shows similar statistical behavior between railway and truck cargo. The
differences are in the volume, with higher truck cargo movements than railway, and in two to
three peak months every year in fall, summer and spring.
Graph 12. Railway Cargo (Tons) Processed Monthly 2004-2008



The growth rate shows several jumps over the analysis period, two of the most important being
the first quarter of 2004 and the second quarter of 2007.
Graph 13. Graph Growth Rate - Cargo (Tons) processed by Railway
2004-2008



Graph 14. Railway Import Cargo (Tons) Processed

B.2 Total Export Cargo Processed in Zamyn Uud by railway and road
Mongolian exports continued to grow in 2008 despite the global financial crisis. Exports
produced in Mongolia are moved by train to Zamyn Uud at which point, cargo transported by
rail continues across the border into Erlian-China. China and Mongolia have agreed that export
cargo from Mongolia is to be transshipped to the Chinese railway gauge in Erlian, after which
it 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 very
low in 2008 at around 53,663 tons. This service will be considered in the project revenue
analysis.
Approximately 2 million tons of export cargo passed through Zamyn Uud in 2008; nearly
twice the amount of cargo in 2004. No monthly export trend was identified, even for the
months 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 169223.3567



B.2.1 Export Cargo moved through Zamyn Uud by railway (Transshipped in
Erlian-China)
Export cargo moved by railway comprises about 97% of total exports moved through Zamyn
Uud. Rail export cargo growth has been high in the analysis period, but it is not considered as
a 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 97,329.315 164,751.425

B.2.2 Export Cargo Transshipped from Rail-to-Road in Zamyn Uud
Rail-to-road export cargo transshipped in Zamyn Uud is just 3% of total exports and basically
consists 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 to
2008, but the cargo levels are still insignificant. Despite the low volume of cargo transshipped
from rail-to-road, these flows will be considered in the revenues analysis. In future years with
the addition of a paved road connecting Ulan Bator with Zamyn Uud, an increase in the flow
of 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 Average
January 1,072.817 1,723.911 2,650.522 3,253.635 5,086.562 2757.4
February 1,150.956 1,009.947 1,152.623 2504.243 2,832.325 1730.0
March 3,291.958 2,176.242 2,124.553 4,369.485 3,394.687 3071.3
April 2,683.449 1,865.491 1,100.312 2,328.837 4,826.114 2560.8
May 1,349.303 729.176 834.244 2,382.874 4,394.993 1938.1
June 816.935 2,339.960 1,608.140 3,366.514 3,802.081 2386.7
July 1,095.917 786.433 1,579.302 2,377.045 5,334.627 2234.6
August 1,691.090 1,100.940 1,564.836 2,275.664 4,677.364 2261.9
September 1,868.567 1,746.543 2,415.555 3,394.049 5,512.393 2987.4
October 2,078.906 2,095.305 1,975.538 2,720.175 4,373.242 2648.6
November 2,594.821 1,911.881 2,276.696 6,413.477 4,653.168 3570.0
December 1,500.649 2,498.293 4,620.844 9,245.563 4,775.625 4528.1
Total 21,195.367 19,984.121 23,903.166 44,631.562 53,663.180



Average 1,766.281 1,665.343 1,991.930 3,719.297 4,471.932

B.3 Import Cargo Processed in Zamyn Uud between January–April 2009
In the first four months of 2009, movement of import cargo through Zamyn Uud reached a
cumulative total of 163,770 tons, which is three times lower than 2008, but still similar to 2007
levels. This shows that 1) 2008 had extraordinary levels of cargo movement and 2) that flows
are facing structural change, as seen by high cumulative cargo levels in 2009 compared to
2004-2005 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 163770.7
Cargo transshipped from road-to-rail followed the same trend as total cargo for all months of
2009 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
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 117462.1
The data shows a strong decline in imported cargo transshipped from rail-to-rail in 2009. The
table below shows that 2009 cumulative cargo through April declined to 2004 levels. This
negative 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
2004 2005 2006 2007 2008 2009
January 12505.5 8552.0 14527.6 14570.3 25484.1 10082.5
February 6466.9 15109.5 19612.7 15003.4 24773.7 11412.6
March 13973.5 15811.9 17238.7 11493.9 26915.8 12782.7
April 23801.5 25216.8 20311.4 23930.8 32269.9 12030.9
Total 56747.4 64690.2 71690.4 64998.4 109443.5 46308.7



C. Center of Business Revenues in Zamyn Uud

This section explains the methodology used to identify and quantify Zamyn Uud’s main center
of business in 2008. The table below shows total revenues for the railway system in 2008, with
a maximum level in November of around MNT 21.258 million, and a minimum of MNT
13.895 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 using
the 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 tariff
of $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 total
sector revenue minus passenger revenue. Using this methodology, 2008 cargo revenue is
estimated 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 total
cargo revenues. To calculate this estimate, transshipment services in Zamyn Uud are
categorized as a different business than cargo transportation.
To calculate transshipment business revenues, the team used 2008 information gathered from
MCGA. MCGA data showed quantity of imports entering Mongolia by both road and rail and
outlined 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



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)
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 300

Finally, 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 transshipment
business 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 2.8



D. Forecasting Future Demand and Revenues for the Project
This section focuses on the demand and revenue analysis for the PPP project. The analysis
looks closely at estimates of the cargo that would pass through the Logistic Park in Zamyn
Uud 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 and
rail-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 and
better understand logistics processes for cargo, trucks and people entering Mongolia from
China.
The third activity involved collecting, compiling and tabulating statistical information of cargo
processed by type of product, primarily to assist in identifying 2008’s composition of demand
and to calculate estimated revenues for transshipment facilities in 2008 using current tariff
rates.
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 from
road-to-rail and $0.67 million from rail-to-rail. The GoM collected $0.13 million for export
cargo transshipment using rail-to-road facilities.
Upon receiving annual information from MRA, the team adjusted the estimations because data
acquired from MCGA underestimated revenues earned from the rail-to-rail component. With
this new source, the team revised revenue estimates upward to $3.8 million for 2008. Of this
new figure, $3.67 million was earned from import cargo transshipment, where $2.11 million
originated 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 is
useful for conducting econometric tests that yield valid results.
In the time series depicting the transshipment of cargo on a monthly basis in Zamyn Uud, it
can be observed see that the series has statistical and graphical seasonality. Specifically,
transshipment experiences high-demand from March to October, and low-demand from
November to February. These periods correspond to the warm and cold months of the year in
Mongolia.
In order to isolate seasonality from the time series two models were used: a dummy variable
model and a second multiplicative decomposition model. Both models estimate seasonal
factors to adjust every month, and ultimately de-seasonalize the time series. Once we adjust
the months for seasonality, we can then see the series trend.
After this adjustment the Quartic Root Dummy Variable (QRDV) model and a Log-Linear
Model were used. The first model uses time as the dependent variable and dummy variables to
model seasonality. The second model was chosen from several models as the best choice to
accurately 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% in
the 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 project
start date of January 2011 would allow sufficient time to complete feasibility studies, issue the
international tender, and complete construction.



Rate of earned revenue at Zamyn Uud was estimated by calculating a weighted average tariff
of 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 $1.73
per 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, using
the QRVD model 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 Log-linear model the range of
revenue 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 range
became $39 million to $50 million.
Finally, different scenarios were simulated based on changes in the WATT and using a
discount rate of 15%. Using the QRVD model, if the WATT is lower, for instance bye $1.2 per
ton, the present value of total revenues is $26.9 million. However if the WATT is higher, for
example $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 first
WATT ($1.2 per ton) and between $35 million and $42 million for the second WATT ($1.91
per ton).
The details of the forecast of demand and revenues are shown in Annex A: Forecasting
Demand and Revenues in ZULP.

SECTION V: CONCLUSIONS AND RECOMMENDATIONS

According to the results of the study, the present value of revenues of the business is enough
to have a successful bidding process. However in order to get positive results, Mongolia
government 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.



o Master Plan. The preparation of a Master Plan will be crucial to regulate future
project expansion and also to include the possibility of developing a new real
estate market for Zamyn Uud. Real estate brokering could reinforce the PPP
project as a source of new revenue and encourage social development.
o Environmental impact assessment to ensure that all environmental protection
requirements are met.
o Financial modeling to develope and tailor specifically to the particular
requirements of the project.
o Design of credit enhancement mechanisms, if required, (e.g. partial credit
guarantees).
o Risk analysis, allocation, and mitigation to allocate responsibility of the main
financial, commercial, operational, engineering, construction, and other risks
associated with the implementation of the concession project.
• Phase B. Transaction Implementation: Managing the competitive transaction
process from project promotion to contract award and financial closure. This includes
the following:
o Organization of the data room. All existing information and documentation
pertaining to the projects is gathered and organized in a transaction data room
and available to all qualified bidders.
o Preparation of bid documents:

Investment brochures that provide all the basic information that a
potential bidder needs to make a preliminary assessment of the project.
Requests for Proposal: A complete RFP package including the bidding
rules and evaluation criteria to award the concession contracts following
Mongolian laws and regulations and best international practice.
Concession/PPP contract. Reflects the details of the technical, financial,
and legal transaction design.

o National and international project promotion campaign to ensure robust
competition.


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