Report and Recommendation of the President to the Board of Directors

Project Number: 41192-013 November 2010

Proposed Loan and Grant Mongolia: Regional Logistics Development Project

CURRENCY EQUIVALENTS (as of 15 November 2010)

Currency Unit – togrog (MNT)

MNT1.00 = $.00078 $1.00 = MNT1,280

ABBREVIATIONS

ADB – Asian Development Bank ADF – Asian Development Fund CAREC – Central Asia Regional Economic Cooperation GDP – gross domestic product IEE – initial environmental examination km – kilometer MRTCUD – Ministry of Road, Transportation, Construction and Urban Development PAM – project administration manual PRC – People’s Republic of China SAPE – sector assistance program evaluation TA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government of Mongolia and its agencies ends on 31

December.

(ii) In this report, "$" refers to US dollars.

Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director T. Duncan, Transport Division, EARD Team leader M. Parkash, Advisor (Knowledge Management and Capacity

Development), EARD Team members F. Asistin, Senior Programs Officer, EARD

T. Badarch, Social Sector Officer, Mongolia Resident Mission, EARD X. Chen, Transport Specialist (Railways), EARD P. Clos, Counsel, Office of the General Counsel E. Infante, Assistant Project Analyst, EARD S. Ferguson, Principal Social Development Specialist (Safeguards), EARD

K. J. Kim, Transport Specialist, EARD S. Noda, Transport Specialist, EARD Y. Zhang, Senior Regional Cooperation Specialist, EARD Peer reviewer A. Kunth, Infrastructure Specialist, Southeast Asia Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROJECT AT A GLANCE

MAPS

I.  THE PROPOSAL 1 

II.  THE PROJECT 1 

A.  Rationale 1 B.  Impact and Outcome 4 C.  Outputs 4 D.  Special Features 4 E.  Investment and Financing Plans 5 F.  Implementation Arrangements 6 

III.  DUE DILIGENCE 7 

A.  Economic and Financial 7 B.  Governance 8 C.  Poverty and Social 8 D.  Safeguards 9 E.  Risks and Mitigating Measures 9 

IV.  ASSURANCES 10 

V.  RECOMMENDATION 10 

APPENDIXES

1. Design and Monitoring Framework 11 

2. List of Linked Documents 13 

Generated Date: 19-Nov-2010 10:27:42 AM

PROJECT AT A GLANCE1. Project Name: Regional Logistics Development Project 2. Project Number: 41192-0133. Country: Mongolia 4. Department/Division: East Asia Department/Transport Division5. Sector Classification:

Sectors Primary Subsectors Transport, and information and communication technology

√ Transport management and policies

6. Thematic Classification:Themes Primary Subthemes Economic growth Promoting economic efficiency and

enabling business environment Environmental sustainability Eco-efficiency Regional cooperation √ Crossborder infrastructure Capacity development Institutional development

6a. Climate Change Impact No Climate Change Indicator available.

6b. Gender Mainstreaming Effective gender mainstreaming (EGM) Gender equity theme (GEN) No gender elements (NGE) Some gender benefits (SGB) √

7. Targeting Classification:

General Intervention

Targeted InterventionGeographic

dimensions of inclusive

growth

Millennium development

goals

Income poverty at household

level√

8. Location Impact: National High Regional High

9. Project Risk Categorization: Low

10. Safeguards Categorization:Environment BInvoluntary resettlement CIndigenous peoples C

11. ADB Financing:Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Project grant Asian Development Fund 5.0 Sovereign Project loan Asian Development Fund 40.0

Total 45.0

12. Cofinancing:No Cofinancing available.

13. Counterpart Financing:Source Amount ($ Million)Government 26.6

Total 26.6

14. Aid Effectiveness:Parallel project implementation unit NoProgram-based approach No

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mon3649a

Tuesday, 16 November, 2010 2:46:56 PM

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mon3649b

Tuesday, 16 November, 2010 2:58:00 PM

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation1 on (i) a proposed loan, and (ii) a proposed grant, both to Mongolia for the Regional Logistics Development Project.2

II. THE PROJECT

A. Rationale

2. Historically, Mongolia has been a north–south land bridge from the People’s Republic of China (PRC) to the Russian Federation on the way to Europe. The transport sector, which mainly consists of roads and railways, is a key driver of economic development in Mongolia. The road network, including state and local roads, is about 49,250 kilometers (km) long, connecting 21 major cities and towns and 160 smaller villages. The 1,810 km Mongolian railway system carries more than 90% of the freight. The main line connecting the PRC’s rail system in the south with the Russian Federation’s Trans-Siberian line in the north was completed in 1955. It is the lifeline of the economy, and most of the economic development in the country during the past 55 years has taken place along this corridor. The strategic location of Mongolia as a transit country between the PRC and the Russian Federation has contributed to the demand for transport. Rapid economic growth in recent years has boosted that demand. Although the volume of transportation has increased, it has not kept pace with the rising demand. This constrains Mongolia’s ability to achieve its full economic growth potential. 3. Since 2003, Mongolia’s gross domestic product (GDP) has grown 7%–10% a year, raising the per capita GDP from $638 in 2004 to $1,560 in 2009. Growth in the mining sector contributed a large part of the economic expansion. The discovery of huge mineral and coal reserves, particularly in south Gobi, is expected to continue stimulating growth in the mining industry in the coming years. This will contribute to the high GDP growth rates. The mining industry and the development of the secondary and tertiary sector depend on efficient transportation and logistics. Most of the mining products are expected to be shipped to the PRC or to international markets through Tianjin port in the PRC. These shipments would generally have to pass through Zamyn Uud, the main gateway to the south. 4. Mongolia is also a landlocked country, and such countries face greater transportation challenges. Mongolia has to depend upon the Russian Federation and the PRC for access to seaports. In recent years, trade flows have been reoriented from the Russian Federation so that more than 80% of the imports now come from the PRC through the southeast border point in Zamyn Uud. Most of Mongolia’s exports also transit through Zamyn Uud on their way to Tianjin port, the only PRC port available to Mongolia for international trade. As a consequence, the traffic handled at Zamyn Uud has grown rapidly in recent years. Zamyn Uud is now badly congested,3 which is delaying imports, exports, and transit traffic. Although a number of factors contribute to these delays (unavailable rolling stock, change of gauge, and delays at customs), the main reason is the inadequate logistics in Mongolia, particularly at Zamyn Uud. 5. Efficient and well-developed logistics are essential for cost-effective and competitive transportation. Trade logistics—the capacity to connect to international markets to ship goods—is essential for developing countries to improve their competitiveness, reap the benefits of

1 The project is included in Asian Development Bank (ADB). 2009. Country Operations Business Plan: Mongolia,

2009–2012. Manila. 2 The design and monitoring framework is in Appendix 1. 3 Discussions with stakeholders revealed that import cargoes could take 10–60 days for clearance at Zamyn Uud.

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globalization, and fight poverty more effectively in an increasingly integrated world. A World Bank-funded study4 based on a global survey of international freight forwarders and express carriers indicated that facilitating the capacity to connect firms, suppliers, and consumers is crucial in a world where predictability and reliability are becoming even more important than costs. A country’s ability to connect to global markets is fast becoming a key aspect of its capacity to compete, grow, attract investment, create jobs, and reduce poverty. Mongolia’s performance in all logistics indicators is poor. Based on a worldwide survey completed by more than 800 logistics professionals, the World Bank has developed a comprehensive cross-country assessment of logistics performance in 155 countries—the logistics performance index. 5 Mongolia has an overall logistics performance index ranking of 141 (1 is the best, 155 is the worst).6 It ranks 149 for customs procedures, 144 for logistics costs (including freight rates), 133 for infrastructure quality, 122 for its ability to track and trace shipments, and 147 for timeliness in reaching a destination. Mongolia’s ranking indicates serious problems in the development of logistics. These are hurting the country’s competitiveness and have serious repercussions for overall economic performance. 6. Zamyn Uud, a town with a population of about 13,000, is the intermodal interchange point for traffic coming from the PRC and Mongolia to the Russian Federation and Europe, and vice versa. It handles road-to-rail, rail-to-rail, and road-to-road traffic. Most of the import traffic into Mongolia and transit traffic to the Russian Federation coming from the PRC (including international traffic from Tianjin port) by rail is transshipped to rail. In recent years, the volume of traffic coming by road from the PRC has increased. Most of this traffic is transshipped to rail at Zamyn Uud. Only a small portion of the traffic coming by road from the PRC is directly transshipped by road because there is no paved road between Zamyn Uud and Ulaanbaatar, or to the Russian Federation border in the north.7 Most of the goods coming into Mongolia are destined for Ulaanbaatar, the capital, with construction material and foodstuff accounting for the bulk of the cargo. Because of the limited logistics facilities at Zamyn Uud, it can take 50–60 days to get shipments to Ulaanbaatar. The development of the mining sector will create a huge demand in future for transporting coal and minerals, and this cannot be met by the existing logistics facilities. 7. To handle the traffic at Zamyn Uud, two facilities were created, one of which was financed by a grant from the Government of Japan in 1995. An additional temporary facility was opened on 11 June 2008. The three facilities are basic—they have no warehouses, limited and outdated equipment for handling material, no planned layout, no transshipment facilities from road to rail, and no heavy duty cranes. 8. The government supports the development of intermodal transport and seeks to build a strong logistics network in the country to improve Mongolia’s global competitiveness. Because of its geographic location, Mongolia is the focal point for international transit trade between the PRC, the Russian Federation, and Europe. The government is a signatory to a number of bilateral and multilateral agreements with neighboring countries and international organizations to facilitate international transport through Mongolia. To address the urgent need to improve logistics, the Government of Mongolia asked the Asian Development Bank (ADB) to support the development of multimodal logistics facilities at Zamyn Uud.

4 World Bank. 2010. Connecting to Compete: Trade Logistics in the Global Economy. Washington, DC. 5 It aggregates the performance in seven areas—from traditional ones, such as customs procedures, logistics costs

(including freight rates), and infrastructure quality, to new areas such as the ability to track and trace shipments, timeliness in reaching a destination, and the competence of the domestic logistics industry. The survey had the support and participation of the International Association of Freight Forwarders, the Global Express Association, the Global Facilitation Partnership, and the Turku School of Economics.

6 The only country in Asia with lower rankings than Mongolia is Afghanistan. 7 A two-lane road from Choyr to Zamyn Uud, partially financed by ADB, is under construction and expected to be

completed by the end of 2012.

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9. ADB has led efforts by international development partners in Mongolia’s transport sector with a combination of policy-level and project-level interventions. ADB’s country partnership strategy for Mongolia8 and the regional cooperation strategy and program update for Central Asia Regional Economic Cooperation (CAREC)9 identify transport as a strategically important sector for ADB assistance. Since 1993, ADB has approved four loans and one grant for roads and one loan for aviation development with an overall amount of $184.7 million. In addition, ADB has financed 12 technical assistance (TA) projects totaling $6.37 million for the transport sector. The first four loans supported the rehabilitation and upgrading of Mongolia’s first north–south corridor (CAREC corridor 4b).10 The United Nations Economics and Social Commission for Asia and Pacific designated the corridor as part of the Asian Highway Network (Asian Highway 3). In western Mongolia, ADB is supporting the development of the first phase from Yarant to Hovd (431 km) of a second north–south corridor in Mongolia (CAREC corridor 4a). This corridor is about 750 km long, running from the border with the PRC at Yarant, through Hovd and Olgiy, to the border with the Russian Federation at Tsagaannuur. It is also part of the Asian Highway Network (Asian Highway 4). ADB has not provided any assistance for railway development in Mongolia. In trade facilitation, ADB has financed six TA projects, including five regional TA projects and one loan for customs modernization. 10. ADB’s country partnership strategy for Mongolia identifies the underdeveloped transport network and inefficient cross-border transport as major sector problems. Its regional cooperation strategy and program update for CAREC identifies multimodal transport as a strategic priority and the development of multimodal facilities at Zamyn Uud as a key intervention for possible ADB assistance. The recent ADB sector assistance program evaluation (SAPE) also identifies logistics as an area for future support.11 11. The SAPE found that ADB’s past program for transport was successful, noting that ADB’s strategic priorities in the sector were well aligned with Mongolia’s needs. The executing agencies for completed and ongoing ADB-financed transport projects in Mongolia have shown strong commitment and generally satisfactory project implementation capabilities. The agencies have generally complied with loan covenants. Environmental management was carried out satisfactorily. Audit covenants were complied with in a timely manner, and the audited financial statements were generally acceptable. 12. The key lessons from the completed transport projects highlight the need to (i) ensure that the executing agency for project processing, implementation, and operation has adequate capacity; (ii) prepare realistic traffic forecasts; and (iii) review traffic constraints on a network basis. These lessons were incorporated in the current project design. 13. The project is consistent with ADB’s country partnership strategy for Mongolia. It will be ADB’s first intervention in the Mongolia transport sector that emphasizes the integration of different modes. This will be achieved through the development of a modern logistics facility, which will lower dwell time,12 increase efficiency, expand network capacity, achieve optimal use

8 Mongolia’s country partnership strategy, 2010–2015, is being developed and is expected to be finalized by January

2011. 9 ADB. 2009. CAREC Transport and Trade Facilitation: Partnership Prosperity. Manila. 10 The first project for rehabilitating the Altanbulag–Ulaanbaatar section was completed in 2001 and was rated highly

successful. The second project for developing the Nalayh–Choyr section was completed in 2005 and was also rated as successful. Implementation of the third road project is ongoing. The SAPE rated ADB’s overall support for the transport sector successful.

11 ADB. 2008. Sector Assistance Program Evaluation: Roads and Railways in Mongolia. Manila. 12 Dwell time is a measure of the time elapsed from the time the cargo arrives in the port to the time the goods leave

the port.

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of the network and assets, and improve staff productivity. All of these will lead to more efficient transport services. 14. The project will be implemented in Zamyn Uud, a poor and isolated desert area where rural people rely mainly on herding livestock. Inadequate and expensive transport services have limited economic opportunities. The local authorities and people living in the area see the development of the logistics facility as a way to address this problem and create more service sector employment in towns. Logistics development is part of the government’s program for the integrated development of a free economic zone in the area. This facility is expected to play an important role in the economic development of Zamyn Uud and the area, and will enable and stimulate international, regional, and domestic trade. The proposed project is in line with the National Development Plan and the government's Regional Development Strategy.13 15. The project is a key intervention in the transport sector that will bring many technical, operational, safety, and economic benefits. It will establish a well-developed logistics terminal, equipped with modern technology and managed by the private sector through a management contract. This will enhance logistics efficiency, increase throughput, and improve reliability—all of which will lead to a more affordable, faster, cheaper, and safer transport services in Mongolia. The proposed ADB support is expected to facilitate the flow of foreign and private capital to finance the logistics development in Mongolia. B. Impact and Outcome

16. The impact of the project is the international and regional trade promoted in Mongolia. The outcome of the project will be an efficient, competitive, and reliable multimodal transport system at Zamyn Uud. C. Outputs

17. The output of the project will be the development of a multimodal facility, with facilities for road-to-road, road-to-rail, and rail-to-rail transshipment at Zamyn Uud. The project will develop an integrated intermodal container terminal with customs and quarantine facilities, as well as rail and road access. Terminal equipment and management systems will be procured and installed. Upon completion, the facility will be operated by the private sector through a management contract. ADB will provide support for institutional capacity strengthening in the areas of (i) detailed design, (ii) implementation supervision, (iii) staff capacity development, (iv) environmental management, and (v) selection and execution of a management contract. D. Special Features

18. First intervention to promote multimodal transport. The project is ADB’s first intervention to promote multimodal transport and the first such intervention in Mongolia’s transport sector. It is also the first ADB project to promote coordinated improvements in transport infrastructure and trade facilitation, including a logistics center; harmonized cross-border regulations, procedures, and standards; and customs and quarantine modernization. 19. Private sector participation. The project will support private sector participation in terminal operations, equipment leasing, warehousing, and light manufacturing. It will stimulate private investment in ancillary industries, container freight stations, and other logistic support functions, such as freight forwarding, customs brokerage, insurance, trucking, and warehousing in and around the terminal for dry and refrigerated cargo. The project is also expected to

13 Government of Mongolia. 2008. National Development Strategy: 2007–2021. Ulaanbaatar.

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increase opportunities for public–private partnerships and private sector investments to develop transport infrastructure in Ulaanbaatar and south Gobi. 20. Integrated approach to logistics development. ADB policy dialogue has emphasized the need to integrate different transport modes in order to provide efficient and cost-effective transport services. The project seeks to achieve this by providing investment support to develop an integrated multimodal logistics facility in Zamyn Uud. Five principles have been followed in designing the facility: (i) nondiscriminatory access to the terminal; (ii) railside access for all licensed railway undertakings; (iii) roadside access to all operators; (iv) transparent capacity allocation and pricing; and (v) bundling of different cargoes (refrigerated and containers) and market segments (international and domestic), resulting in improved capacity utilization. 21. Terminal capacity management. The project will adopt international best practices for capacity management, including a sophisticated information-technology-based capacity management system and terminal management software applications (for example, customs administration information system, customs external portal system, risk management system, data warehouse system, and automated loading unit identification system). The equipment to be procured will be the most modern available in the market, consistent with the needs of current development in the logistics industry. The technologies will be compatible and adaptable to existing systems, and will be proven and scalable. The trial and testing period will be sufficient to ensure their successful operation. Adequate maintenance spares and staff training will be provided to support their sustainability. 22. Institutional and capacity development. The project will support institutional development and the enhancement of staff capacity. Working with the Ministry of Road, Transportation, Construction and Urban Development (MRTCUD), the project management consultants will review the existing institutional arrangements of the Mongolia Railway Authority, make recommendations for strengthening it, and undertake capacity development programs. Capacity development support will also be provided to increase private sector participation, and to select and execute a management contract to operate the facility upon completion. About 50 staff will be trained, and technical exchanges on logistics management will be organized. E. Investment and Financing Plans 23. The project is estimated to cost $71.64 million, including taxes and duties, contingencies, and interest and other charges during implementation. Table 1 summarizes the investment plan. The cost estimates are based on quantities derived from preliminary engineering designs and unit rates reflecting market prices for goods and materials.

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Table 1: Project Investment Plan ($ million)

Item Amounts A. Base Costa 1. Civil works, materials, and equipmentb 58.21 2. Project management, consulting services, and environmental mitigation 3.11 Subtotal (A) 61.32 B. Contingenciesc 8.95 C. Financing Charges During Implementationd 1.37 Total (A+B+C) 71.64 a In July 2010 prices. b Including taxes and duties of $1.95 million. c Physical contingencies are estimated at 6% and price contingencies computed at 10% for local

currency costs for 2011–2015 and 3% for foreign exchange components for 2011–2015. d Interest during implementation for the Asian Development Bank loan is based on Asian

Development Fund rate of 1% during the grace period. Source: Asian Development Bank estimates.

24. The government has requested $45 million from ADB’s Special Funds resources to help finance the project, comprising a loan of $40 million equivalent from the Asian Development Fund (ADF) and a $5 million ADF grant. The ADF loan will have a term of 32 years, including a grace period of 8 years, with an annual interest charge of 1% during the grace period and 1.5% thereafter, and such other terms and conditions set forth in the draft financing agreement. The Government of Mongolia will be the borrower. A summary of the financing plan is in Table 2.

Table 2: Financing Plan ($ million)

Source Total % Asian Development Bank (Loan) 40.00 55.8 Asian Development Bank (Grant) 5.00 7.0 Government 26.64 37.2

Total 71.64 100.0 Source: Asian Development Bank estimates.

F. Implementation Arrangements

25. The project will be implemented over 5 years. Physical implementation will be completed by 31 December 2015 and the loan account will close by 30 June 2016. The government confirmed that the land for the facility has been allocated. Civil works will start in March 2011 and be completed by December 2014. Trial operations will start in July 2015 and last for 6 months. 26. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual (PAM).14

14 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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Table 3: Implementation Arrangements

Aspects Arrangements Implementation period January 2011–December 2015 Estimated completion date 31 December 2015 (project completion date)

30 June 2016 (loan and grant closing date) Management

(i) Oversight body MRTCUD (ii) Executing agency MRTCUD (iii) Key implementing agencies Mongolian Railway Authority (iv) Implementation unit Project implementation unit will be established under Mongolian

Railway Authority (v) Operation of the facility Through management contract

Procurement International competitive bidding

6 contracts $ 41.54 million

Consulting services

QCBS

International consultants (60 person-months) and national consultants (112 person-months)

$ 2.71 million

Retroactive financing and/or advance contracting

MRTCUD proposes starting implementation of the project before loan and grant signing, and requested ADB’s approval of advance contracting and retroactive financing of up to 20% of the loan and grant amounts, for expenditures incurred and paid for but not earlier than 12 months before the date of the financing agreement. The government has been informed that provision of advance contracting and procurement and retroactive financing does not commit ADB to finance the project.

Disbursement The loan and grant proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2007, as amended from time to time) and detailed arrangements agreed upon by the government and ADB.

ADB = Asian Development Bank; MRTCUD = Ministry of Road, Transportation, Construction and Urban Development; QCBS = quality- and cost-based selection. Source: Asian Development Bank.

III. DUE DILIGENCE

27. The project benefits and impacts were assessed along with potential risks associated with the project. The project will (i) reduce logistics costs, promote international trade, and enable Mongolia to earn foreign exchange; (ii) enable shippers to benefit from lower transport costs; (iii) benefit consumers and producers of goods and services through the provision of timely and efficient transport services, and lower logistics costs; and (iv) improve trade competitiveness, enabling exporters and importers to benefit from lower costs. The combined benefits and impacts outweigh the costs, and net benefits will accrue to the project area. A. Economic and Financial

28. The economic internal rate of return was calculated by comparing the “with-project” and “without-project” scenarios. The project will reduce the cost of freight transport to and from Mongolia. The economic costs include (i) initial investment in fixed assets and facilities, container and terminal handling equipment, logistics center management systems, and customs and quarantine equipment; (ii) additional investment in repair and maintenance of assets and equipment renewal; (iii) change in working capital; and (iv) recurring costs, including fixed and variable operating costs. The economic benefits include (i) time savings for rail-to-rail, rail-to-truck, truck-to-rail, and truck-to-truck loading operations; (ii) diverted traffic cost savings, consisting of containerization benefits of current rail and road traffic that is not containerized;

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(iii) diverted traffic, cargo loss or damage, and logistics cost savings; and (iv) generated transport benefits. The economic internal rate of return indicates that the project is economically viable. Sensitivity analysis confirms the robustness of the project's economic viability. Changes in the key variables do not affect economic viability significantly. 29. Financial projections, prepared in accordance with ADB’s Guidelines for the Financial Management and Analysis of Projects,15 assessed the financial viability and sustainability of the project. The projected financial statements indicate that revenues will be sufficient to cover operation and maintenance costs, income taxes, and debt service; and provide a reasonable rate of return. The financial evaluation was undertaken in real terms using constant 2010 prices. The project cost estimates and financial projections in nominal terms were converted to real terms by adjusting for the projected effects of foreign and domestic inflation, and currency fluctuation. Incremental costs and benefits were derived under with- and without-project scenarios. The financial internal rate of return, computed on an after-tax basis, compares favorably with the weighted average cost of capital, also computed on an after-tax basis. The project is financially viable and sustainable. Sensitivity and risk analyses indicate that the financial internal rate of return for the project is robust under assumptions of plausible variability. B. Governance

30. All procurement to be financed under the ADB loan will be carried out in accordance with ADB’s Procurement Guidelines (2010, as amended from time to time). The relevant sections of ADB’s Anticorruption Policy (1998, as amended to date) will be included in all procurement document and contracts. The recruitment of consultants will be carried out in accordance with ADB’s Guidelines on the Use of Consultants (2010, as amended from time to time). 31. ADB’s Anticorruption Policy was explained to and discussed with the government and the MRTCUD. The specific policy requirements and supplementary measures are described in the PAM (footnote 14). C. Poverty and Social

32. An efficient, multimodal facility will enable the efficient flow of goods, promoting trade and development of the local economy of Zamyn Uud. It will help increase standards of living and reduce poverty by removing transport constraints to sustainable economic growth. Providing efficient, multimodal transportation in underserved, less-developed areas will create the conditions necessary for developing local resources, and creating jobs and other income-generating opportunities. The major project beneficiaries will be (i) the government, which will benefit from higher trade earnings; (ii) consumers, who will benefit from affordable products; and (iii) freight shippers, who will benefit from less damage to shipments and more affordable, faster, and safer shipment deliveries. The poor will benefit from the local economic improvement and employment generation. 33. The jobs created by the development of the logistics facility at Zamyn Uud will provide potential new sources of income for women and other vulnerable groups. They will benefit from multimodal development and have equal access to employment and wages. The development will generate demand for local labor and increase worker productivity and wages. The expansion of secondary and tertiary industries will generate additional jobs for men and women close to their homes. By participating more fully in the labor market, women will increase their net income and savings, improve overall family welfare, and upgrade their status.

15 ADB. 2006. Guidelines for the Financial Management and Analysis of Projects. Manila.

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34. Economic development has generated some adverse social impacts, including increased risk of HIV/AIDS or sexually transmitted infections, and human and drug trafficking. These particularly affect vulnerable groups, including women and girls.16 Such adverse trends could increase as trade expands. Stakeholders were consulted about these potential social impacts during project preparation. A consultation and participation plan will be carried out during project implementation. 35. This project will seek to increase awareness and prevent such social impacts. The measures to achieve this are set out in the environmental management plan of the draft initial environmental examination (IEE). 17 Some will be focused on the project site (the logistics terminal) and managed by the Mongolian Railway Authority; others will assist the local community in Zamyn Uud with the support of the local government. Funding support will also be made available through an ADB-financed TA project for HIV/AIDS prevention.18 D. Safeguards

36. The project is classified as environmental category B. The project preparatory TA consultants prepared a draft IEE, including an environmental monitoring plan and a grievance redress mechanism. The IEE was submitted to the Ministry of Nature, Environment and Tourism for review and endorsement. The project could have adverse environmental impacts in the following areas: (i) soil erosion from cut and fill; (ii) deterioration of underground water quality of adjacent waterways; and (iii) public health and safety, including HIV/AIDS or sexually transmitted infections. The IEE concluded that the adverse environmental impacts can be successfully mitigated through the use of best practices and appropriate technologies. Implementation of the environmental management, mitigation, and monitoring programs included in the IEE will ensure compliance with ADB and government environmental guidelines and procedures. Regular monitoring and audits will be conducted to ensure that standards and regulations are followed. 37. The site for the logistics terminal is vacant desert land owned by the government. No one resides on or uses the land. The road that will connect with the main highway to the site does not require any land acquisition, or demolition of structures or trees. Therefore, the project is classified as category C for involuntary resettlement. Zamyn Uud does not have any ethnic minority communities; the area is settled by Khalkh people, the dominant ethnic group in Mongolia. Some minority households have migrated to Zamyn Uud for work, but they have been incorporated into the local community. The project is classified as category C for indigenous peoples. E. Risks and Mitigating Measures

38. The project is formulated to minimize potential risks. Sensitivity tests indicate that economic circumstances would have to become substantially worse for the project to lose its economic viability. Risks associated with potential changes in government policy are minimal. The project is a high-priority investment supported by the government. The development of this facility will increase the trade competitiveness of Mongolia and promote industrial development, which will stimulate economic development. Macroeconomic conditions are expected to be favorable in view of the expected development of major mining operations in south Gobi. Stable economic performance is expected based on the government's projections and growth trends.

16 Summary Poverty Reduction and Social Strategy (accessible from the list of linked documents in Appendix 2). 17 Initial Environmental Examination (accessible from the list of linked documents in Appendix 2). 18 ADB. 2008. Technical Assistance to Mongolia for HIV/AIDS Prevention in ADB Infrastructure Projects and the

Mining Sector. Manila (TA 7175-MON).

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39. The equipment and materials to be procured are based on proven technologies. The use of project management consultants will ensure that the design is robust and the facility is developed in a timely manner. A potential risk is a delay in implementation, which would postpone the project benefits. However, MRTCUD has experience implementing ADB-financed projects, has adequate capacity, and will set up a project implementation unit with personnel experienced in project implementation. The consulting services provided under the project will help strengthen the capacities of the Mongolian Railway Authority and the project implementation unit. The steering committee set up to coordinate implementation will support smooth coordination among line ministries, different agencies, and stakeholders; and provide guidance to support the timely completion of the project. Major risks and mitigating measures are described in detail in the risk assessment and risk management plan.19

IV. ASSURANCES

40. The Government of Mongolia and MRTCUD have assured ADB that implementation of the project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan and grant documents. 41. The Government of Mongolia and MRTCUD have agreed with ADB on certain covenants for the project, which are set forth in the financing agreement.

V. RECOMMENDATION

42. I am satisfied that the proposed loan and grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan in various currencies equivalent to SDR25,358,000 to Mongolia for the Regional Logistics Development Project, from ADB’s Special Funds resources, with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft financing agreement presented to the Board; and

(ii) the grant not exceeding $5,000,000 to Mongolia, from ADB’s Special Funds resources, for the Regional Logistics Development Project, on terms and conditions that are substantially in accordance with those set forth in the draft financing agreement presented to the Board.

Haruhiko Kuroda President

19 November 2010

19 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms

Assumptions and Risks

Impact International and regional trade promoted in Mongolia

Mongolia international trade increased by 100% in 2020 compared with 2009 PRC–Mongolia trade increased by 120% in 2020 compared with 2009

Government statistics

Assumptions Macroeconomic targets achieved

Associated facilities and infrastructure developed

Outcome An efficient, competitive, and reliable multimodal transport system developed at Zamyn Uud

Freight traffic handled at Zamyn Uud increased by 80% by 2018 compared with 2009 Container traffic volume increased by 100% by 2018 compared with 2009 Waiting time at Zamyn Uud reduced by 50% in 2018 compared with 2009

MRTCUD statistics and post-evaluation surveys Post-evaluation surveys and reports from MRTCUD

Assumptions Traffic forecast for Zamyn Uud realized

Shippers and freight operators realize the benefits of using the facility

Outputs 1. A multimodal

facility with facilities for road-to-road, road-to-rail, and rail-to-rail transshipment developed at Zamyn Uud

2. Terminal

equipment and management systems procured and installed

3. Strengthened

institutional capacity

Multimodal facility starts operations by December 2015 Procurement and installation is completed by June 2015 Capacity development support for project implementation and management contract completed by June 2015

Project administration missions and PCR Progress reports and PCR Consultants reports and progress reports

Assumption Government provides funds in a timely manner

12 Appendix 1

Activities with Milestones Inputs 1. Civil works and buildings completed by

December 2014

2. Materials and equipment procured by December 2014

3. Track laying completed by December 2014

4. Equipment and communication facilities completed by June 2015

5. Consulting services completed by June 2015

6. Management contract started by July 2015

ADB: $45 million ($ million)

Item ADB Loan Amount

ADB Grant Amount

1. Civil works and equipment

39.66 1.89

2. Project management, consulting services, and environmental mitigation

0.00 3.11

3. Contingencies 0.34 0.00

Government: $26.64 million Item Amount ($ million)

1. Civil works and equipment

13.06

2. Licenses, taxes, and duties

3.60

3. Contingencies 8.61

4. Financing charges during implementation

1.37

ADB = Asian Development Bank, MRTCUD = Ministry of Road, Transportation, Construction and Urban Development, PCR = project completion report, PRC = People’s Republic of China. Source: Asian Development Bank.

Appendix 2 13

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=41192-01-3

1. Financing Agreement

2. Sector Assessment (Summary): Transport

3. Project Administration Manual

4. Contribution to the ADB Results Framework

5. Development Coordination

6. Financial Analysis

7. Economic Analysis

8. Country Economic Indicators

9. Summary Poverty Reduction and Social Strategy

10. Initial Environmental Examination

11. Risk Assessment and Risk Management Plan