64600 Southern Mongolia infraStructure Strategy Southern Mongolia infraStructure Strategy 1 Southern Mongolia infraStructure Strategy © 2009 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. 2 Southern Mongolia infraStructure Strategy table of contentS Acknowledgements 5 Executive Summary 6 Mining in Southern Mongolia 6 Town Development 7 Railways and Roads 9 Electricity 12 Water Resources 15 Social Issues 16 Environment 17 Financing 17 Institutions 18 1. introduction 20 2. Mining in Southern Mongolia 22 2.1. Major mines of Southern Mongolia 22 2.2. Markets for Mongolia’s coal 27 2.3. Markets for Mongolia’s copper 28 3. houSing and urban infraStructure 30 3.1 Population growth 30 3.2 Different models for mining settlements 32 3.3 Options for planning and providing urban services 34 3.4 Planning towns in Southern Mongolia 39 3.5 Current Priorities 42 4 land tranSPort 43 4.1 The choice between road and rail 43 4.2 Possible railway destinations 44 4.3 Regulation of private railways 50 4.4 Roads 52 4.5 Trucking and Logistics 53 4.6 Current priorities 54 5 electricity 55 5.1 Existing electricity and heating systems 55 5.2 Demand forecasts 56 5.3 Supply options 57 5.4 Assessment of supply options 60 3 Southern Mongolia infraStructure Strategy 5.5 Investment plan and costs 63 5.6 Tariffs 64 5.7 Impact of Chinese Imports for Oyu Tolgoi 65 5.8 Current Priorities 65 6 Water reSourceS 66 6.1 Demand for water resources 66 6.2 Groundwater potential supply 68 6.3 Long distance surface water pipelines 73 6.4 Comparison of groundwater versus surface water pipeline 73 6.5 Groundwater management 74 6.6 Current priorities 75 7 Social iSSueS 77 7.1 Sharing the Benefits of Mining Development 77 7.2 Providing Adequate Social Services 82 7.3 Protecting Vulnerable Groups 85 7.4 Current Priorities 89 8 environMent 90 8.1 Land conversion and mine sites 90 8.2 Transport infrastructure 90 8.3 Road traffic 91 8.4 Energy 92 8.5 Water abstraction 92 8.6 Urban development 93 8.7 Induced development 93 8.8 Cultural and natural heritage 93 8.9 Current Priorities 94 9 Planning and inStitutionS 96 9.1 Tasks to be performed 96 9.2 Functions and required skills 97 9.3 Possible new institutions 102 9.4 Current Priorities 106 4 Southern Mongolia infraStructure Strategy acknoWledgeMentS This World Bank report was written by Michael Warlters, leading a team that included Jim Reichert, Tony Whitten, Tumentsogt Tsevegmid, Graeme Hancock, Angela Khaminwa, Andrew Goodland, Erdene Ochir Badarch, Sunjidmaa Jamba, Nomuuntugs Tuvaan, Byambaatar Ichinkhorloo, Otgonbayar Yadmaa, Daniel MacDonald, and Bolormaa Gurjav. • The report draws on background studies written by various authors: • Land transport – Richard Bullock of Bullpin Consulting; • Urban infrastructure – Denzel Hankinson and David Ehrhardt of Castalia; • Electricity – William Derbyshire of Economic Consulting Associates; • Water resources – Albert Tuinhof and Buyanhishig Nemer of Acacia Water; • Environment – Thomas Walton; • Community concerns –Bayan-Altai Luvsandorj; and • Social issues – Angela Khaminwa. The report has also drawn on information provided in workshops held in Mongolia, in May, September, and October 2008, and April 2009; a study tour to Australia in November 2008; and information provided by various mining companies in Mongolia including Ivanhoe Mines, Rio Tinto, Energy Resources, MAK, and SouthGobi Sands. The workshop proceedings and background studies are available at www.worldbank.org/southgobi. The report was prepared by the World Bank with financial support from the Public-Private Infrastructure Advisory Facility (PPIAF) and the Australian Government’s AusAID – East Asia and Pacific Infrastructure for Growth Trust Fund. 5 Southern Mongolia infraStructure Strategy ExEcutivE Summary The signing on October 6, 2009 of an need to be established that can manage all of these investment agreement for the development of a steps, and carry them forward as quickly as possible. copper and gold mine at Oyu Tolgoi marks a turning point in Mongolia’s history. As Mongolia begins to emerge from the Global Financial Crisis, the Mining in Southern Mongolia country’s decision-makers can turn their attention The table below sets out preliminary estimates to the plans, institutions and investments needed to of production volumes from the major mines in support the country’s tremendous growth potential. Southern Mongolia. Coal production in the region If the right steps are taken, within a few years, the could reach 45 million tonnes per year, of which mines of Southern Mongolia could be generating 14,000 tonnes of steam coal production from annual revenues of more than US$5 billion. But in Shivee Ovoo is currently intended to be converted order to make this a reality, more than US$5 billion into electricity for export to China. of infrastructure investment will be needed. This will be a huge challenge, in a country with a GDP of Over the next five to ten years, the Chinese around $5 billion, and with a Government deficit of market might absorb about 20 million tonnes of 8.2 percent of GDP in June 2009. coking coal imports per year, with Mongolia in a good position to dominate China’s import market. Beyond the signing of investment agreements for the proposed mines of Southern Mongolia, The market for steam coal is much more the Government will need to make plans for marginal, with China having a lot of cheap domestic the construction of towns, energy and transport production of steam coal. The cost of production facilities, and management of water resources. The of Southern Mongolia’s coal will be in the order of social and environmental impacts of the mines, $10-$30/tonne. The cost of rail freight into China supporting infrastructure, and population influx could be in the order of $10-$30/tonne. And the will need to be managed. Laws and regulations price paid by Chinese power plants for thermal coal governing infrastructure investment and regulation ranges from $18-$55, depending on the thermal will need to be developed or amended, to provide a value of the coal. The price paid for rail freight will reasonable balance between the interests of private be a key factor in selling thermal coal to China. investors and the Government. And institutions will Potential Major Mines in Southern Mongolia Production Employment Start date Mine Mineral Life (years) (‘000 tons/year) Estimate Estimate Tavan Tolgoi Coal 200+ 15,000 1500 2012 Uhaahudag Coal 40 10,000 1000 2009 Baruun Naran Coal 20 6,000 500 2012 Tsagaan Tolgoi Coal 20 2,000 150 2015 Nariin Sukhait Coal 40 12,000 150 2003 Ovoot Tolgoi Coal 50 5,000 400 2008 Sumber Coal 50 5,000 400 2015 Shivee Ovoo Coal 200+ 14,000 600 2015 Oyu Tolgoi* Copper 50 2,000 4000 2012 Tsagaan Suvraga* Copper 20 250 1000 2012 Total 7800 * Production figure is for copper concentrate (30% copper) 6 Southern Mongolia infraStructure Strategy Higher prices may be realized in markets outside heating, and solid waste services. By 2015, town China. Gaining access to these markets will require development might require investment of US$ 1.4 the construction of good rail connections through billion. China or Russia, and will again depend on the rail freight prices. There are several different models for town development, and these will have important At current prices, exports of 20 million tonnes of implications for the extent of population influx and coking coal would generate annual revenue of US$ the region’s development. The models include: 2 billion. Exports of 15 million tonnes of steam coal would generate annual revenue of US$0.9 billion. • Fly-in fly-out: For mines in remote areas or with small deposits which would sdnot justify large The Chinese market should be able to absorb set-up costs, mining companies frequently all of Southern Mongolia’s copper production. choose “fly-in fly-out�, or bus-in bus-out ar- Combined with the gold that will be produced at rangements, with workers staying at the mine Oyu Tolgoi, Southern Mongolia’s copper mines for 2-3 weeks, and then spending 1 week at would generate annual revenues of around US$ 2.3 home in a large town. Many workers find these billion at current prices. arrangements preferable to living full-time in small and remote location, but it places stresses on family life. FIFO arrangements typically result Town Development in relatively low population influx near the mine In planning towns, the starting point is an site, and accordingly require lower total invest- estimate of mine employee numbers. The rate of ment. population growth is extremely uncertain, and the Government will need to monitor population • Gated community: Internationally, some min- changes regularly to ensure that adequate services ing companies have chosen to develop gated are provided for new arrivals. This report assumes communities, in which their workers and their that the population will increase by around eight families live close to the mine, in a small town times the number of mine employees. On average, which is separate from the existing local com- Mongolian families have 4.1 members. And munity. Reasons for such segregation include international experience of mining towns suggests security concerns, or because the mine workers that for every new person in a mining employee’s require very different standards of accommoda- family, an additional new arrival may be attracted by tion from the rest of the community. increased economic opportunities. Based on preliminary estimates of mine • Integrated community: Where such concerns employment, indicative population estimates can are not relevant, and the mine is located near be made for the various mining centers of Southern existing towns, new mines can choose to inte- Mongolia. An Excel model is available which can grate their housing arrangements into the exist- convert the estimated population numbers into an ing community. Where possible, these sorts of estimate of the capital cost of town development. “integrated communities� present a range of The costs estimated include housing, other buildings, social advantages, but they require an existing drinking water, waste water, town electricity and community with the capacity to house several indicative capital costs of town development Population center additional Population buildings infrastructure total ($m) ($m) ($m) Tavan Tolgoi 16,772 238 42 280 Nariin Sukhait 7,967 112 29 141 Oyu Tolgoi 33,544 490 69 559 Tsagaan Tolgoi 1,258 18 20 38 Shivee Ovoo 5,032 70 23 93 Dalanzadgad 16,772 238 42 280 total 81,344 1,166 225 1,391 7 Southern Mongolia infraStructure Strategy thousand new mine employees and their fami- of Mongolia is interested not just in the success lies. of individual mines, but in the development of a vibrant mining industry. Recognizing that different • Company town: Finally, some mining companies workers and their families will have different have built “company towns�, where the min- preferences, the Government should work to ensure ing company builds all the housing and infra- that a range of township options are provided in the structure. This sort of arrangement can run into region, including FIFO and integrated communities. problems of financial sustainability if the level of Providing a range of regional accommodation population influx is large – the mining company choices will help to enlarge the employment pool for may be unwilling or unable to expand services the mining industry. In order to bring this about, the to new arrivals who do not work for the mine. Government will need to monitor all of the different proposals being made by mining companies, and Investment costs are likely to drive much of the might need to suggest changes. decision-making concerning town development. Mining companies have a desire to see town Moreover, mining companies are not necessarily development proceed rapidly. And with the security the best entities to plan, build, and operate town of a future revenue stream arising from their services. For example, mining companies may proposed mining projects, the mining companies be unwilling or financially unable to provide are able to raise large amounts of capital to finance housing and other services for non-employees. the developments that are necessary in order to Democratically elected local governments can be undertake the mining projects. Housing their expected to be more responsive to the needs of workers in agreeable accommodation is one of the local community. But national government the priorities for all of the mining companies. So may have better access to finance and stronger it is attractive to rely on the mining companies to human capacity than local governments. The table develop the necessary towns and town services. below suggests the advantages and disadvantages of allocating planning responsibility to different But the planning process should not be entirely entities which could possibly plan and organize left to the mining companies. The Government town services. choosing Who Plans and controls infrastructure assets advantages disadvantages National Government • Highest capacity • Remote from local needs • Good on national infrastructure like highways, railways, transmission Aimag • Can coordinate development of several • Lack of capacity mines, several towns, and the links • Still somewhat remote from some local between them. needs Soum • Knows the local situation • Lacks capacity • Accountable to local people • Cannot coordinate • No economies of scale Mining company • Business interest in having infrastructure • Interested in own workers, not the rest of to support workers the community • Not specialized in infrastructure Specialized private • Strong financial incentive to get • More complicated to procure and manage operator infrastructure working well • Can be hard to attract a good operator Private property • Business interest in getting infrastructure • Not specialized in infrastructure other than developer working for tenants housing • No obligation to serve populations outside of property gate 8 Southern Mongolia infraStructure Strategy A consultative planning process is suggested Careful political leadership will be required in order to govern town development. Suggested to explain the tariff implications of new town activities include: development. If private sector finance is to be used • conduct a public workshop with mining to build infrastructure services, tariffs will need to companies, to determine the mining companies’ cover the costs of service delivery – the private sector plans including likely employment numbers and will not invest in non-profitable activities. Compared proposed housing strategies; with current tariffs, cost-covering tariffs for new • issue a public discussion document, indicating facilities could be 2.3 times higher for drinking the proposed locations of new towns, as water, 3.5 times higher for electricity, and 26 times well as an indication of possible options for higher for waste water. service delivery at each of those locations, and indicative costings for each of those options. Railways and Roads Permit a period of public debate before making Mongolia faces a trade-off between minimizing a government decision on the locations. the costs of railway investment, and addressing • allocation of responsibility (across tiers of the market power of railway companies. Larger government and between ministries) and investments in railways will mean higher establishment of a timeline for the preparation transportation costs, a smaller profit margin for the of town development plans for each of the mining industry and lower mining revenues for the proposed locations. Each town development Government. On the other hand, serving Southern plans should indicate, for each infrastructure Mongolia with multiple railways owned by different service (buildings, water, waste-water, electricity, operators would help to reduce the market power heating, solid waste): of any individual railway. Monopoly railway owners - the expected capital and operating costs; – in China, Russia, or Mongolia – have the potential - who would finance the assets; to charge excessive prices for railway transportation, - who would design and build the assets; reducing competition and the profitability of - who would operate the infrastructure Mongolian mines. service; and the expected level of tariffs and approach to revising tariffs over time. Managing the trade-off between investment cost • publish the town development plans, and seek and market power of railways can best be managed public comment on them, before formally ap- with a phased approach to railway development. proving them; In the near-term, the priority should be to develop • where the Government seeks mining company the least-cost railways that will kick-start the finance to support town development, ensure development of mining in Southern Mongolia: the that a written agreement is reached setting out proposed railways from Tavan Tolgoi to Gashuun the details, and make this agreement publicly Sukhait and then to Baotou, and from Nariin Sukhait available. to Ceke. Once these railways are built, the resulting cost-covering tariffs Water Waste- electricity electricity electricity heating heating water option a option b option c option a option b Units $/m3 $/m3 $/kWh $/kWh $/kWh $/m2/month $/m2/month Current residential 0.52 0.17 0.05 0.05 0.05 0.17 0.17 tariff Current enterprise 0.61 0.17 0.08 0.08 0.08 0.40 0.40 tariff Tariff covering 0.11 0.06 0.03 0.07 0.45 0.06 O&M Tariff covering 1.20 4.57 0.19 0.29 0.55 0.41 0.03 full costs Assumes a population of 15,000 people. Option A provides electricity over a high voltage transmission line, with heating from heat only boilers. Option B provides electricity and heat using a 5MW combined heat and power plant. Option C provides electricity from local diesel generators without district heating – for heating residents would used heat only boilers, as in Option A. 9 Southern Mongolia infraStructure Strategy boost to national GDP will facilitate financing of mining competitors from using the railways. Such additional railways. behavior would not be in the broader interests of Mongolia. The construction of additional competing Part of the solution to the market power of railway routes over time could help to lessen such Chinese railways could be long-term contracts potential monopoly power. addressing the prices at which coal and other minerals will be transported within China. Prior to The Government could also play a useful role making large investments, developers of Mongolian by regulating to ensure that competing mining mines and railways may seek such contracts privately companies can have access to Mongolian railway in order to enhance certainty over their investment services at reasonable prices. Development of returns. The Mongolian Government could usefully a regulatory access regime will be, however, a play a role in dealing with the Chinese Government considerable challenge in terms of both policy to provide inter-governmental recognition of such development and institutional capacity. In the short- long-term arrangements and ensuring effective term, operating licenses for these railways could remedies in the event of breach of such contracts. include provisions which ensure which provide a A secure agreement for the transit of Mongolian forum and basic pricing principles for arbitration in minerals across China for overseas export would the event that access disputes cannot be resolved help to promoting a reliable and competitive mining between the parties directly involved. industry in Mongolia, which would also be in China’s interests. Possible railway routes for tavan tolgoi’s coal Another part of the solution to railway market At a cost of around US$1.8 million per kilometer, power in China may be the construction of new railways in Southern Mongolia will only be alternative railway routes to Russia. These routes financially justified for freight volumes of at least 2-4 are not the lowest cost options for the transport of million tonnes per annum. New railway construction Mongolian minerals to international markets, but will be justified for coal mines, but it is unlikely their construction may become necessary in the event that copper mines or other minerals extraction that reasonable long-term arrangements cannot be (eg uranium in northern-eastern Mongolia) would made with Chinese railways. In the near-term, the generate the freight volumes to justify new railway possibility that a railway to Russia could be built construction. will help to improve Mongolia’s bargaining position when dealing with Chinese railway operators. The value of Southern Mongolia’s coal mines will depend on the cost of the railways they use, and Within Mongolia, individual railway companies this in turn is determined by the transport distance. will also have market power in dealing with mining Various potential railway routes were considered for companies. Decisions have already been made to the export of coal from Tavan Tolgoi. The following permit Energy Resources and MAK to build railways table summarizes the combined costs of coal serving Tavan Tolgoi and Nariin Sukhait. There are production and rail freight, for different potential economic incentives for these mining companies to railway routes, depending on the annual quantity of use their monopoly control of the railways to set coal produced at Tavan Tolgoi. The cheapest costs high transport tariffs and extract all of the profit from for delivered coal are at Baotou or the Chinese port competing mines, or to completely exclude their of Huanghua. 10 Southern Mongolia infraStructure Strategy cost per tonne for coal exported from tavan tolgoi (uS$) 10 million 20 million 30 million tonnes/year tonnes/year tonnes/year A. Tavan Tolgoi – Gashuun Sukhait – Baotou $33.00 $26.80 $24.70 B. Tavan Tolgoi – Gashuun Sukhait – Baotou – Huanghua $56.50 $50.30 $48.20 C. Tavan Tolgoi – Sainshand – Zamiin Uud – Datong – Qinhuangdao $55.50 $53.15 $50.10 D. Tavan Tolgoi – Tsagaan Suvraga – Sainshand – Choibalsan – Vladi- $95.22 $87.72 $81.62 vostok E. Tavan Tolgoi – Airag – Choibalsan – Vladivostok $94.92 $87.72 $81.62 F. Tavan Tolgoi – Airag – Ulaanbaatar – Ulan Ude – Vladivostok $83.54 $89.84 $84.04 G. Tavan Tolgoi – Ulaanbaatar – Ulan Ude – Vladivostok $81.64 $80.84 $76.24 Assumptions and notes. (1) Assumes an indicative $12 cost of coal production. Estimated costs of coal production range from $10-$28 per tonne. (2) It is assumed that a new railway has capital cost of $1.8 million per kilometer, amortized over 20 years at a 15% discount rate, operating costs of $0.02 per tonne per kilometer, and a distance of 1.05 times the indicated straight-line distance. (3) It is assumed that the existing Mongolian network can handle volumes of up to 10 million tonnes per year at an operating cost of $0.02 per tonne per kilometer. For greater freight volumes, a second track would need to be constructed, with the same assumptions as for note (2). (4) The estimated cost for the existing Chinese network reflects current Shenhua and China Railways tariffs. Actual prices will be com- mercially negotiated. (5) The estimated cost for the Russian network is based on operating costs of $0.01 per tonne per kilometer. This is likely to be an under-estimate of the true cost and can be compared with current Russian freight rates of around $85 per tonne for foreign coal from Naushki to Vladivostok. The costing assumes that Russian railways could The relationship between the value of provide services at a cost of US$0.01 per tonne per Mongolia’s coal resources and the costs of rail kilometer. The actual cost is likely to be higher. freight is illustrated in the following table. The table Under the current regime of rail pricing, Russia estimates the present value of coal sales from Tavan charges a higher freight price for foreign coal than Tolgoi, net of the costs of production and rail freight, for domestic coal. Transport of foreign coal from under the assumption that all of the coal is directed Naushki to Vostochnaya would cost around $85/ along one of the routes discussed above. The table tonne. Including the cost of railway construction in is not intended to be an accurate reflection of the Mongolia, the total cost of transporting coal from value of Tavan Tolgoi reserves. Rather, it illustrates Tavan Tolgoi to Vostochnoy would be in the order the importance of considering coal mine and rail of $125/tonne. At this cost it would be impossible development together. For example, under the to export thermal coal through Russia. Coking coal assumptions in the table, if Tavan Tolgoi produces exports would be very vulnerable to fluctuations in 20 million tonnes per year, the resulting revenue world prices or changes in Russian freight charges. stream would be worth $6.2 billion if the coal is exported through Huanghua, but $1.5 billion if the Even if acceptable Russian rail freight prices can coal is exported through Vladivostok via Sainshand be negotiated, it is not clear that the ports would and Choibalsan. accept Mongolian coal. Russian ports are largely controlled by Russian coal companies. It is also not clear that Russian ports currently have the capacity to accept additional large freight volumes. 11 Southern Mongolia infraStructure Strategy indicative Present value of tavan tolgoi revenues ($ million) F. D. Sainshand E. Tons per Airag G. Ulaanbaatar A. Baotou B. Huanghua C. Qinhuangdao Choibalsan Airag Choibalsan Year Ulaanbaatar Vladivostok Vladivostok Vladivostok Vladivostok 10m 4,194 2,723 2,785 299 318 1,030 1,149 20m 9,164 6,222 5,865 1,537 1,537 1,272 2,399 30m 14,140 9,727 9,370 3,451 3,451 2,997 4,462 Assumptions: All coal is freighted along the routes indicated. Present value is computed assuming constant annual sales at $100/tonne, less the cost of production and rail freight as indicated in Table 4.1, during a period of 20 years with a discount rate of 15%. Note that not all values are possible (eg, it is unlikely that 30 million tonnes of coking coal can be sold at Baotou in the foreseeable future). Similar analysis is performed for potential rail would improve access for workers, for emergencies, routes to transport coal from Nariin Sukhait. Coal and for mining supplies. A sealed road along this could be transported along the new Chinese railway route would cost in the order of US$ 85 million. from Linhe to Ceke, or alternatively a new railway could be built to connect with the Energy Resources The Mongolian trucking industry is currently Railway at Tavan Tolgoi. The analysis suggests that impeded by over-zealous regulation. Individual a railway from Nariin Sukhait to Tavan Tolgoi would permits, signed and sealed by relevant individuals, not be justified unless freight volumes reach at least are required for each individual international freight 50 million tonnes per year. trip. A simplified system is required, in order to promote Mongolia’s road freight industry. roads Mongolia’s Road Master Plan, prepared in 2007, The border crossings at Gashuun Sukhait and calls for the construction of several sealed roads Ceke also need revised regulatory procedures. For in Southern Mongolia. Their estimated cost is set example, the crossing at Gashuun Sukhait is only out in the following table. Where possible, the open for Mongolians and Chinese to cross, on the master plan suggests that mining projects will be first 20 days of each quarter. All foreign specialists encouraged to finance and perform the works for who work with the mines and their Chinese upgrading or new construction. The roads will then customers must travel via Ulaanbaatar. This is not be handed back to the Government which would conducive to development of an efficient mining operate them as toll-roads to at least cover their industry in Southern Mongolia. current costs. road Master Plan Projects in Southern Mongolia timing distance (km) cost (uS$ million) Ulaanbaatar – Mandalgovi 2008-10 230 69 Dalanzadgad – Gashuun Sukhait 2008-09 329 99 Nariin Sukhait – Chinese border 2009 40 12 Mandalgovi – Dalanzadgad 2011-15 293 88 total 892 268 The master plan notably omits any connecting road between Dalanzadgad and Nariin Sukhait. This Electricity appears to be an oversight. The mines around Nariin Without additional generating capacity, there Sukhait would benefit from access to a regional will be an inadequate supply reserve margin from mining service center, which could be located at 2011, and electricity demand will exceed supply Dalanzadgad or near Tavan Tolgoi. A sealed road from 2012. The demand forecast is set out in the 12 Southern Mongolia infraStructure Strategy figure below. The forecast assumes 3.5% demand MW Egiin hydro power plant (HPP). But con- growth on the Central Electricity System (CES) struction bids ranged were for a minimum of centered on Ulaanbaatar, and takes account of the $400 million. The project was cancelled in mid- likely development of Oyu Tolgoi, Uhaahudag and 2008 and the credit was reallocated to other Tavan Tolgoi mines. It is assumed that Nariin Sukhait projects. Subject to financial and environmental and Ovoot Tolgoi will be supplied with electricity feasibility, the Egiin hydro power plant would be imported from China. If Chinese imports are not a useful addition to the CES, providing the flex- permitted, demand growth will be even greater ibility to respond rapidly to plant outages. If a than shown in the figure. revised attempt to raise financing for the plant begins now, the plant could be commissioned Peak electricity demand growth, by 2015. 2007-2020 • The 100 MW Orkhon HPP would serve as an al- ternative to the Egiin HPP. It is unlikely that both would be developed in the near future. As Egiin is more advance, this report assumes that Ork- hon will not be developed. • A 50-100 MW pumped water storage plant using treated waste water has been proposed as part of the Tuul Songino water supply and wastewater treatment complex. Current price differentials between night and daytime tariffs are not sufficient to make the project reliable. Moreover, the plant would not make a reliable contribution to baseload capacity. The project is not considered as a reliable means of meeting In order to meet the expected demand growth, the expected growth of baseload and peakload various possible projects have been considered: demand. • The Oyu Tolgoi mine developers have reached • Thermal power plant Number 2 (TPP#2) was an advanced stage of preparation for construc- initially supposed to be retired in 2005. TPP#3 tion of a 450 MW coal-fired power plant. This was to be retired in 2008 and 2011. Darkhan plant could be commissioned in 2012. TPP was to be retired in 2013. Some deferral of • The Shivee Ovoo thermal power plant is intend- these plants’ retirement is possible, but it is now ed to be a 3,600 MW power plant, exporting anticipated that TPP#2 will need to be retired in power to China. The commercial feasibility of 2012, and TPP#3 will be retired in 2016. the plant is unclear. Government to Govern- • The privately financed Newcom 50MW wind ment negotiations are also likely to be complex. farm is expected to be commissioned in 2010, The plan is unlikely to be ready by 2012-13, al- although there are still ongoing negotiations though it may be an option in the longer term. concerning the power purchase agreement. Be- • A mine-mouth power plant at Tavan Tolgoi has cause the output is dependent on the wind, this been proposed. The Ministry of Fuel and Energy plant cannot be considered as a candidate for proposed a 600 MW power plant in May 2008. supplying firm capacity to meet peak demand. A larger power plant of, say, 2000 MW, could • The Ministry of Mines and Energy is currently be built, supplied by coal middlings, produced in negotiations with a Chinese bidder for con- as a waste product in coal washing. There has struction of a proposed 300 MW Thermal Power been little work done on the plant so far, but Plant #5 (TPP#5) at Ulaanbaatar, to be operated with a determined effort and an experienced as an independent power plant. Because of the transaction advisor, an IPP could be commis- complications of dealing with a single bidder, in- sioned at Tavan Tolgoi by 2013-2014. ternational experience suggests these negotia- • There have been proposes to develop a 650 MW tions are likely to be protracted, and the report Integrated Gasification Combined Cycle Plant at assumes the plant will not be commissioned be- Baganuur. The plant would convert coal to liq- fore 2013. uids for export of oil to China. It would require • The China Exim Bank agreed in 2006 to provide around 400 MW for the coal to liquids process, a $300 million credit for construction of the 220 leaving 250 MW available for supply to the CES. 13 Southern Mongolia infraStructure Strategy There are considerable technological and com- Tolgoi TPP, and Tavan Tolgoi TPP. Because of the mercial uncertainties associated with this proj- need to expand heat supply in Ulaanbaatar, the ect. It is unlikely that the plant will be commis- least-cost option would be to commission TPP#5 sioned in time to meet the growth of demand first. But there is a high risk that TPP#5 will not be over the next few years. commissioned until 2013. • Increased Russian imports provide a safety valve in the system, but only up to a maximum of 255 If the Oyu Tolgoi plant were not developed, MW – the capacity of the existing transmission reliance on TPP# 5 would pose a high risk of line. Mongolia has a current contract for import delaying Oyu Tolgoi mine’s start of operations until of up to 120 MW of electricity. Mongolia does 2013, depriving the country of US$ 2 billion of mine not wish to increase its reliance on imports, for revenues, of which perhaps $670 million would reasons of security of supply. be Government revenues. Moreover, reliance on From among the various options, three plants TPP#5 would pose significant operational risks for could provide the necessary security of base-load the mine at Oyu Tolgoi. Accordingly, the suggested capacity, in the time-frame required: TPP#5, Oyu investment plant involves the commissioning of Oyu Tolgoi in 2012. The following table sets out the suggested investment plan. And the figure below it sets out the implied balance between supply and demand across the CES and Southern Mongolia. Suggested electricity investment Plan Additions (MW) a Retirements (MW) a Available Capacity (MW) b Investment Cost ($million) 2008 902 2009 902 2010 +50 (Newcom) 952 2011 952 2012 +416 (Oyu Tolgoi) -18 (TPP#2) 1350 750 CES-South Gobi interconnector 207 2013 +270 (TPP#5 unit 1) 1,620 450 2015 +220 (Egiin HPP) 400 +277 (Tavan Tolgoi TPP unit 1) 2,117 450 2016 -107 (TPP#3) 2,009 2017 2,009 2018 +270 (TPP#5 unit 2) 2,279 450 2019 2,279 2020 2,279 a. Available capacity shown. This differs from installed capacity due to self-consumption by units. b. Assumes imports of up to 255 MW. Supply and demand in the ceS and Southern Mongolia combined 14 Southern Mongolia infraStructure Strategy These plans suggest the following priorities: The following figures show the projected demand-supply balance in the CES and Southern • Ensure timely completion of the CES-South Gobi Mongolia, under the revised plant commissioning interconnector transmission line. schedule. • Provide the permits for construction of an Oyu Tolgoi TPP, in conjunction with the investment Supply & demand in Southern Mongolia with delayed agreement for Oyu Tolgoi copper and gold oyu tolgoi tPP mine. • Develop a power purchase agreement under which the Oyu Tolgoi mine will find it financially attractive to sell power to the CES. • Complete the bidding process for TPP#5. Hiring an internationally-experienced transaction adviser would facilitate the process. • Hire an internationally experienced transaction adviser to launch a bidding process for Tavan Tolgoi TPP. • Relaunch the Egiin hydro power project, seeking alternative donor finance or as a privately financed IPP. Financing the new investments will require tariff Supply & demand in Southern Mongolia with delayed increases. Without taking account of the need for oyu tolgoi tPP upgrading transmission and distribution facilities, tariffs would need to increase by more than 30% in real terms. Including full-cost recovery for transmission and distribution, tariffs might need to rise by up to 60%. As an alternative to the investment plan set out above, the report also considers the impact of supplying Oyu Tolgoi with electricity imported from China until 2016. It will still be possible to satisfy demand in the CES, provided that TPP#5 is commissioned in 2013. Increased Russian imports will be necessary, as it will not be possible to supply energy from spare capacity at the Oyu Tolgoi TPP to the CES. However, during 2011-2014 reserve margins will fall to very low levels, increasing the Water Resources risk of temporary supply interruptions. Frequent The extent of underground water resources in interruptions are likely, as no generating unit can Southern Mongolia is not known with any precision. operate at 100% availability. It appears that there is sufficient groundwater Without the Oyu Tolgoi TPP there will be difficulty potential to accommodate demand growth until in meeting growing demand in Southern Mongolia. at least 2020. Based on a fairly high estimate of In 2013 and 2014, before the commissioning of possible demand growth, the demand for water a power plant at Tavan Tolgoi, capacity would be resources in Southern Mongolia could grow from insufficient to meet electricity demand in Southern the current consumption of around 50,000 m3/day Mongolia. This could be addressed through to around 350,000 m3/day in 2020. additional imports of Chinese power. But this A conservative estimate of the extent of water may imply higher costs of electricity supply than a resources in the area suggests there is groundwater local power plant, and there may be problems of potential for 500,000 m3/day. This estimate takes reliability arising through dependence on a single account of: inter-connector for supply. 15 Southern Mongolia infraStructure Strategy • shallow groundwater (<50 meters deep) is likely new studies, and could develop guidelines for the to be recharged through infiltration by rainfall. sustainable allocation and use of groundwater in the A conservative estimate of the extent of this region. A program of technical assistance to support recharge is 1 mm/year, based on comparable the establishment of such an institution might cost international areas such as the Gobi Desert in around US$2.5 million over three years. China. Spread across the (large) surface area Two policy issues could also usefully be reviewed: of Southern Mongolia, this represents storage of 950,000 m3/year in the shallow aquifers. It l• arge numbers of herder wells are currently is assumed that 30% of this storage could be abandoned, suggesting current institutional abstracted, providing 300,000 m3/day. problems in ownership, operation, and mainte- • Studies were made prior to the 1990s at more nance. A review of alternative operating models than 40 sites in the region. These studies were could help to find solutions. constrained by maximum drilling depths of 170 • Current pricing of water resources does not ap- meters, and assumed that local aquifers would pear to be based on economic principles for the be depleted by 40-60% over a period of 25 management of exhaustible resources. A review years. It is assumed that the groundwater po- of Mongolia’s water resource pricing principles tential is only 50% of that identified in the stud- could be used to set tariffs at a level which en- ies. courages appropriate levels of recycling and • the Gunii Hooloi groundwater aquifer study minimization of water demand. concluded that 60,000 m3/day could be ab- stracted over a period of 40 years, lowering the Social Issues groundwater table to the top of the aquifer. The It will be difficult to developing a comprehensive conservative estimate assumes this is the only strategy to ensure that local residents receive a deep aquifer (> 200 meters) in the region. reasonable share of the benefits of mining, because Development of a water supply system relying there are so many different institutions responsible on abstraction of groundwater reserves could cost for addressing the diverse social impacts. in the order of US$ 260 million, of which around A first step towards a comprehensive strategy US$ 35 million would be required for investigative would be the establishment of a regular consultative studies and drilling to identify reliable wells. forum, involving different tiers of government, An alternative option would be to supply mining companies, local communities, and Southern Mongolia with surface water, piped from NGOs. The forum could provide opportunities for either the Kherlen or the Orhon Rivers. The capital information-sharing, decision-making, and dispute cost of these options would be at least US$ 400 resolution. Many of the social impacts will need to million each. The option of groundwater supply be addressed by local governments. Investments in is preferable not only because it is cheaper, but capacity-building of local government should begin because the capital costs can be spread across ahead of population influx. time and space, as particular mining and town developments proceed. There may eventually be a need for the Some of the areas to be addressed include: construction of water pipelines from the Kherlen or Sharing mining revenues. On a per capita basis, Orhon Rivers. But over the next decade the priority local residents should receive at least as much of should be to rely on groundwater resources in the the proceeds of mining revenues as residents in region, and to increase knowledge of the extent of other parts of the country, and there should be those resources through a program of studies and transparent reporting on how any reserved part of drilling. It is likely that additional studies will reveal mining revenue is allocated to local communities. additional resources beyond those assumed in the Aligning mining company contributions with conservative estimate of groundwater potential of government policy. Mining company contributions 500,000 m3/day. to the local community should be aligned with a To support the studies and drilling, a new local development strategy, developed by the local Southern Mongolia Groundwater Management and government. Capital contributions should only be Information Center is proposed. This Center would accepted if there are adequate funds to support act as a focal point for information and initiation of ongoing maintenance. 16 Southern Mongolia infraStructure Strategy Improving employment opportunities through Environment education and training. Education and training facilities need to be developed and improved to Construction of major roads and railways will address the needs of the mining industry, so that have serious and regionally significant impacts on local residents can improve their employment movement of wildlife, including khulan (wild ass) prospects. Entrepreneurs can be supported with and Mongolian gazelles. At present, not enough business incubation and training services. is known about what migration routes are used by these animals, and what sorts of facilities Encouraging women’s participation in the labor they will use to cross major roads and railways. force. Mining companies themselves can play an Studies to identify appropriate wildlife crossing important role in the promotion of women in the arrangements are a high priority. Requirements to workforce. Governments can support with social construct wildlife crossings should be included in services addressing child care, sexual harassment the environmental management plans for approved and violence against women. roads and railways. Where feasible, transport Improving town and social services. The networks should be planned to minimize disruption capacity of local governments will be severely to major migration routes. stretched as local populations grow. There will be Dewatering of mines will drain ground water a need to ensure adequate accommodation, town from large areas around those mines. Development infrastructure, education, health, law and order, of bores and springs elsewhere could help to offset and town administration. the environmental consequences. Protecting vulnerable groups. Compensation Development of Southern Mongolia will arrangements for herders who are displaced by new involve a host of individual projects, including mining developments could be reviewed to ensure mines, towns, roads, railways, power facilities, that adequate livelihoods are retained following and water abstraction. Each project will need its relocation. Environmental and technical training own environmental impact assessment (EIA) and could help to promote awareness of improved environmental management plan (EMP). The mining techniques by artisanal miners. Government Ministry of Nature, Environment and Tourism will vigilance will be needed to ensure that government- have an important role in ensuring the quality of determined salaries and pensions keep pace with EIAs, appropriate responses to EIAs, and appropriate local inflation in Southern Mongolia, and to ensure monitoring and enforcement of EMPs. The Ministry’s registration of new arrivals to permit access to social resources may need to be increased, to provide high services. quality and speedy responses. Protecting foreign workers. Large numbers of Soum and aimag governments could also foreign workers, particularly from China, will be play an increased role in environmental impact employed by the construction and other industries. assessment and environmental management, but Internationally, immigrant workers are often subject will need substantial capacity building in order to to discriminatory practices, exploitation, and racism. play this role. Careful political leadership will be required to ensure acceptable working standards and respect for the Mongolia can contribute to global goals on human rights of all workers, including temporary climate change by increasing efficiency of new and foreign workers. existing power plants, increasing reliance on zero- emissions fuels, ensuring appropriate pricing of Planning for mine closure. Particularly for short- power, and adopting energy efficiency measures to lived mines, the Government should begin developing reduce demand growth. its strategies now for how to handle eventual mine closure. Where possible, diversification of the local Financing economy can reduce dependence on mining and ease the transition when the mine closes. If this is Development of the infrastructure to support not possible, housing and other strategies should be mining in Southern Mongolia will require employed to minimize population influx while the investments totaling more than US$ 5.5 billion by mine is operating. 2015. The Ministry of Finance should develop a financing plan, which indicates who would finance the various investment projects: the budget, donors, or the private sector. 17 Southern Mongolia infraStructure Strategy infrastructure investment needs (to 2015) US$ million Observations towns 1,454 Buildings 1,277 Drinking water 10 Options include financing and delivery by governments, PUSOs, min- ing companies, and/or property developers. A complex series of deci- Waste water 28 sions is required. Power and heat 125 Town roads 4 Solid waste management 4 There are likely to be several different transactions involved in securing Transaction management 6 investors for different services for different towns. Complexity and diversity of approaches will raise transaction costs. land transport 1,150 Tavan Tolgoi – China 700 Will be financed and operated by Energy Resources Rail Nariin Sukhait – China 100 Will be financed and operated by MAK Roads 350 Includes Road Master Plan roads, plus Nariin Sukhait to Dalanzadgad sealed road. Some sections will be privately constructed. electricity 2,711 Oyu Tolgoi 450MW 750 To be financed by Ivanhoe Mining South Gobi interconnector 207 TPP #5, Ulaanbaatar, unit 1 450 Although an IPP is planned, at least some risks will be borne by the Gov- ernment. Oyu Tolgoi plant 450 Likely to be financed by Ivanhoe Mining Tavan Tolgoi plant, unit 1 450 This plant could be privately developed. A much larger plant could be built to export power to China. Egiin HPP 400 Likely to be largely government financed. Transaction advisers for an IPP, including all the necessary studies, can Transaction management 4 cost over $1 million per transaction. Water resources 262 Investment 224 Some investigation and investment will be financed by mining companies. Investigation 35 Institutional strengthening 3 total 5,577 The financing needs for Southern Mongolia’s either by lending directly to private investors (eg infrastructure vastly exceed the Government’s IFC investment loans), or through the provision of currently available finances. Many, but not all, of the various sorts of guarantees addressing political or individual projects could be financed by the private other risks. All of these options should be addressed sector. But this will require a major effort to improve in a comprehensive financing strategy for Southern the investment climate for private investment in Mongolia. infrastructure. Donors can assist in providing financing, in Institutions various ways. Total disbursements from all donor As a basis for discussion various possible new loans were in the range of US$ 80 – 130 million institutions are proposed. These proposals are per year, during 2002-2008. As Mongolia becomes intended to develop new areas of expertise, or to richer, it will begin to lose its access to donor loans serve as improved mechanisms for the coordination with the lowest rates of interest (eg IDA credits). of multiple activities which will be needed in order But lending limits are likely to be higher for loans to implement an integrated infrastructure strategy. that offer less concessionality, but that are still Among the different institutions there should be cheaper than market borrowing (eg IBRD loans). a single high-level agency which is responsible For example, it is already possible for Mongolia for taking the lead on development of Southern to expand its borrowing from the World Bank for Mongolia’s infrastructure, ensuring that other projects that can be linked to the generation of relevant agencies play their roles and meet deadlines foreign currency (enclave financing). Donors can in an integrated development plan. also assist in the mobilization of private investment, 18 Southern Mongolia infraStructure Strategy Southern Mongolia Infrastructure Council. in PPP transactions. There is always at least a small This council would include representation from probability that a guarantee will be triggered. The the national government, aimag and soum Government needs to make sure it can cover any governments, mining companies, and NGOs. It such events. At a minimum, a Risk Management would provide a forum for public consultation, Unit should report annually on the extent of any in which the government and mining companies contingent liabilities created through guarantees. would regularly exchange information about their The RMU could report on the expected liability, plans. One model for the Council would be purely having regard to estimated probabilities of as an advisory body and forum for stakeholder guarantees being called. The RMU could also play a consultation. Another model would give the Council role in establishing caps on the overall exposure to a budget and the authority to make decisions and to contingent liabilities, and in the approval of project- finance infrastructure. specific requests for government guarantees. Southern Mongolia Infrastructure Coordination International Infrastructure Expert Advisory Unit. Implementation of Southern Mongolia’s Panel. At various times the Government and the infrastructure investments will require a lot of Parliament may be concerned about whether they exchange of information between government are getting the best possible advice, or whether the ministries, as well as the coordination of decisions outcomes of commercial negotiations represent across multiple tiers of government. Strong systems the best possible deal for Mongolia. To assist, have not yet evolved for the regular sharing of the Government might wish to hire a panel of information. A Coordination Unit could take various internationally respected infrastructure experts, paid possible forms: on a retainer, who can be called upon from time to time to review particular matters. • it could simply gather information and monitor the activities of line ministries; Economic Regulation Agency. Special skills, • it could be given “step-in� powers, to take over particularly economic, accounting, and legal, are control of activities from line ministries when required for effective regulation of infrastructure adequate progress is not being made; PPPs, balancing the needs of investors, government, • it could be given powers to manage all stages and consumers. These skills are in short supply in of policy development and project management all countries. Particularly in small countries, it makes for Southern Mongolia’s infrastructure. sense to bring these skills together in a single agency, rather than having them fragmented across different sectoral agencies. Consideration could be PPP Unit. A wide range of specialist skills are given to establishment of an economic regulation required to manage a successful PPP transaction. agency which would assume responsibility for tariff Mongolia does not have significant experience in regulation in the railway and electricity sectors, and developing PPPs, nor does it have a large number of also for contract monitoring and tariff-setting for potential PPP projects. Accordingly, it would make the various proposed PPPs in Southern Mongolia. sense to concentrate Mongolia’s scarce PPP skills in a single institution. Before deciding on where Southern Mongolia Groundwater Management this unit should be located, it is important to have and Information Center. This Center would be used a good idea of the particular PPP transactions it is to bring together the information which currently intended to manage. exists spread across multiple government agencies. It could also coordinate a program of drilling and Risk Management Unit. Government studies to better establish the extent of groundwater guarantees will be required to cover various risks potential. 19 Southern Mongolia infraStructure Strategy 1 introduction “Knowing your destination is half the journey� – Anonymous This report is concerned with the development The mines of principal interest are indicated in of the infrastructure which is required in order to the map in Figure 1.1. Significant copper deposits support proposed mines in Southern Mongolia. are found at Oyu Tolgoi and Tsagaan Suvraga. In order for the mines to be developed, it will be In addition to copper, there are several existing necessary to provide towns for the new inhabitants, and proposed coal mines in the region. The coal road and rail links to provide supplies and to transport deposits at Tavan Tolgoi are known to be particularly the mines’ products to markets, and electricity significant. Mining companies are exploring the for the mines’ operations. Water resources need extent of additional coal resources, and if their best to be investigated and supplied to the mines and hopes are realized Southern Mongolia could become towns. And as all of the development advances, one of the world’s major coal producing areas. consideration needs to be given to mitigating any negative environmental and social impacts. figure 1.1 important Mines in Southern Mongolia 20 Southern Mongolia infraStructure Strategy The geographic focus of the report varies accord- In terms of time, the report concentrates on the ing to the particular topic. The mines are all located most important priorities for government action up in a region which this report defines as “Southern to 2015. Nevertheless, consideration is given to a Mongolia�, and which includes the aimags of Om- longer time-horizon when considering the potential nogovi, Dornogovi, Govisumber and Dundgovi. The environmental and water resource demands likely to majority of the important new mines are located arise as a result of the region’s development. The in Omnogovi, and the analysis of housing and so- report is not concerned with the longer-term actions cial impacts is concentrated in areas close to these required for broader economic development of the mines. When attention turns to water resources and region, including the development of value-added environmental issues, all of Southern Mongolia is industries associated with the mining industry. To considered. For issues of electricity, attention broad- get to long-term objectives, it is necessary to start ens further to the interconnected Central Electricity with the short term. This report assumes that the System, which is centered on Ulaanbaatar. And for Government will permit development of the mines land transport, attention extends as far as ports in in the near future, and addresses the question: what China and Russia. else needs to happen in order to make the mines a reality? 21 Southern Mongolia infraStructure Strategy 2 mining in SouthErn mongolia key PointS • Southern Mongolia may be able to export around 20 million tonnes of coking coal annually, which at a price of $100/tonne would generate revenues of US$ 2 billion. • Annual exports of 15 million tonnes of thermal coal may also be possible, which at a price of $60/tonne would generate annual revenues of $0.9 billion. • Exports of copper and gold from Oyu Tolgoi and Tsagaan Suvraga may generate annual revenues of around US$2.3 billion. • Southern Mongolia’s coal exports may be constrained by China’s demand. • Realizing Southern Mongolia’s coal potential will depend on the price of rail freight, in order to undercut current domestic Chinese coal, or to export to inter- national markets. • An alternative way of marketing Southern Mongolia’s coal may be as electricity exports to China. • The Chinese market should be able to absorb Southern Mongolia’s copper. 2.1 Major mines of Southern Mongolia Table 1.1 sets out preliminary estimates of the mine owner plans. This report bases its estimates annual volumes of coal and copper that may be on these assumptions. In planning infrastructure for produced by Southern Mongolia’s major mines, as Southern Mongolia, the Government will need to well as employment at the mines and associated continually update its projections of mine output infrastructure, and possible start dates. All of these and employment. estimates are subject to changes in government and table 2.1 Potential Major Mines in Southern Mongolia Mine Mineral Life (years) Production Employment Start date (‘000 tons/year) Estimate Estimate Tavan Tolgoi Coal 200+ 15,000 1500 2012 Uhaahudag Coal 40 10,000 1000 2009 Baruun Naran Coal 20 6,000 500 2012 Tsagaan Tolgoi Coal 20 2,000 150 2015 Nariin Sukhait Coal 40 12,000 150 2003 Ovoot Tolgoi Coal 50 5,000 400 2008 Sumber Coal 50 5,000 400 2015 Shivee Ovoo Coal 200+ 14,000 600 2015 Oyu Tolgoi* Copper 50 2,000 4000 2012 Tsagaan Suvraga* Copper 20 250 1000 2012 Total 7800 * Production figure is for copper concentrate (30% copper) 22 Southern Mongolia infraStructure Strategy tavan tolgoi and baruun naran Tavan Tolgoi contains over 4.5 billion tons of established resources, of which 1.9 billion tons are coking coal, and the remainder is thermal coal (see Box 1.1 for a discussion of the different types of coal). Additional resources are inferred taking the total resource envelope up to 6.0 billion tons. Tavan Tolgoi includes four fields: Uhaahudag, Tsanki, Eastern Tsanki, and Bortolgoi (Figure 2.1). figure 2.1 coalfields at tavan tolgoi A joint venture between the aimag government and Qinhua currently operates a small mine within the Tsanki coalfield, trucking about 1 million tons of coal per year to the Chinese border (Figure 2.2) figure 2.2 existing tavan tolgoi coal mine The Uhaahudag coal field is owned by Energy The remaining fields of Tavan Tolgoi are owned Resources. Energy Resources is currently preparing by Erdenes MGL LLC, the state-owned holding its mine site, and expects to export about 2 million company. How best to go about developing these tons in 2009. The Government has given Energy fields has been the subject of much debate within Resources the right to construct a railway, which Mongolia. It is likely that a major strategic investor would permit Energy Resources to expand its will be sought to develop the mine and to market production to around 10 million tons per year. the coal. 23 Southern Mongolia infraStructure Strategy box 2.1 tyPeS of coal Coal is classified by its carbon content, which determines the amount of heat given off when it is burned. There are three “ranks� of coal, as well as lignite: • Lignite is a soft brown fuel which has characteristics somewhere between coal and peat. The heat content of lignite ranges from 2,400 to 4,165 kcal/kg. It is used almost exclusively as a fuel for steam for electric power generation. Because of its low energy density, it is not profitable to transport lignite long distances, and it is not traded extensively on the world market compared with higher coal grades. It is often burned in power stations constructed very close to mines. • Sub-bituminous coal is a brown coal with a heat content of 4,165-5,700 kcal/kg, and is used primarily as fuel for steam electric power generation. Its relatively low density and high water content (20-30% inherent moisture by weight) renders it susceptible to spontaneous combustion if not packed densely during storage in order to exclude free air flow. • Bituminous coal is a hard coal with a heat content of 5,700-8,480 kcal/kg. Bituminous coal is classified into coking and non-coking grades. Both kinds are widely used in industrial power plants. Bituminous coal must meet a set of criteria for use as coking coal, including moisture content, ash content and fusion temperature, sulfur content, volatile content, tar content and plasticity/fluidity. Coke is produced by baking coal at high temperature (2000 degrees Celsius) in an airless oven, to drive off volatile (vaporizing) material. Coke is the main fuel in blast furnaces used to make iron. • Anthracite is a hard coal, with a carbon content of between 92 and 98%, and a heat value greater than 6,200 kcal/kg. Its principal use is as a domestic fuel. It burns cleanly with little soot, but its high value typically means it is too expensive to use in power plants. The “grade� of coal is determined by the amount of ash and trace elements it contains: • Most commercial coals range from 3% to 9% ash, typically sand and clay that was carried into the swamp which produced the coal. After burning, ash is either removed from the combustion chamber, or it goes up the smokestacks as fly ash. • Trace elements in coal can either affect the combustion process or cause atmospheric pollution. Sodium causes ash to precipitate on the boilers, reducing the efficiency of the boiler. Sulfur is released as sulfur dioxide upon burning, and if not scrubbed out of the emissions, will produce sulfuric acid and acid rain. Other trace elements commonly found in coal include phosphorous, chlorides, nitrates, sulfates, mercury and arsenic. A number of Mongolian coals also contain uranium. The Baruun Naran deposit lies about 20km west of Tavan Tolgoi. It has a reported potential production of about 120 million tons of coal of which 70 million is coking coal and 50 million tons is thermal coal. Until 2008, the deposit was owned by QGX Limited, a Canadian listed company. In 2008, MCS Holdings LLC, acquired QGX. MCS Holding also holds a controlling interest in Energy Resources. Prior to the takeover, QGX Limited, a Canadian company, had planned to commence production in 2011 or 2012. Annual production was planned at 6 million tons with a mine life of twenty years. 24 Southern Mongolia infraStructure Strategy nariin Sukhait and ovoot tolgoi The Nariin Sukhait coal deposit contains two mines, one owned and operated exclusively by the Mongolian Alt Corporation (MAK) and another operated as a joint venture between MAK and the Chinese company Quinhua (Quinhua-MAK). The deposit reportedly contains 134 million tonnes of coal resources. The mines currently truck about 2 million tons of coal per year, to the Chinese border at Ceke. figure 2.3 nariin Sukhait (Mak), ovoot tolgoi east and West fields, and Sumber Photo source: SouthGobi Energy Resources website, January 22, 2009 Adjoining the Nariin Sukhait coal deposit, South The current operations form part of a single Gobi Energy Resources (a subsidiary of Ivanhoe) thick seam of low-ash, high-rank, bituminous coal began operations at the Ovoot Tolgoi mine in April extending from the surface to depths ranging 2008. The deposits at the Ovoot Tolgoi West Field between 120 and 150 meters, with a thickness and South and East Field contain approximately averaging approximately 60 meters. This seam 259 million tonnes of measured and indicated continues across a major coal basin that stretches coal resources, and a further 145 million tonnes of 120 km east and west from Nariin Sukhait. South inferred resources. This mine is expected to ship Gobi Energy Resources holds the exploration rights about 2 million tons of coal per year, and perhaps to much of this seam. In addition to the operations 6 to 8 million tons if a rail connection to China is at Ovoot Tolgoi, the company is currently examining constructed. the potential for operations at Sumber, 16 km east 25 Southern Mongolia infraStructure Strategy of Ovoot Tolgoi. Initial results show coal of similar measured and indicated resources of 1.387 billion quality to Ovoot Tolgoi, although the seam is not tonnes grading 1.33% Cu and 0.47 g/t Au, and quite as thick. a further inferred resource of 1.397 billion tonnes grading 0.98% Cu and 0.24 g/t Au; ie containing Shivee ovoo and eldev about 32 million tonnes of copper and 987 tonnes Shivee Ovoo is located 250 km south of of gold. Mineable reserves are likely to be somewhat Ulanbaatar in Govisumber aimag, beside the below these global resource figures, but nevertheless trans-Mongolia railway line. It has coal resources this is a huge orebody with potential to sustain a estimated at more than 2 billion tonnes. It was large scale mining operation for more than 50 years. opened in 1992 for the purpose of meeting domestic demand for coal in Mongolia. Shivee- Ovoo coal is sub-bituminous, with a high moisture The project is owned by Ivanhoe Mines Mongolia content. This causes some problems when it is used Inc, a joint venture between Ivanhoe Mines Inc in power stations in Mongolia due to poor ignition and Rio Tinto PLC. The cost of mine development in the furnace and freezing of stockpiles in winter. has been estimated by Ivanhoe at around US$ 5 There are plans to use the deposit to fuel a large billion, and net of these costs the project has been power plant, and to export electricity to China. The projected to yield revenues with a present value of proposed power plant would be in the order of 6 x around $3 billion. The Government is encouraging 600 MW, and would be a joint venture between the Ivanhoe Mines Mongolia to build a smelter, and to Mongolian and Chinese governments. export refined copper. The Eldev coal mine is 20 km north of the Trans-Mongolian Railway, in Dornogovi aimag. The mine is operated by MAK. The mine has resources While extensive exploration and mine site estimated at 51 million tonnes, and currently preparation has already occurred, moving into exports 500,000 tonnes of coal per year, making it the production stage awaits the conclusion of an one of the largest existing operations in Southern investment agreement with the Government. The Mongolia. It is not anticipated that the mine will be agreement is necessary to provide certainty to expanded to the extent of other existing coal mines private investors concerning the legal and fiscal in Southern Mongolia, and it is not considered arrangements, particularly the stability of royalty and further in this report. tax rates, and other levies that will be paid to the Government. The current Government has recently oyu tolgoi indicated that concluding an investment agreement The Oyu Tolgoi copper and gold deposit is about for Oyu Tolgoi is one of its highest priorities. 200 km south-east of Dalanzadgad. The deposit has figure 2.4 Mineshafts at oyu tolgoi 26 Southern Mongolia infraStructure Strategy tsagaan tolgoi required, with very limited imports. In recent years Tsagaan Tolgoi is a coal deposit about 100 km as steel production has rapidly increased, imports of west of Oyu Tolgoi, with 36.4 million tonnes of coking coal have also increased, but they remain a measured and indicated resources, and a further 9 small proportion of total Chinese demand. In 2007, million tonnes of inferred coal. The coal rank is high estimated Chinese production of metallurgical coal volatile B and C bituminous (which would usually be was 365 million tons, with exports of 6 million tons used for steam, but could be blended with higher and imports of 3 million tons. In the past, most of rank coal to make coke). Its owners, South Gobi China’s coking coal imports came from Australia. In Sands (which is partially owned by Ivanhoe), have recent years Mongolia has rapidly become the most suggested that it could be used as a fuel source for important supplier. In 2008, Mongolia supplied the power plant supplying electricity to Oyu Tolgoi. more than 50% of China’s coking coal imports, and over 75% in June and July. tsagaan Suvraga Given its geographical proximity, Mongolia The region surrounding Tsagaan Suvraga, could capture the market for all of China’s coking approximately 150 km northeast of Oyu Tolgoi coal import requirements, other than a few in Dornogovi aimag, contains seven significant specialized shipments. Early in 2008, the medium- copper-molybdenum deposits, of which the most term forecast for the growth of China’s demand significant is at Surven-Sukhait. This deposit is 164 for coking coal imports was 8% per annum, with km southwest of the Zuun-Bayan railway station, imports growing to around 20 million tons by 2013. which lies at the end of a 50 km branch from the The current economic crisis could significantly trans-Mongolia railway. Copper resources have weaken this demand growth. Southern Mongolia’s been estimated at over 220 million tons at 0.54% new coal mines will also compete with existing copper and 0.019% molybdenum. These grades Mongolian mines, which already account for over 3 are similar to those at Erdenet (Mongolia’s largest million tonnes of coal sales to China. copper mine and third-largest city), although the The market for exports of thermal coal from currently identified resources are substantially Mongolia to China is much more marginal, and will smaller. Expected output is about 1 million tonnes depend on the particular grades of coal, the costs of copper concentrate per year (ie about 50 trucks of transport, and the prices of coal and electricity per day). As yet, there are no firm plans for the in China. In August 2008, the on-grid power tariff development of Tsagaan Suvraga. for generators in China’s Inner Mongolia was around RMB 240 (US$ 35/MWh). If the Chinese plants cover full costs, this tariff would support coal 2.2 Markets for Mongolia’s coal prices ranging from US$ 18/tonne to US$55/tonne, Given the extent of coal resources in Southern depending on the thermal value of the coal. The cost Mongolia, sales of coal over the next decade or so of freight for coal from Southern Mongolia to Inner are likely to be constrained by the extent of demand Mongolia might be in the range of US$ 10-30 per rather than by the supply of coal. Exports of around tonne. These figures suggest a price range from US$ 20 million tons of coking coal per year might -28/tonne to US$ 45/tonne that Inner Mongolian generate net revenues of around $1.2 billion per year power plants would pay for Mongolian thermal (assuming production costs of $30/ton, freight costs coal. Coal exports would only be profitable if the of $20/ton, and a price for coking coal of $110/ton). cost of production is less than the price received: Key factors affecting revenues will include the pace the current regulated price of production from at which the mines and associated rail infrastructure Shivee Ovoo is Tg 11,400/tonne (US$10/tonne). can be developed, the strength of Chinese demand for coal, the vagaries of international prices for coal, developers of the Baruun Naran mine have and the rates negotiated for access to the Chinese suggested that their operating costs, including rail network. overheads would be around US$ 28/tonne (Table 2.2). Mongolia is well-placed to capture the majority of China’s growing demand for coking coal imports. the operators of the Ovoot Tolgoi mine report Historically, China produced all the coking coal it current operating costs of US$11.5/tonne (http:// www.southgobi.com/s/OvootTolgoi.asp). 27 Southern Mongolia infraStructure Strategy Against this gloomy outlook, there are three Finally, an alternative to exporting coal to China possibilities for creating a market for export of is to export electricity, using coal fired power plants thermal coal from Southern Mongolia: possible built in Southern Mongolia. The amount of coal increases in the price of electricity in China; possible used by a power plant varies, depending on factors exports beyond China; and conversion of coal such as the efficiency of its burners, the calorific into electricity in Mongolia, to support exports of value of the coal used, and the proportion of time it electricity. is operational per year. The Mongolian Government table 2.2 indicative open-cut coal Mining costs is seeking to develop a 3,600 MW power plant at Shivee Ovoo to export electricity to China. The Unit Cash Costs per Product Ton US$/metric ton plant would consume around 14 million tonnes Overburden Removal $14.87 of coal per year. It would also be possible to build Coal mining and product haul $1.78 a large power plant in the area of Tavan Tolgoi, potentially fuelled by coal middlings produced as Field support cost $2.72 a byproduct of coal washing for the production of Coal washing and handling $3.46 coking coal for export (which would otherwise be Administration, royalty, and overheads $5.46 dumped as a waste product). It is cheaper to export Total Operating Costs/ton $28.29 coal as electricity than by rail freight, but feasibility studies for this option will need to take account of transmission and distribution losses. It will also be Coal transport and port costs $10.00 – $32.00 necessary to operate efficient power plants that can Source: QGX Ltd. Press release, January 23, 2008 compete with potential new plants in China. The market for thermal coal in China reflects In sum, within the next five years, Southern government regulation of retail prices for electricity. Mongolia may be able to export around 20 million It appears that Chinese power producers sell power tonnes of coking coal per year, and up to 15 million at a price which does not include the full value of the tonnes of thermal coal. At prices of $100/tonne for coal they consume. In February 2009, benchmark coking coal and $60/tonne for thermal coal, this prices for Chinese coal at Qinhuangdao port were would generate annual revenues of US$ 2 billion for around US$ 90/tonne. Deducting transport and coking coal, and US$ 0.9 billion for thermal coal. port costs of around US$30/tonne, this would give These quantities of coal exports are less than the a price for coal at a power plant in Inner Mongolia estimated supply capacity of Southern Mongolia’s of US$60/tonne. There will be commercial pressures mines, set out in Table 2.1. Unless exports to world in China in coming years to adjust electricity tariffs markets are undertaken, it may not be possible to to reflect the full value of coal inputs. Adjusting for develop all of the coal mines in Southern Mongolia different coal heating content the equivalent price over the next decade. Individual mine developers for Southern Mongolian thermal coal might be in will bear the risk of ensuring that there is demand the order of $35/tonne. This would be profitable for for their coal output, before investing in major mine at least some Mongolian thermal coal producers, developments. The Government will similarly need depending on the price of rail freight. to be careful to ensure that it does not over-invest in shared infrastructure. It may be possible to realize higher prices for 2.3 Markets for Mongolia’s copper Mongolian coal by exporting to Japan and Korea, China’s copper consumption in 2008 was or other international markets. In January 2009, around 5 million tons, while its output of refined Macquarie Group Ltd forecasts for coking coal copper was about 3.7 million tons. To meet the prices in 2009 were $110 per metric ton for coking additional demand for copper, China imports coal and $75 for thermal coal FOB in Newcastle about 4-5 million tonnes of concentrate (ie about (compared with $300 and $125 in 2008). Obtaining 1.5 million tonnes of refined copper). Although such prices for Southern Mongolia’s coal would China’s economic growth will weaken considerably depend on the price of rail freight through China in 2009, its copper consumption is still forecast to or Russia. Chapter 4 discusses the feasibility of grow to around 5.4 million tons in 2009, because of potential rail routes by which such exports might ongoing urbanization and the infrastructure focus occur. 28 Southern Mongolia infraStructure Strategy of China’s stimulus package. In addition, several With a price of $3,850/tonne for copper, Oyu large copper mines in China will reach the ends of Tolgoi’s annual output of around 450,000 tonnes their productive lives by around 2015. Compared of refined copper would generate revenues of with other countries, Mongolian copper concentrate around $1.746 billion per year. Oyu Tolgoi will should have a freight advantage in selling to China. also produce around 330,000 ounces (10 tonnes) Accordingly, it should be possible to find a market of gold per year, which at a price of $900/ounce for all of Mongolia’s copper production in China. would have a market value of $297 million per In January 2009, prices for copper were around year. Tsagaan Suvraga’s output of 60,000-80,000 $3,200 per tonne, a third of the level a year earlier. tonnes of copper would have a value of $230-300 Copper prices have been very volatile over the past million per year. Together, the mines at Oyu Tolgoi five years, experiencing an unprecedented period and Tsagaan Suvraga could generate revenues of of high prices from 2003 to mid-2008. Prices are around $2.3 billion per year. forecast to return to an average price of around $1.75 per lb ($3,850/tonne) over the next few years. 29 Southern Mongolia infraStructure Strategy 3 houSing and urban infraStructurE key PointS • Over the next five years, the population of Southern Mongolia may expand by around 80,000 people, with one extra immigrant for every member of mine workers’ families. • To plan for infrastructure demand, the Government should regularly keep track of expected mine employment as well as the actual rate of population growth associated with new mines. • Four possible models of mining settlements are identified: fly-in fly-out; gated community; integrated community; company town. • A mix of FIFO and integrated community developments may help to widen the potential labor market for mines and other employers in Southern Mongolia. • Once town locations are decided, decisions need to be made about who will plan, finance, construct and operate urban infrastructure such as buildings, local electricity, drinking water, sanitation, solid waste, and town roads. • Town development for 80,000 people could cost around $1.4 billion. • Cost-covering tariffs for infrastructure services will be needed if private investment is sought. • Cost recovery implies tariff increases of 230% for drinking water and 350% for electricity, compared with current tariff levels in Southern Mongolia. • A consultative process is recommended to plan town locations, models of mining settlements, and arrangements for provision of urban infrastructure. • If it is expected that mining companies should make financial contributions to township development, this should be specified in agreements between the Government and the mines, in connection with Investment Agreements. 3.1 Population growth Employment in Southern Mongolia’s mines will The population multiplier associated with mine stimulate population growth much greater than the workers is determined by several factors. Workers direct employment numbers. Miners will bring their will want to live with their families, and average families with them to the region, and additional Mongolian households have 4.1 people. In addition, population influx will be induced by commercial many people who are not directly employed by the and lifestyle opportunities. A plausible estimate is mines will be attracted to the area by increased that the population will expand by more than 8 commercial opportunities, hopes of employment, times direct mining employment within 5-10 years. or because urban service provision is better in the Table 2.1 (page 3) provides preliminary employment new mining developments than in the surrounding estimates of 9,700 in the major mines of Southern region. A plausible estimate of this “influx� is Mongolia, suggesting a total population increase of more than 80,000. The majority of these would be located in Omnogovi aimag. 30 Southern Mongolia infraStructure Strategy box 3.1 Predicting PoPulation groWth It is very difficult to predict how many people will be attracted to live in the area of a new mine, beyond those who are not directly employed at the mine. The table below summarizes a range of international experience. The “influx multiplier� is measured over several years according to data availability and is calculated as: Final population − base population base population where the base population includes the existing population at the start of mine operations plus mine employees and their families. Mine Settlement Initial End Years Mining Influx Type population population of data workers multiplier Pilbara, Australia Fly-In Fly-Out 44,798 37,762 5 180 -0.17 Tierra Amarilla, Chile Integrated community 11,724 12,888 10 860 -0.12 Copiapo, Chile Integrated community 100,907 129,091 10 860 0.24 Escondida, Chile Gated community 228,408 296,905 10 2,000 0.26 Grasberg, Company town 1,000 110,522 29 18,000 0.43 Papua New Guinea Pierina, Peru Gated community 66,888 100,931 14 540 0.47 Sossego, Brazil Integrated community 10,000 20,000 3 600 0.63 Yanacocha, Peru Integrated community 92,447 162,326 14 269 0.74 Zouerate, Mauritania Company town 1,000 18,000 27 1,900 1.35 Erdenet, Mongolia Company town 1,000 83,000 35 6,000 2.03 Carajas, Brazil Gated community 1,000 110,000 24 2,150 11.00 There is wide variation between the different cases. Mines which rely on fly-in fly-out operations (eg some of Rio Tinto’s Pilbara operations in Western Australia) result in minimal or even negative population influx. Company towns, where the mining company provides extensive good quality urban services, typically attract higher levels of population influx. International experience does not suggest that remoteness plays an important role in determining the level of population influx. Rather, migration is likely to be determined by the relative opportunities offered by mining communities as compared with opportunities elsewhere in the country. For this report, an influx multiplier of 1.0 is assumed for Southern Mongolia. That is, one new person will move to the area for each additional mine worker or member of his or her family. This is at the high end of the cases surveyed, reflecting Mongolians’ relatively high mobility, past experience at Erdenet, and the relative importance of mining in Mongolia’s economy. But an influx rate equal to that of Erdenet is not expected, in part because modern mining companies are unlikely to build the sort of company town that was built during the Soviet era. For planning purposes, the Government should regularly keep track of the mines’ employment plans, and update its knowledge of the rate of influx as people start arriving in the region. Regular updating of plans will help to ensure adequate and timely infrastructure services provision. 31 Southern Mongolia infraStructure Strategy that for every member of a miner’s household, one 3.2 Different models for mining settlements more person will migrate to thearea (Box 3.1). Finally, Mongolia’s population growth rate has averaged about One of the factors affecting the rate of population 1% over the past 15 years, and Southern Mongolia’s growth will be choices made in the provision of population may be expected to grow at this rate (ie a accommodation and urban infrastructure for the new multiplier of about 1.05 every five years). population. The level of population influx associated with International experience suggests a range of mine construction is difficult to predict. Employment options for the housing of mine employees and at individual mines will peak during initial construction associated population influx. The options chosen in and site preparation. Construction workers will Mongolia will have implications for the cost of town typically be housed in temporary construction camps, construction and service provision, mine construction without their families. The construction workforce at and operation costs, the extent of population influx, Oyu Tolgoi reached around 3,000 in 2007, although and the social well-being of the region’s inhabitants. once the mine enters production the workforce is likely This report groups settlement options into four to be in the order of 2,000. Although construction types: fly-in fly-out; gated communities; integrated workers are typically temporary, housed in camps communities; and company towns. Each has their without their families, considerable population influx advantages and disadvantages. has already been observed at nearby Khanbogd during Oyu Tolgoi’s site preparation. fly-in, fly-out In the fly-in fly-out model (FIFO), workers and Although individual mines are likely to regard their families live in regions, often metropolitan areas, construction workers as a temporary phenomenon, located far away from the site of mining operations. Southern Mongolia as a whole is likely to experience Workers commute to the mine site on a rotation a protracted construction period of up to a decade, basis, for example 14-days on/7 days off. There since the mines will not all enter production at the is no recruitment from local communities, and no same time. Additional construction workers will also infrastructure development in local communities. The be required to build the infrastructure associated with mining company builds a mining camp, inside the mine the region’s development. For example, a planned 450 gate, with enough infrastructure for mine employees MW power plant to serve Oyu Tolgoi might employ only. A variation on the FIFO mode is the bus-in, bus- up to 2,000 workers during an 18 month construction out model used where commuting distances permit, or period. Construction workers are likely to move around airstrips are not available. the region over the next decade, from site to site. It may be desirable to ensure a central location where FIFO operations are often used in remote locations, construction workers and their families can be based where there are few possibilities for local recruitment between jobs (eg Dalanzadgad). and housing, particularly for mines with a relatively short operating life. Because accommodation is kept Table 3.1 provides a preliminary estimate of the to the minimum necessary for mine operation, the population growth that could be associated with the capital cost of mine construction is minimized. But main mining areas of Southern Mongolia. The table transport costs, as well as the complications of worker suggests that by 2015, in addition to the people scheduling can raise mine operating costs. For mines who already live there (and their natural population with short operating lives, FIFO minimizes the social growth), a further 80,000 people may be living in dislocation associated with mine closure. Southern Mongolia. table 3.1 Preliminary Population Projections for Mining areas in 2015 Mine Workersa Familiesb Influxc Total, with natural population growthd Tavan Tolgoi and Baruun Naran 2,000 6,200 8,200 16,772 Nariin Sukhait, Ovoot Tolgoi, Sumber 950 2,945 3,895 7,967 Oyu Tolgoie 4,000 12,400 16,400 33,544 Tsagaan Tolgoi 150 465 615 1,258 Shivee Ovoo 600 1,860 2,460 5,032 Dalanzadgadf 2,000 6,200 8,200 16,772 Total 9,700 30,070 39,770 81,344 a. from Table 2.1. b=a x 3.1. c=a+b. d=a x (1.01)^5 + b x (1.01)^3 + c x 1.01. e. Ivanhoe Mines intends that it will disperse accommodation and recruitment of its workers around the region. Accordingly the total popu- lation indicated here would be dispersed to reflect this pattern, and would not all be located near the mine site. f The figures here do not include the existing population of Dalanzadgad, merely the additional numbers of potential Dalanzadgad resi- dents attributable to the mining industry 32 Southern Mongolia infraStructure Strategy Many mine workers prefer FIFO arrangements, community, and poorer residents outside the gate because they and their families can live in large towns – the “haves� and “have-nots�. with a wide range of urban services, rather than in integrated community a small remote mining town. The long periods off In the integrated community model, mine work are also attractive to many workers. Being workers are housed in an existing community able to recruit such workers enlarges the potential located near the mine. The local community would employment pool for mining companies. provide the bulk of the accommodation and Negative social impacts associated with FIFO infrastructure for these workers. Depending on the operations may arise from the transient nature of local community’s resources, mining companies the workers they attract, who will typically have may make some contribution, and would typically few ties to any local communities which may be permit non-miners to use any facilities they provide. located in the area of the mine. A shortage of Depending on the resources of the hosting recreational opportunities for mine workers can lead community, the integrated community model may to social problems of alcohol and drug use. The long provide some opportunities for a mining company periods away from home mean that workers’ wives to reduce its capital costs. The greater involvement effectively adopt the role of single mothers, and of the mining population in the local community there is some evidence that the work model may be can also be positive for the company’s local image associated with greater instances of family violence – which may be important in securing other aspects and break-ups, and parenting problems. of the company’s activities. On the other hand, gated community where the mine becomes involved in upgrading In the gated community model, workers and their community services to ensure appropriate standards families are housed in an area which adjoins existing for its workers, it may find that costs escalate with local communities. The mining company builds the population growth and pressures on the company infrastructure needed to support the families within to provide services for all town inhabitants. the gated community, for the exclusive use of these The social benefits of the integrated community families. The mine may take advantage of some model include workers living with their families, of the local community’s infrastructure, such as and potentially greater benefits to the existing local roads or electricity connections. Mines may provide communities because of the greater interaction leisure facilities for the families within the gated with mine workers. On the other hand, tensions community, but might also expect workers to use may arise from some of the consequences of mine facilities of the local community for leisure. development. The economic activity generated The model implies greater capital cost to the by the mine may bring with it a higher cost of mining company than FIFO, and probably greater living, and an influx of migrants that the existing cost than would be incurred under the integrated population does not always view as desirable. For community model. It typically involves lower example, at the Yanacocha gold and silver mine capital costs for the mining company than the in Cajamarca, Peru, residents have benefited from company town model. Mining companies may be improved services, but view the mineworkers as attracted to the gated community model, where disorderly and rough, and note the deterioration of the local community is unable to provide the sort local customs with the appearance of nightclubs, of accommodation and services which are necessary prostitution, and increased crime. to recruit mine workers. Gated communities may be company town used particularly where there are security concerns. In the company town model, a mining company For a relatively short-lived mine, the model may be builds and operates an entire town including all basic appropriate to lessen social dislocation associated infrastructure necessary to accommodate miners with mine closure. and their families. It may also build and operate Compared to a FIFO model, the gated community recreation and leisure facilities (eg restaurants, model offers social and health benefits associated retail shops, community centers, hotels, and with workers living full-time with their families. On movie theaters). Mining companies usually plan to the other hand, the presence of a gated community accommodate the supplier and contract population, can create social discord, because of the presence the service population, and possibly some of the of relatively wealthy workers within the gated existing population. 33 Southern Mongolia infraStructure Strategy The substantial capital costs associated with - The national Government; building a company town mean that mining - The aimag Government; companies would only contemplate it for a very - The soum Government; long-lived mine, and where there is little possibility - A mining company; of gaining financial contributions to the expenses - A specialized private infrastructure service from the local government and community (eg. company; because of remoteness or poverty). If the mine - A private property development company. subsidizes town services, it is likely to attract increased population influx. There is a risk that as Planning and controlling infrastructure the population expands the mining company may Mongolia illustrates a range of options for the not be able to operate all of the township services planning and controlling of infrastructure. National effectively. infrastructure has traditionally been planned and Positive social effects of a company town include controlled by national government ministries and the health benefits of the family-centered style of state-owned enterprises. Aimag governments accommodation. Negative social effects come from control municipal public urban service organizations the town’s dependence on the mining company for (PUSOs) by owning the assets. In Dalanzadgad, the employment and economic activity. aimag government has delegated operations and maintenance to a private company, but retains 3.3 Options for planning and providing urban control through its majority ownership of the PUSO. services Internationally, many governments take Once plans are made about where a town will responsibility for planning and controlling be located, and forecasts for the population over the infrastructure assets. Even if private companies build, next 3-5 years are made, a variety of decisions need own and operate infrastructure, the Government to be made concerning the town’s urban services: typically specifies where the infrastructure should be built, and who should receive services from it. - What physical infrastructure is needed, where it For example, many private companies build, own, should go, how much capacity is needed, and and operate electricity infrastructure in the United when will capacity be expanded? States, Australia, and Japan, but the national and - What quality of infrastructure services will be provincial governments in these countries control provided, and what prices will consumers pay where generating stations and transmission lines for those services? can be built. - Who will design, build, operate, and maintain the infrastructure? In countries with decentralized governance - Who will pay for the infrastructure to be built? systems, planning for local settlements and - Who will pay for the operating expenses of the communal infrastructure is usually a local infrastructure services? government responsibility. Where private firms are making significant new investments, the private firms may also plan settlement and infrastructure, Potentially, a range of different organizations as they do in traditional mining towns. could make these decisions and/or provide the various infrastructure services. Possible organizations Table 3.2 compares the advantages and include: disadvantages of having different entities responsible for planning and controlling infrastructure assets. 34 Southern Mongolia infraStructure Strategy table 3.2 choosing Who Plans and controls infrastructure assets advantages disadvantages National Government • Highest capacity • Remote from local needs • Good on national infrastructure like highways, railways, transmission Aimag • Can coordinate development of several mines, • Lack of capacity several towns, and the links between them. • Still somewhat remote from some local needs Soum • Knows the local situation • Lacks capacity • Accountable to local people • Cannot coordinate • No economies of scale Mining company • Business interest in having infrastructure to sup- • Interested in own workers, not the rest of the port workers community • Not specialized in infrastructure Specialized private operator • Strong financial incentive to get infrastructure • More complicated to procure and manage working well • Can be hard to attract a good operator Private property developer • Business interest in getting infrastructure work- • Not specialized in infrastructure other than ing for tenants housing • No obligation to serve populations outside of property gate The national government typically has greater families, but will be less interested in making that expertise than provincial and localgovernments, infrastructure available to existing non-mining and can best coordinate investments across multiple populations or influx. Mining companies also do not provinces and soums, and across multiple sectors. specialize in planning and controlling infrastructure This is clearly still the case in Mongolia. Aimag assets. A government entity, whether national, capitals (including Dalanzadgad) rely on national provincial, or national, has incentives for planning government to run their power plants. The PUSOs, infrastructure that are better aligned with those of which provide water services in many soums often the non-mining populations, and typically has more look to Ulaanbaatar’s Water Supply and Sewerage experience planning infrastructure for towns, and Authority (USUG) for technical support. controlling those infrastructure assets. On the other hand, national governments are Private property developers have expertise in not likely to understand or appreciate the needs planning housing complexes, and the infrastructure of provincial and local populations as well as do required to serve those complexes. Private property provincial and local government officials. National developers also have a strong business interest in governments are often better at planning and getting infrastructure up and running for their controlling large-scale infrastructure investments future tenants. Private property developers are than smaller-scale infrastructure investments within not, however, necessarily experts in planning large- provinces, towns and cities. We see evidence of scale network infrastructure such as water and this in Mongolia, where, as summarized in Section wastewater treatment facilities, or heating and 2, the national government has a lot of plans for electricity production, nor are they required to serve transmission lines, roads, and rail lines, but fewer populations that cannot afford, or do not want to detailed plans for infrastructure within towns near live in their apartments or homes. South Gobi’s mines. Paying for infrastructure Mining companies historically have also played If an additional 80,000 people migrate to a role in planning and controlling infrastructure. Southern Mongolia over the next five years, the cost Mining companies, however, may lack the inclination of buildings and urban infrastructure could be in the or skills to plan and control infrastructure for towns order of US$ 1.4 billion, including US$1.2 billion for that include miners as well as non-miners. Mining buildings and $225 million for infrastructure (Table companies, because of their business interests, may 3.3). plan infrastructure for their workers and workers’ 35 Southern Mongolia infraStructure Strategy table 3.3 indicative capital costs of town development Population center additional Population buildings infrastructure total ($m) ($m) ($m) Tavan Tolgoi 16,772 238 42 280 Nariin Sukhait 7,967 112 29 141 Oyu Tolgoi 33,544 490 69 559 Tsagaan Tolgoi 1,258 18 20 38 Shivee Ovoo 5,032 70 23 93 Dalanzadgad 16,772 238 42 280 total 81,344 1,166 225 1,391 An Excel spreadsheet model is available at www. Detailed model costings are illustrated in Table worldbank.org/southgobi, which estimates the 3.4, for a single town big enough to deal with the cost of urban infrastructure based on assumptions projected population influx centered on Oyu Tolgoi. including population size the proportions of the The costing assumes that small 5MW combined population living in gers and apartments, and the heating and power plants are built to supply manner in which electricity is provided (Option A – electricity and heat to the population. In practice, transmission line from a large plant; Option B – CHP the population associated with Oyu Tolgoi could be plant; Option C – a small diesel plant combined with served with power from the proposed 450 MW Oyu heat only boilers). Tolgoi power plant, and the population could be distributed across several towns. table 3.4 indicative capital cost for new Population near oyu tolgoi Number Unit Per Unit Total Buildings Apartments 4.792 Apartments 78.867.60 377.933.539 Gers 3.195 Gers 500.000 1.597.333 Schools 8.051 Students 1.317.00 10.603.167 Kindergartens 2.013 Children 2.677.00 5.388.801 Dorm itory 671 Beds 2.388.00 1.602.348 Family Hospitals 1.175 Persons/day 12.944.44 3.459.721 General Hospitals 302 beds 13.047.00 33940.194 Other - - - 85.626.864 total 490.151.968 Portable Water Boreholes 24 Boreholes 8.695.64 208.695 Main Pipelines 2.876 m 86.96 250.087 Water Ring Mains (100-20mm) 12.460 m 52.17 650.087 Pumps (250m3/day each ) 2 Pumps (250m3/day each ) 260.869.50 521.739 Reservoirs 4.500 cubic meters 144.93 652.174 Standpipes 15 Standpipes 18.147.27 272.209 Connections (incl.meters) 4.792 Connections (incl.meters) 300.00 1.437.600 total 3.992.592 Waste water Pipelines (150-200mm) 7.188 m 130.43 937.565 Pump Station 1 Pump Station 52.174.00 52.174 Treatment Facility 12.000m3/day 1 Treatment Facility 12.000m3/day 5.217.391.00 5.217.391 Connections 4.792 Connections 853.00 4.087.576 total 10.294.706 36 Southern Mongolia infraStructure Strategy electricy Cool plant (5MW CHP) 1 Plants 8.000.000.00 8.000.000 Substation (2.500kva) 2 Substations 349.694.50 699.389 Distribution lines (10kV) 76.672 m 15.60 1.195.700 Distribution network (0.4 kV) 383.360 m 9.23 3.538.413 Connections 7.987 Connections 171.00 1.365.777 �èéò 14.799.279 heat distribution Main Pipelines (820 mm) 19.168 m 345.00 6.612.960 Distribution Pipelines (100-300mm) 28.752 m 176.78 5.082.853 Distribution Stations (50 \GcalI/stations) 6 Stations 3.000.000.00 18.000.00 Plate Heat Exchangers 72 Heat Exchangers 30.000.00 2.160.000 Connections 4.792 Connections 930.00 4.456.560 total 36.312.373 road 9.067 m 198.00 1.795.369 total 1.795.369 Solid Waste land fill 7.275 Tonnes/year 103.09 750.000 Collections Vehicels 2 Vehicles 28.900 115.600 Bulldozer 76.672 Bulldozers 128.000 128.00 Excavator 383.360 Excavators 140.000 140.000 Truck-Mounted Crane 7.987 Cranes 158.000 158.000 total 1.291.600 total 558.637.887 The table illustrates the cost of services for a town of 33,544. It is assumed that the population is housed 60% in apartments, 40% in gers. Apartments receive all utility services; gers receive only electricity, water service through stand- pipes/kiosks; and use of roads. Data for construction costs reflect Mongolian prices in 2008, and the model assumes no inflation. A guide to the model is found in the urban infrastructure background paper. The capital costs of infrastructure construction are usually provided with some mix of equity and debt. The cost of this capital is usually paid back over time, with the proceeds of consumer tariffs. Table 3.5 considers the various organizations which could arrange the up-front financing for infrastructure construction. The organization which organizes the financing will usually want a strong role in determining how the infrastructure is built and managed. It will be important to allocate responsibility for town development in Southern Mongolia to an entity which has the ability to raise finance, and to act quickly and efficiently in getting the towns and infrastructure services built. table 3.5 choosing Who finances infrastructure assets National Government • May have access to the lowest cost of • Remote from local needs. finance • May have other spending priorities. • Problematic if financing is tied with planning and control. Aimag or Soum • Knows the local situation • Cannot easily borrow • Accountable to local people Mining company • Can borrow easily • Interested in own workers, not the rest of the community • Can move quickly • Not specialized in infrastructure • Business interest in getting infrastructure • Lower ability to minimize lifetime costs, ultimately implying working. greater cost to government. Specialized private • Strong incentive to operate well and • More complicated to procure and manage operator minimize lifetime costs. • Higher financing costs • Can be hard to attract a good operator Private property • Strong incentive to finance construction of • Less infrastructure operational experience which would allow developer infrastructure to serve homeowners them to minimize lifetime costs. • Can borrow easily • Less incentive to minimize lifetime costs once property is sold. • Can move quickly. 37 Southern Mongolia infraStructure Strategy It is good practice to require customers to pay adequate finance has in turn frequently been for the capital costs associated with infrastructure associated with low service quality. construction, in addition to the operating costs. If • Internationally, some private mining companies the tariffs paid by consumers do not cover the capital have subsidized infrastructure services for their costs, it is very difficult to raise the finance to replace workers. In such cases, the subsidy expense is and renew the assets as they age. It is not possible met from mining revenues, reducing the net for the private sector to invest in infrastructure revenue which available to pay government tax- services unless it is clear that the tariffs will cover es and charges. costs, over the life of the investment. • When the private sector invests in infrastructure, it does so with the expectation of receiving the Table 3.6 illustrates the implications of full cost initial capital expenditure, plus a return reflect- recovery for each of the different infrastructure ing the time value of money and a risk premi- services, for an illustrative case of a town of 15,000 um. In order to induce private investment, tariffs people. The full cost recovery tariffs are presented need to be set at a level which will ensure this as prices per unit of the service, but it would also be rate of return. possible to split the tariffs with a monthly fee and unit fee. table 3.6 cost-covering tariffs Water Waste- electricity electricity electricity heating heating water option a option b option c option a option b Units $/m3 $/m3 $/kWh $/kWh $/kWh $/m2/month $/m2/month Current residential 0.52 0.17 0.05 0.05 0.05 0.17 0.17 tariff Current enterprise 0.61 0.17 0.08 0.08 0.08 0.40 0.40 tariff Tariff covering 0.11 0.06 0.03 0.07 0.45 0.06 O&M Tariff covering 1.20 4.57 0.19 0.29 0.55 0.41 0.03 full costs Assumes a population of 15,000 people. Option A provides electricity over a high voltage transmission line, with heating from heat only boilers. Option B provides electricity and heat using a 5MW combined heat and power plant. Option C provides electricity from local diesel generators without district heating – for heating residents would used heat only boilers, as in Option A. The table illustrates that full cost recovery would If Government does decide to regulate the price require large tariff increases compared with the of infrastructure tariffs to a level below the cost tariffs currently levied for these services in Southern of service, it is important that the service provider Mongolia. Drinking water tariffs would rise to 2.3 should be compensated with an explicit subsidy times their current level for residential consumers. from the Government. Ultimately, either consumers The cheapest option for electricity supply, option or taxpayers pay for all infrastructure services, and A, would require electricity tariffs to rise 3.5 times the service received is determined by the level of their current level for residential consumers. And those payments. wastewater tariffs would need to rise to 26 times designing, building, and operating infra- their current level. structure Internationally, consumer tariffs for infrastructure Table 3.7 sets out advantages and disadvantages services are often regulated, in part to protect of different entities designing, building and operating consumers from the market power of monopoly urban infrastructure. Mongolia has a tradition of service providers. In practice this has often meant having the national government design and build that consumer tariffs are below the level of cost urban infrastructure; with aimag governments, recovery: through PUSOs, providing water, wastewater, solid • Where governments have financed infrastruc- waste, and in some cases electricity and heating ture, they have not always charged consumers services. Leaving aimags with responsibility for tariffs which reflected the full capital costs. In- infrastructure service provision would be a familiar 38 Southern Mongolia infraStructure Strategy approach, and require few changes in the way in infrastructure of Omnogovi’s soums. Dalanzadgad which infrastructure is currently built and operated. has an airport, and some paved roads within the Relying on mining companies could ensure fairly city and to the airport. Electricity is provided by a rapid roll-out of new services, but they may not be 6 MW coal-fired combined heat and power (CHP) interested in expanding services as population grows plant. The CHP provides heating for apartments, significantly. Specialized private infrastructure public and commercial buildings. The plant suffers companies could provide efficient and sustainable frequent outages, but electricity service is more services, but their procurement is typically difficult regular than in many other soums. Centralized water and fraught with delays in countries with little PPP and sanitation services also exists for apartments, experience. public and commercial buildings. table 3.7 choosing Who designs, builds and operates infrastructure advantages disadvantages National Government • Has scale and capacity for large infrastructure • Government may not always be best at running businesses • Remote from local area Aimag or Soum • These governments currently provide municipal • Lacks specialized skills infrastructure • May lack economies of scale • Simple • Accountable to local people Mining company • Business interest in getting infrastructure work- • Interested in own workers, not the rest of the ing community • Generally well-organized • Not specialized in infrastructure Specialized private operator • Strong incentive to operate well and minimize • More complicated to procure and manage lifetime costs. • Can be hard to attract a good operator • Can be held accountable under a contract • Removes direct political control • Removes direct political control, helping to ensure financial viability Private property developer • Business interest in getting infrastructure work- • Less infrastructure operational experience. ing • No incentive to provide infrastructure to those • Good at designing and building infrastructure who don’t buy homes. 3.4 Planning towns in Southern Mongolia government Plans In 2001 the Mongolia Parliament approved a the current Situation Regional Development Concept, defining policy Omnogovi aimag is sparsely populated, with for urban and rural development until 2020. The only limited infrastructure. Forty-five thousand Regional Development Concept develops separate people occupy more than 165 square kilometers of plans for five economic zones: Western, Khangai, land. Eighty to ninety percent of the population lives Central, Eastern, and Ulaanbaatar. The Central in gers. economic zone includes the aimags of Southern Ger households generally heat with stoves Mongolia (Omnogovi, Dornogovi, Dundgovi and burning coal or animal dung, receive water through Govisumber) as well as Darkhan-Uul, Selenge, communal standpipes, and rely on open pit latrines and Tuv. The Ministry of Construction and Urban for sanitation. Gers located near soum centers Development (prior to its merger with Transport in generally receive some electricit service from a diesel 2008) has projected population growth over the generator operated by the aimag government. For next decades and developed plans for both regional example, at Tsogttsetsii gers receive service for five and soum-level communal infrastructure, based on to six hours in the evening. Public buildings and the the Regional Development Concept. few private buildings that exist may also receive The Ministry of Construction and Urban centralized heating, water and sanitation services. Development has also developed a more detailed Water is generally chlorinated at the source, and plan for the Galbyn Gobi micro-region, which is typically sold at water kiosks. Waste water is treated defined as the area affected by the mines at Tavan in open aeration ponds. Tolgoi, Oyu Tolgi, and Tsagaan Suvraga. The micro- Dalanzadgad, the capital of Omnogovi, has the region includes Tsogttsetsii, Manlai, Khanbogd, and largest population (17,000) and the most developed Bayan-Ovoo soums in the Omnogovi aimag; and 39 Southern Mongolia infraStructure Strategy Khatanbulag and Mandah soums in the Dornogovi held in May 2008 in Ulaanbaatar, the proceedings aimag. of which are available at www.worldbank.org/ southgobi. It is notable that the various ministries’ Two consulting firms working for the Ministry of plans were not all consistent with each other. Construction and Urban Development have outlined possible plans for developing infrastructure in the current Mining company Plans Galbyn Gobi micro-region. Both firms predict that The plans being developed by Ivanhoe Mining the population of the Galbyn Gobi micro-region, and Rio Tinto for the Oyu Tolgoi copper and gold which is currently 10,500, will grow to roughly mine are evolving, but it is understood that they 120,000 by 2020. Both firms include projections involve a scheme of dispersed recruitment and of the urban infrastructure required to serve this housing, with workers living in Khanbogd, Manlai, population. The firms differ, however, in how they Bayan Ovoo, and Dalanzadgad. The workers at see the population dispersed around Galbyn Gobi. Khanbogd would commute daily; others would work on a bus-in bus-out basis, with rotations of 10-20 days spent living at the mine site and 7 days One consulting firm envisages development at home. dispersed throughout the five soums in Galbyn Gobi, including specific non-mining industries: SouthGobi Energy Resources, through its subsidiary SouthGobi Sands, owns two coal mines • In Tsogttsettsii – a coking and chemical industry, at Ovoot Tolgoi. SouthGobi Sands currently has a poultry and pig farming, a construction materi- mining camp with ger accommodation for 180 als industry, and other small and medium enter- workers. Roughly 40 to 50 workers are bused in and prises; out from the nearby soum of Gurvan Tes every two • In Bayan Ovoo – barter trade and service facili- weeks. All other workers are flown in and out from ties, duty-free, frontier guard, emergency au- Ulaanbaatar. SouthGobi Sands is planning a three- thorities, public epidemic and law and order in- storey hotel to replace the gers in 2009. The hotel stitutions, livestock farming, and fruit and berry will accommodate 196 workers. farms; • In Khanbogd – transport services (air, rail and The MAK-Quinhua joint venture at Nariin road), warehousing and packaging, printing, Sukhat has 215 workers, with roughly 20% of the irrigated farming, livestock farming, meat and workforce recruited locally from the Gurvan Tes meat processing, ecological research and moni- soum. Currently all workers are accommodated in toring, tree nurseries, and an air navigation au- camps at the mine sites. In 2009 the companies thority planto introduce rotational fly-in, fly-out or bus-in, • In Manlai – livestock farming and vegetable bus-out schedules. In 2008, the companies invested growing; about 4.5 billion tugrugs in the camps and their • In Mandah – mining enrichment industries, facilities. The two camps, located 7-8 km apart transportation services, tourist camps, fruit and consist of block houses with hot water, heating, vegetable farming, sewing, and wool knitting electricity and indoor sanitary facilities. Each camp factories. also contains a mine office building, laboratory, garage, repair shop, and fuel station. The company also plans to build a 35kV electricity transmission Another consulting firm would create two new line from Nariin Sukhait to the Chinese border (56 towns: one located between Tavan Tolgoi and Oyu km), and a 25 km line to Gurvan Tes; and a 56 km Tolgoi; and the other new Tsagaan Suvraga. Under road to the Chinese border. MAK has a license to this plan, the new towns would be the center for construct a 47.8 km railway from Nariin Sukhait to economic activity in the region and other soums the Chinese border. would be mostly involved in agricultural production. Suggested Planning approach Prior to the 2008 elections other ministries had Planning decisions need to be made about also prepared various plans for the development of population projections; town locations; settlement Southern Mongolia. Ministries included Construction models (eg FIFO, company town etc); extent and Urban Development; Roads, Transport and of financing to be provided directly by mining Tourism; Fuel and Energy; Industry and Trade; and companies; and operating models for the supply of Finance. These plans were discussed at a workshop various urban infrastructure services. 40 Southern Mongolia infraStructure Strategy The foundation for planning towns in Southern To assist Mongolia’s mining industry to have Mongolia needs to be projections of planned a large potential labor pool, it would be useful to mine employment, and monitoring of the actual diversify the accommodation options in Southern population consequences arising from new mining Mongolia, to account for different workers’ housing developments. These projections need to be updated preferences. regularly to take account of changes in the plans of • If Southern Mongolia relied purely on FIFO, some mines and government. potentially qualified workers would regard the A useful starting point would be for the arrangements as too disruptive to their families Government to hold a workshop with the major and would not be interested in working in the mining companies, in which the mining companies mines. would be asked to present their employment • If Southern Mongolia relied purely on integrat- and worker accommodation plans. The mining ed communities, there may be other workers companies should be asked to provide this whose spouses prefer the employment or social information in writing, prior to the workshop. For opportunities offered in Ulaanbaatar or other its part, the Government should provide the latest major towns, and who would not be interested information on populations in the areas of the mines, in living in relatively small and remote mining so that there can be checking over time to see the communities. empirical extent of population growth in response A mix of FIFO and integrated community to new mine employment. Such workshops should developments, with significant contributions from be held annually, to permit regular updating of the major mining companies, is recommended for information. Southern Mongolia. In each of the main mining areas of Southern • Some FIFO or BIBO operations will be appropri- Mongolia, different accommodation plans will ate, particularly for relatively small and short- need to be put in place. Where multiple mining lived mines, distant from other mines. companies will operate in proximity to each other, • Mongolia does not present the security con- there will be a greater need for government cerns which might justify gated communities for coordination to ensure that individual mining mine workers and their families in some coun- company plans are consistent with each other, and tries; nor are there likely to be great social di- to permit the realization of economies of scale in vides between mine workers and others which town construction and operation. Specific plans might justify segregation. should be prepared for town development in each • Pure company towns, where mining companies of the following areas: plan, finance, build, and operate all aspects of the town, are unlikely to be viable in Mongolia. • Dalanzadgad; Modern mining companies have moved away • Nariin Sukhait, Ovoot Tolgoi, Sumber, and Gur- from this model. Relatively high influx of non- van Tes; worker populations can be expected in Mongo- • Tavan Tolgoi, Baruun Naran, and Tsogttsetsii; lia, and mining companies will be unwilling to • Oyu Tolgoi and Khanbogd; finance urban infrastructure services for these • Tsagaan Suvraga; people. An unwilling service provider is unlikely • Tsagaan Tolgoi; to be as responsive to the needs of these people • Shivee Ovoo and Choir. as would a local government. A decision may be required about which town Where integrated community developments are should be the main town center for the region, with proposed, it is likely that mining companies will need facilities such as a large hospital, training center, to be closely involved in the development planning services for the mining industry, and housing for process. The current aimag and soum governments, itinerant construction workers. The obvious choices even if provided with adequate finances from the are Dalanzadgad or a new settlement close to central government, are unlikely to have sufficient Tavan Tolgoi. Expansion of the existing services in technical capacity to develop townships at the Dalanzadgad may be less risky, rather than trying speed which timely mine development will require. to build entirely new facilities in the area of Tavan Particularly in the current period of global financing Tolgoi. constraints, when the national government may find financing difficult, mining companies’ balance 41 Southern Mongolia infraStructure Strategy sheets may prove to be an attractive source of 3.5 Current Priorities finance for the initial capital outlays. Flowing from the suggested planning approach, If the plans for the development of townships in immediate priorities for the development of new any particular area call for contributions from one towns in Southern Mongolia include: or more mining companies, it will be important to have these plans agreed between the Government • conduct a public workshop with mining compa- and the affected mining companies, and published. nies, to determine the mining companies’ plans Provision for such subsidiary agreements should including likely employment numbers and pro- be included in new Investment Agreements for posed housing strategies; strategic mines. • issue a public discussion document, indicating the proposed locations of new towns, as well Given the financial significance of housing as an indication of possible options for service developments for mine workers and their families, delivery at each of those locations, and indica- as well as the need for timely coordination of this tive costings for each of those options. Permit housing and mine development, it would make a period of public debate before making a gov- sense to have mining companies responsible ernment decision on the locations. for the financing and construction of housing • allocation of responsibility (across tiers of gov- for workers and their families. Cost sharing ernment and between ministries) and establish- arrangements between mining companies and ment of a timeline for the preparation of town local governments should be established for the development plans for each of the proposed lo- development of communal infrastructure which will cations. Each town development plans should benefit mine workers, the pre-existing populations, indicate, for each infrastructure service (build- and any additional population influx. However, ings, water, waste-water, electricity, heating, mining companies should not typically be made solid waste): responsible for the ongoing operation of communal - the expected capital and operating costs; infrastructure. Local governments or specialized - who would finance the assets; private infrastructure service providers will have - who would design and build the assets; stronger incentives to ensure ongoing service - who would operate the infrastructure provision for the entire community. service; and - the expected level of tariffs and approach to revising tariffs over time. • publish the town development plans, and seek public comment on them, before formally approving them; • where the Government seeks mining company finance to support town development, ensure that a written agreement is reached setting out the details, and make this agreement publicly available. 42 Southern Mongolia infraStructure Strategy 4 land tranSport key PointS • To maximize the value of Mongolia’s coal resources, investment costs in railways need to be kept to a minimum. • For mines with less than 2-4 million tonnes of output per year, new railways are not justified, and road transport is adequate. • Key decisions have already been made to award licences to develop private railways: — Energy Resources Rail: Tavan Tolgoi to Gashuun Sukhait — MAK: Nariin Sukhait to Ceke • Decisions on railway routes need to consider the impact on the value of coal resources. — A railway connecting Southern Mongolia to the Trans-Mongolian Railway is not currently justified. • Attention is needed for the rail regulatory framework: — Need to ensure that other mining companies can gain access to these railways at a reasonable price. — Need rules on when railway capacity should be expanded and how this will be paid for. — Take time to get this right, because it will drive the region’s development – the railways could take all of the profits from Southern Mongolian mines. • Private railway companies will need Government help to negotiate access to the Chinese rail network. Realizing Southern Mongolia’s development where: potential will require roads and railways to ensure • C is the total cost per ton; that minerals can be transported to markets, and • K is the capital cost of route construction per that supplies and workers can travel to the region. kilometer (eg $1.8 million for railway, $300,000 for a road); 4.1 The choice between road and rail • T is the amortization period (eg 20 years); Railways are expensive to build, and will only be • r is the discount rate (15%, or 0.15); justified to serve mines for which there is sufficient • x is the freight volume per year; freight volume. For tonnages up to about 2-4 • v is the operating cost per tonne per kilometer million tonnes per year, road transport is generally (eg $0.02 for rail; $0.08 for road); the most economical method of transport. Railways • d is the distance of the route in kilometers. will be justified for most of Southern Mongolia’s coal mines. But it will generally be uneconomic to Note that in this model, the costs of rolling build railways in Southern Mongolia whose major stock are incorporated into the operating costs. A purpose is the transport of copper, gold, other more complicated model would separate out rolling metals, general freight or passengers. stock as a separate item, and would also depreciate A simple model can be used to compare the infrastructure and rolling stock at different rates. costs of different road and railway options: Using the simple model, Figure 4.1 illustrates that for indicative values likely to be realized in Mongolia, rail would yield lower lifetime transport costs than road for volumes greater than 2 million tonnes per year at a 5% discount rate, greater than 43 Southern Mongolia infraStructure Strategy 3 million tonnes at a 10% discount rate, and greater construction of a railway on their own. than 4 million tonnes per year at a 15% discount • Nariin Sukhait’s output is probably not sufficient rate. Private enterprises might use a discount rate of to justify commercially the expense of railway 15%; governments frequently use a discount rate of construction, unless the railway can share the 10%. For volumes of around 10 million tonnes per output of neighboring mines (ie Ovoot Tolgoi, year and including capital costs, rail is about 4 cents Sumber, and other deposits of SouthGobi En- cheaper per net tonne-kilometer (5.1 cents/ntkm ergy Resources). for rail, 9.0 cents/ntkm for road, at a 10% discount • Oyu Tolgoi’s output will not be sufficient to rate). For a 400 kilometer haul, this translates to a justify the construction of a railway, but the difference of $16/tonne. most likely route for the Tavan Tolgoi-Gashuun Sukhait railway runs immediately past Oyu Tol- figure 4.1 difference between rail and road goi. Oyu Tolgoi will be able to take advantage freight costs of this railway line to lower its transport costs. • It is probably not justified to build a railway to Tsagaan Tolgoi or Tsagaan Suvraga. For these mines, it would be cheaper to truck ore to the nearest railway line. • Shivee Ovoo coal mine is located on the trans- Mongolia railway line. Passenger and non-mineral freight will not generate sufficient traffic to justify construction of a railway: • Mining supplies, other than fuel, are generally transported by road as mixed loads and are typi- assumptions: cally no more than 5-10% of the output vol- • Rail construction costs $2 million per kilometer; a similar ume. road costs $500,000/km. • Passenger demand for travel by public transport • Operating costs (excluding infrastructure, but including to and from Ulaan Baatar is unlikely to exceed the capital costs of rolling stock) are 3 cents per tonne- 200,000-300,000 trips p.a. (i.e. 2-3 trips per kilometer for rail, and 8.5 cents for road. person living in the aimag); this only requires • Infrastructure costs are covered with equal nominal around ten bus trips daily for the aimag as a charges spread over a 20 year project life, and present value of these charges calculated using discount rates of whole. 5, 10, and 15%. • General freight in such situations is typically about 0.5-1 tonnes/head per year. This can be The choice between road and rail will also be handled by 10 –20 trucks per day (or by a gen- influenced by matters which are not purely financial. eral freight train once or twice a week) The negative environmental impact of road transport While all these traffics may use a railway to some in Southern Mongolia is considerable. There extent if one is built, none is large enough to justify are already an average of around 50 loaded coal construction of a line unless there is other traffic. trucks per day between Tavan Tolgoi and Gashuun Sukhait, and similar volumes between Nariin Sukhait 4.2 Possible railway destinations and Ceke, with problems of multi-tracking, dust, erosion, and wildlife and livestock impact. The justification for railway construction rests on the needs of the coal and minerals trade for The indicative cut-off point of 2-4 million different routes for export. Figure 4.2 provides a tonnes per annum as the choice between road and map of north-eastern Asia, including the main steel rail transport can be compared with the expected processing areas around Baotou in China, as well volumes of output from individual mines in Southern as the Chinese and Russian ports. Each of these Mongolia, set out in Table 2.1: points is a potential destination for rail freight from • Mines at Tavan Tolgoi, Baruun Narain, Ovoot Southern Mongolia. Tolgoi, and Sumber could probably justify the 44 Southern Mongolia infraStructure Strategy figure 4.2 Potential rail destinations in north-east asia Markets in the vicinity of baotou from Tavan Tolgoi to Gashuun Sukhait. MAK has The closest market for Southern Mongolia’s the right to build a railway from Nariin Sukhait to coal is the area around Baotou in China. Baotou Ceke. Both railways will be built using standard is a major steel production area, providing a ready gauge, which is the gauge used in China. market for coking coal. In addition, there are several Energy Resources has established a subsidiary power plants which could consume steam coal company, Energy Resources Rail, which is responsible from Southern Mongolia, depending on the price at for developing the railway. While Oyu Tolgoi’s which it is sold. output would not be sufficient alone to justify In mid-2008, the Government decided to give construction of a railway, it is conveniently located two companies the right to build private railways along the Tavan Tolgoi-Gashuun Sukhait route, and which would deliver coal and other freight from should be able to access the railway once it is built. Southern Mongolia to the area around Baotou. China’s Shenhua Group intends to build a rail Energy Resources (the owner of the Uhaahudag coal link from the Gashuun Sukhait border crossing to field at Tavan Tolgoi) has the right to build a railway Baoutou, at a cost of 4.7 billion yuan (US$ 687 45 Southern Mongolia infraStructure Strategy million). The railway will be able to transport 60 corridors. The northern corridor carried over 500 million tonnes of coal and copper per year, when million tonnes of coal in 2005, the central corridor completed by 2011. In January 2009 Shenhua carried 75 million tonnes, and the southern corridor and Energy Resources Rail signed a memorandum carried 110 million tonnes. of understanding, agreeing to complete their The main rail operator in China is China respective rail lines to the border crossing by mid- Railways. Currently there is an annual convention 2011. There was also a mid-January 2009 meeting at which the available capacity (which is constrained in Ulaanbaatar between Chinese and Mongolian on most of the east-west routes) is allocated to officials to discuss the opening of five new land users, and on which the Ministry of Railways’ annual border crossings between China and Mongolia, one transportation plan is then based. If a particular of which will be a new Gashuun Sukhait crossing. shipper fails to obtain an allocation, it is possible China Railways has recently completed to try for a non-plan allocation by applying to the construction of a railway connecting Linhe to Ceke, relevant railway authority. But this is not guaranteed which will provide access to the Baotou market for and is subject to changes in circumstances. coal from the Nariin Sukhait area. The Government There are no arrangements whereby a third party may wish to consider regulatory arrangements can pay access charges to operate over the main which require the railway to provide rail freight for China Railways network. The normal arrangement coal from all three companies in the area (MAK, is that traffic is carried in China Railways wagons. MAK-Qinhua, and SouthGobi Sands) as well as any Indicative rates, assuming China Railways wagons, potential new entrants in future years. are Rmb 170/tonne (US$ 24.80) from Gashuun chinese Ports Sukhait to Qinhuangdao; and Rmb 123/tonne (US$ One option for shipping Mongolian coal to 18) from Erlian to Qinhuangdao via Jining and the Chinese ports would be to use the Shenhua railway. Daqin line. Tariffs in private wagons would need to The Shenhua Group is a state-owned mining and be negotiated but would probably attract a discount energy company, and is one of 44 major “backbone� of about 15% for the round trip. companies directly controlled by China’s central russian Ports government. Shenhua Group operates the Shenfu It would be useful for Mongolia to have an Dongsheng coalfield as well the affiliated railway alternative export route through Russia, if only to assets, power plants, port facilities, shipping fleet, gain greater bargaining power in negotiating freight and coal liquefaction projects. Its existing railway rates for export through China. Exports through extends from Baoutou to the port of Huanghua. Russia will, however, be difficult to achieve unless Shenhua’s railway is operated independently of current practices within Russia can be changed. This China Railways, and so it has the freedom to enter would require inter-governmental discussions to into the sort of long-term agreements that Energy address upgrading of Russian rail capacity, changes Resources Rail requires in order to raise finance for in rail freight pricing arrangements, and access to the Tavan Tolgoi-Gashuun Sukhait portion of the Russian port terminals. railway. Based on current rates, the cost of shipping coal over the Shenhua network would be Rmb Russia applies discriminatory freight charges 161/tonne (US$ 23.50). The actual rates obtained to foreign coal as opposed to domestic coal. Rail by Mongolian coal producers will be a matter of freight for foreign coal from Naushki to Vostochnaya commercial negotiation with Shenhua. (4,047 km) would cost about $85/tonne. Russian coal producers in Siberia typically pay about $25/ There are few alternatives to the Shenhua tonne, for hauls of about 4000 km. railway for exporting Mongolian coal to Chinese ports on a reliable long-term basis. China’s rail Even if adequate commercial arrangements can network is highly congested, and there is little spare be made with Russian railways, Russia’s Pacific ports capacity on key routes. Coal occupies about 40% are currently close to capacity. In 2006, the eastern of the traffic carried on China’s railways. The major port capacities were: Vostochnoy – over 15 mtpa; coalfields are all located west of the mountain range Posyet – over 1.9 mtpa; Nakhodka – 0.4 mtpa; and which runs north-south up the center of China. Vanino – 0.6 mtpa. Combined, the ports shipped Most of China’s power plants, and all the coal 18.3 million tons in 2006. Several expansion projects ports are located to the east of the mountains. Nine are currently underway. railway lines cross the mountains, grouped in three 46 Southern Mongolia infraStructure Strategy In addition to questions of physical port capacity, • Alternatively, coal could be shipped along a new there are likely to be difficulties in gaining access railway from Tavan Tolgoi to Sainshand, then to to port terminals, which are largely controlled by Zamiin Uud and through the Chinese rail net- Russian coal companies or their marketing arms. work of Jining and Datong to the port of Qin- In 2004, China attempted to export products, huangdao. particularly coal, from a region adjacent to the • a possible new railway line passing from Tavan Russian ports of Posyet and Zarubino, where they Tolgoi to Choibalsan, via Tsagaan Suvraga and proposed to construct new terminals. The Russian Sainshand. This route would take advantage of government advocated the use of existing port the existing 50 km railway from Sainshand to facilities by Russian companies, and didn’t feel that Zuunbayan, as well as the existing 300 km link it was appropriate to rent out port terminals to from Choibalsan to the trans-Manchurian rail- foreign companies. way. From here, freight would continue over the trans-Siberian railway to the Russian port of Possible railway routes for tavan tolgoi’s Vladivostok. coal • an alternative new railway line serving exports Table 4.1 sets out indicative estimates of the through Russia, which would pass from Tavan cost per tonne of delivering coal from Tavan Tolgoi Tolgoi to Choibalsan, passing via Airag. This to Baotou, the Chinese ports of Huanghua and route would take advantage of the existing 60 Qinhuangdao, and the Russian port of Vladivostok. km railway from Airag to Bor-Ondor. From Choi- The analysis includes different possible routes for balsan freight would continue to Vladivostok. new railways within Mongolia, as illustrated in • a possible railway from Tavan Tolgoi to Airag, Figure 4.3. The routes considered are: from where freight would be transported along • the proposed Energy Resources Rail and Shen- the existing trans-Mongolian railway to Ulaan- hua railway line from Tavan Tolgoi to Baotou, baatar and Ulan Ude, and from there along the passing via Gashuun Sukhait. This route would trans-Siberian railway to Vladivostok. be used to sell coal to the steel plants around • a possible new railway line passing directly from Baotou. Tavan Tolgoi to Ulaanbaatar, from where freight • continuing on from Baotou, Mongolian coal would be transported along the existing trans- could be shipped over the Shenhua railway net- Mongolian railway to Ulan Ude, and from there work to the Chinese port of Huanghua. Current along the trans-Siberian railway to Vladivostok. tariffs along this line are around $25/tonne for transport from Baotou to Huanghua. figure 4.3 Possible rail routes in Southern Mongolia 47 Southern Mongolia infraStructure Strategy The table indicates the cost advantage gained The relationship between the value of Mongolia’s by targeting markets around Baotou, using the coal resources and the costs of rail freight is illustrated Energy Resources Rail line passing through Gashuun in Table 4.2. The Table estimates the present value Sukhait. When the demand around Baotou is fully of coal sales from Tavan Tolgoi, net of the costs of satisfied, the next lowest cost option will be to sell production and rail freight, under the assumption coal to world markets through the port of Huanghua. that all of the coal is directed along one of the Once the Energy Resources Rail line is built, any routes discussed above. The table is not intended incremental increases in coal export volumes will to be an accurate reflection of the value of Tavan further lower the unit costs of rail freight along that Tolgoi reserves. Rather, it illustrates the importance railway. of considering coal mine and rail development The estimates in Table 4.1 of costs for rail together. For example, under the assumptions freight through China and Russia are not necessarily in the Table, if Tavan Tolgoi produces 20 million the prices that Mongolian coal will be charged. tonnes per year, the resulting revenue stream would Nevertheless, these numbers suggest that there be worth $6.2 billion if the coal is exported through is a highly significant cost advantage in exporting Huanghua, but $1.5 billion if the coal is exported through China. Moreover, the cost estimates for through Vladivostok via Sainshand and Choibalsan. Russian rail are likely to be under-estimates, and the total cost of Russian exports does not leave much profit margin with current coking coal prices. 48 table 4.1 indicative cost per tonne for coal exported from tavan tolgoi (uS$) a. b. c. d. e. f. g. tavan tolgoi tavan tol- tavan tavan tolgoi tavan tolgoi tavan tolgoi – tavan tolgoi – – gashuun Sukhait goi – gashuun tolgoi – Sains- – tsagaan Suvraga – airag – choibal- airag – ulaanbaatar – ulaanbaatar – ulan ude – baotou Sukhait – baotou hand – Zamiin – Sainshand – choibal- san – vladivostok ulan ude – vladivostok – vladivostok – huanghua uud – datong – san - vladivostok Qinhuangdao coal production (1) $12.00 $12.00 $12.00 $12.00 $12.00 $12.00 $12.00 (385 km) new railway (2) (410 km) (410 km) (870 km) (860 km) (390 km) (490 km) • 10 million tonnes • $21.00 • $21.00 • $19.70 • $44.50 • $44.00 • $20.00 • 25.10$ • 20 million tonnes • $14.80 • $14.80 • $13.90 • $31.40 • $31.00 • $14.10 • $17.70 • 30 million tonnes • $12.70 • $12.70 • 12.00 • $27.00 • $26.70 • $12.10 • $15.20 existing Mongolian (240 km) (350 km) (360 km) (760 km) (410 km) railway (3) • 10 million tonnes • $4.80 • $7.00 • $7.20 • $15.20 • $8.20 • 20 million tonnes • $8.25 • $12.60 • $13.00 • $27.40 • $14.80 • 30 million tonnes • $7.10 • $10.90 • $11.20 • $23.60 • $12.70 $1.00 change of gauge existing chinese $23.50 $18.00 railway (4) existing russian (3,172 km) (3172 km) (3,634 km) (3,634 km) railway (5) $31.72 $31.72 $36.34 $36.34 total • 10 million tonnes • $33.00 • $56.50 • $55.50 • $95.22 • 94.92 • $83.54 • $81.64 • 20 million tonnes • $26.80 • $50.30 • $53.15 • $87.72 • $87.72 • $89.84 • $80.84 • 30 million tonnes • $24.70 • $48.20 • $50.10 • $81.62 • $81.62 • $84.04 • $76.24 (1) The $12 cost of coal production is purely indicative. Estimated costs of coal production range from $10-$28 per tonne. (2) It is assumed that a new railway has capital cost of $1.8 million per kilometer, amortized over 20 years at a 15% discount rate, operating costs of $0.02 per tonne per kilometer, and a distance of 1.05 times the indicated straight-line distance. (3) It is assumed that the existing Mongolian network can handle volumes of up to 10 million tonnes per year at an operating cost of $0.02 per tonne per kilometer. For greater freight volumes, a second track would need to be constructed, with the same assumptions as for note (2). (4) The estimated cost for the existing Chinese network reflects current Shenhua and China Railways tariffs. Actual prices will be commercially negotiated. Southern Mongolia (5) The estimated cost for the Russian network is based on operating costs of $0.01 per tonne per kilometer. This is likely to be an under-estimate of the true cost and can be compared with current infraStructure Strategy Russian freight rates of around $85 per tonne for foreign coal from Naushki to Vladivostok. 49 Southern Mongolia infraStructure Strategy table 4.2 indicative Present value of tavan tolgoi revenues (uS$ million) F. D. Sainshand E. Tons per Airag Ulaan- G. Ulaanbaatar A. Baotou B. Huanghua C. Qinhuangdao Choibalsan Vladi- Airag Choibalsan Year baatar Vladivo- Vladivostok vostok Vladivostok stok 10m 4,194 2,723 2,785 299 318 1,030 1,149 20m 9,164 6,222 5,865 1,537 1,537 1,272 2,399 30m 14,140 9,727 9,370 3,451 3,451 2,997 4,462 Assumptions: All coal is freighted along the routes indicated. Present value is computed assuming constant annual sales at $100/tonne, less the cost of production and rail freight as indicated in Table 4.1, during a period of 20 years with a discount rate of 15%. Note that not all values are possible (eg, it is unlikely that 30 million tonnes of coking coal can be sold at Baotou in the foreseeable future). Possible railway routes for nariin Sukhait’s There have been proposals to establish two coal separate railways between Nariin Sukhait and Ceke: Coal from the mines at Nariin Sukhait/Ovoot the MAK railway to serve the MAK and MAK- Tolgoi could be transported to Baotou along Qinhua mines; and a separate railway to serve the the railway being planned by MAK to Ceke, and SouthGobi Sands mine at Ovoot Tolgoi. A single- from there via Linhe to Baotou. Alternatively, an track railway with appropriate passing loops could additional railway line could be built from Nariin provide the capacity for 30 million tonnes of coal Sukhait to Tavan Tolgoi, from where coal could be exports per year, and should be capable of serving transported to China via Gashuun Sukhait. all three mines in the commercially foreseeable future. Construction of an additional 50 km railway Until high volumes of coal are exported, a would cost in the order of $100 million in avoidable railway connecting Nariin Sukhait to Tavan Tolgoi capital costs. It is in the interests of all parties – the will not be financially feasible. Looking only at the three mining companies and the Government – to operating costs, Table 4.3 indicates that the route ensure that the costs of railway development are to Baotou via Tavan Tolgoi is shorter and cheaper minimized. than the route via Ceke. But the saving in operating costs is small, and would require a volume of around 4.3 Regulation of private railways 50 million tonnes in order to justify the capital cost of railway construction. Moreover, because The Government has decided that private mining there are mountains between Nariin Sukhait and companies should finance, develop, and operate Dalanzadgad, the operating costs for a railway the proposed railways serving Nariin Sukhait and between these points may be higher than indicated Tavan Tolgoi. Private financing will resolve much in the table. of the uncertainty associated with synchronizing table 4.3 operating costs of Possible railways from nariin Sukhait Cost/tonne From To Distance Cost/ntkm (Rmb) Cost/tonne (Rmb) (US$) via tavan tolgoi Nariin Sukhait Tavan Tolgoi 380 0.10 38.00 Tavan Tolgoi Wuyuan 378 0.10 37.80 Wuyuan Baotou Xi 177 0.13 22.82 total 935 98.62 14.43 via ceke Nariin Sukhait Ceke 20 0.10 2.00 Ceke Linhe 550 0.15 84.15 Linhe Baotou Xi 234 0.10 23.10 total 804 109.25 15.99 50 Southern Mongolia infraStructure Strategy mine and railway development. Private railways Tsanki and Bortolgoi coalfields at Tavan Tolgoi will may also be developed more quickly and operated depend on having access to the Energy Resources more efficiently than if they were operated by railway. The deposits held by SouthGobi Energy government. Resources in the area of Ovoot Tolgoi could prove to be as significant as the Tavan Tolgoi deposits, There are, however, some risks associated but large-scale development will depend on having with the development of these private railways. In access to the MAK railway. And in future decades, particular, there is a need to ensure that the private deposits may be found in proximity to both of the mining companies which own these railways do not planned railways, to be owned by companies which use their control of the railways to inhibit competition may not even exist yet, and which may require from other coal mines. There are international access to the railways. examples where private mining companies have been unwilling to allow competitors to have access The cost of coal production is currently around to those railways at reasonable prices (see Box 4.1). $10-30 per tonne from an open cut mine. The price Chinese smelters are willing to pay for coking coal In order to maximize coal production in Southern is currently around $110/tonne. A private railway Mongolia, the Government should be concerned could thus charge a freight rate of up to $80/ to ensure that the regulatory framework permits tonne to carry a competitor’s coking coal. Excessive competing mining companies to use the private freight charges would inhibit the development of railways. The development of the Tsanki, Eastern competing mines. box 4.1 Mining railways in Western australia The Pilbara region of Western Australia exports over 40% of the world’s sea-borne trade in iron ore. Two companies, BHP Billiton, and Rio Tinto, dominate iron ore production in the region. Starting in the 1960s, each company built its own railway network, extending about 400 km inland. In recent years, a number of “junior� mining companies have discovered additional iron ore deposits in proximity to the railways. In 2004, one of these juniors, Fortescue Metals Group, sought to use BHP Billiton’s Mount Newman railways, in order to develop a new mine. In 2007, additional juniors sought to gain access to Rio Tinto’s Robe and Hamer- sley railways, and BHP Billiton’s Goldsworthy railway. BHP Billiton and Rio Tinto have opposed granting access to their competitors. Following several years of administrative proceedings and court challenges, the Pilbara railways of both BHP Billiton and Rio Tinto were “declared� in 2008. Under special Australian legislation, if the owner of a “declared facility� does not permit others to use it, those seeking access can then ask for an administrative determination governing the terms and conditions by which the owner is legally obliged to provide access. Declaration occurs following a recommendation from the National Competition Council to the Australian Treasurer (Finance Minis- ter), and is only permitted when (among other matters) it would be uneconomical to develop another facility and where permitting access would promote competition. Fortescue Metals has, in the meantime, built its own railway from Port Hedland to Cloud Break and began to ship iron ore to China in 2008. The result is that there are now two separate single track railways running parallel to each other for about 400 km – a massive avoidable expense. Moreover, joint operation of the two railways (ie double tracking) would provide two to three times the combined capacity of two single track railways. Australian administrative reviewers and the courts have found that it is economically justified for small mining companies to have access to the railways operated by BHP Billiton and Rio Tinto. The delays in providing such access could have been avoided with more clearly specified access arrangements applying from the time that the railways were built. The Western Australian State Government is seeking to ensure that this lesson is learnt further south in the state, where an additional railway is planned to serve new iron ore mines. Even before the railway is built, the State Government is specifying the access rules which will govern its operation. 51 Southern Mongolia infraStructure Strategy Rail services should be provided at a rate which order of 30 million tonnes per year. If at some point reflects the cost of service provision, including production from the Tavan Tolgoi area exceeds this investment and operating costs, and a reasonable level, a double track line will be needed. return on investments. This is likely to be in the order of 7-8 cents/ntkm. For a 190 km railway from 4.4 Roads Tavan Tolgoi to Gashuun Sukhait, this would imply a In 2005 the Government formulated a National freight charge of around $13.30-$15.20 per tonne.1 Development Policy for 2006 to 2021. Its objectives International approaches to regulation of mining for the road sector include the development of a railways to ensure open access typically rely in the highway network crossing the country form east to first instance on commercial negotiation between west (the “Millenium Road� project) and continuing companies. Only if agreement cannot be reached the periodic maintenance of state highways. These would regulatory intervention be required. Where objectives were translated into a set of staged price regulation is exercised, care needs to be taken development targets specifying the length of road to ensure that the regulated price is high enough to to be improved and its condition by 2021. The provide proper incentives to the owner to maintain Government intends to improve all unpaved roads and expand the facility as required. directly to asphalt, rather than using the intermediate option of gravelling. Where a private railway owner refuses to provide access to the railway to a mining company to ship A more detailed road master plan was prepared significant quantities of resources (say, more than 1 in 2007. Its key feature is a proposal to provide a million tonnes per year), consideration could be given sealed road between Ulaanbaatar and each aimag to compelling the railway to expand its facilities, or center, and to provide full connectivity between revoking its operating license. If a mine is unable to the international network and the national roads access an existing railway, it should certainly have serving the five economic regions of Mongolia. the right to construct its own railway (subject to The proposed routes and their timing are set out environmental and other land use considerations). in Figure 4.4. The total cost of the program was A single-track line will be able to support in the estimated at US$1.8 billion. figure 4.4 road Master Plan projects, 2008-2020 Note: dashed lines indicate that the alignment has not been precisely defined. 1 These prices are only intended as an indication of the rough magnitude of cost-reflective pricing for rail freight, to be contrasted with the potential price of around $80/tonne. Accurate cost-reflective pricing would require detailed assessment. 52 Southern Mongolia infraStructure Strategy The master plan indicates that where possible, mining projects will be encouraged to finance 4.5 Trucking and Logistics and perform the works for upgrading or new The current organization of road freight transport construction. The roads will then be handed back to in Southern Mongolia is controversial.2 While the Government which would operate them as toll- Mongolian drivers are permitted to drive only 100 roads to at least cover their recurrent costs. km beyond the border into China (not far enough to reach any of the coal consumers), Chinese trucks The road master plan projects that are relevant drive all 260 km to Tavan Tolgoi to pick up coal. This for mining development in Southern Mongolia are is in violation of the bilateral transport agreement set out in Table 4.4. The average estimated costs in between Mongolia and China, but there are few 2008 prices are $300,000 per kilometer. table 4.4 road Master Plan projects relevant for Southern Mongolia timing distance (km) cost (uS$ million) Ulaanbaatar – Mandalgovi 2008-10 230 69 Dalanzadgad – Gashuun Sukhait 2008-09 329 99 Nariin Sukhait – Chinese border 2009 40 12 Mandalgovi – Dalanzadgad 2011-15 293 88 total 892 268 The road master plan did not include any projects connecting Dalanzadgad towards the Nariin Sukhait. Mongolian trucking companies with the scale Rather, Nariin Sukhait would be connected to the to provide the necessary services. An attempt to north, with Arvaiheer in Ovorkhangai aimag. In impose a single concession for trucking coal within 2009, the Ministry of Roads, Transport, Construction Mongolia to a Mongolian company was frustrated and Urban Development has proposed that Nariin when the concession was won by a company that Sukhait would be connected by a sealed road did not have the financial resources to implement its running north to the town of Bayankhongor, and concession. from there onwards to Russia, with the objective of figure 4.5 coal being transported from tavan facilitating the development of western provinces. tolgoi to china The mining industry will need to transport various supplies, as well as people, by road. It would make sense to have a center which supports the mining industry, with specialist supplies and services. This center could be located in Dalanzadgad or near Tavan Tolgoi. Regardless of where the center is precisely located, the various mines of the Nariin Sukhait fault would be better served if they had easy road access to such a center of mine services. It would be useful to revisit the road master plan, to examine the case for a paved road connection from Nariin Sukhait to Dalanzadgad. The straight line distance is 265 km, so a sealed road would cost in the order of US$ 80 million. 2 This section draws from a 2008 World Bank report, trade and transport facilitation action Plan. 53 Southern Mongolia infraStructure Strategy Development of a Mongolian trucking industry 4.6 Current priorities may be impeded by current Mongolian laws and procedures. Regulation of the road trucking industry Immediate priorities for land transport are: appears to be excessive, with a large number of • Prepare licenses for the Energy Resources Rail laws and responsibilities fragmented across various and MAK railways. These licenses should be agencies. Permits are required for each international drafted in a manner which ensures that coal freight trip. In 2007, 9000 permits were issued companies which compete with Energy Re- for transport to Russia, and 15,000 for transport sources and MAK can have access to the rail- to China. The permits are issued by the Ministry ways at reasonable prices. The licenses should of Roads, Transport, Construction and Urban also provide dispute resolution mechanisms in Development or its delegated provincial agencies. the event that the ERR and MAK railways reach The permits are required to have seals and signatures full capacity and are unable to provide such ac- of the authorizing officials. A simplified system is cess. required if Mongolia wants an effective domestic • Provide a time limit for the development of the road freight industry. MAK railway, before the rights to develop the A new border crossing has been opened at railway are re-allocated. MAK’s freight volume Gashuun Sukhait and is open daily for freight but is only barely sufficient to justify construction of only open for people to cross on the first 20 days a railway. But in conjunction with the output of of each quarter, and then only for Chinese and Ovoot Tolgoi, there is a need for the railway to Mongolians. The many foreign specialists who be built. need to travel between the South Gobi mines and • Develop a capacity building program for the their Chinese customers must travel via Ulaanbaatar Mongolian Railway Authority, to ensure it is rather than via Gashuun Sukhait. Expanded border able to respond rapidly and effectively to the facilities and revised procedures to facilitate rapid competing needs of rail license holders, project passage of drivers and other foreigners are required financiers, and future mine developers. at Gashuun Sukhait. • Evaluate the feasibility of a sealed road from Nariin Sukhait to Dalanzadgad. • Review the road freight permit regime, with a view to encouraging the growth of a domestic road freight industry. • Upgrade the border crossing arrangements at Gashuun Sukhait and Nariin Sukhait, to facili- tate driver crossing and the crossing of all na- tionalities. 54 Southern Mongolia infraStructure Strategy 5 ElEctricity key PointS • Without additional generating capacity, electricity demand will exceed supply from 2012. • From among ten potential sources to meet growth of demand, there are just three candidate plants with strong potential to supply firm capacity and be commissioned by 2013-14: TPP#5, Oyu Tolgoi TPP, and Tavan Tolgoi TPP. • The proposed Oyu Tolgoi 450 MW power plant is probably the only power plant that could be ready to satisfy the increased electricity demand in 2012 arising from the Oyu Tolgoi mine. A delay of one year in supplying power to Oyu Tolgoi would defer mining revenues of $2 billion and Government revenues of $670 million. • The suggested investment plan includes the following sequence: o Oyu Tolgoi TPP should be commissioned in 2012, to meet demand from Oyu Tolgoi mine. o TPP#5 unit 1 (300MW) should be commissioned as soon as possible, to meet demand growth on the CES. o Subsequent demand growth in the CES should be met with CHP units at TPP#5, and demand growth in the South Gobi by development of the Tavan Tolgoi TPP. • Approximately $550 million investment will be required each year from 2009 to 2012; and then $200 million annually until 2017. • Negotiation of a power purchase agreement with the proposed Oyu Tolgoi power plant is a high priority. Alternatively, there may be a need for imports of power from China, beyond the quantities required to serve Oyu Tolgoi. • Large increases in tariffs will be required, exceeding 30% in real terms. 5.1 Existing electricity and heating systems • National Dispatching Center Company (NDC). • Ulaanbaatar Electricity Distribution Network The Mongolia energy sector consists of three Company (UBEDN). regional interconnected systems – the Central, • Darkhan-Selenge Electricity Distribution Net- Western and Eastern systems – as well as a number work Company (DSEDN). of isolated grids. The Central Energy System • Erdenet-Bulgan Electricity Distribution Network represents 91% of installed generating capacity and Company (EBEDN). 96% of electricity supplied. In Ulaanbaatar, Erdenet, • Baganuur and South-Eastern Regional Electricity Baganuur and Darkhan the CES also serves district Distribution Network Company (BSEEDN). heating networks and provides steam for industry. • Ulaanbaatar District Heating Network Company The electricity sector was restructured in 2001 (UBDHN). into independent generation, transmission and • Darkhan District Heating Network Company distribution companies, comprising: (DDHN). • Five generation companies, arranged around CRETG operates a zero balance account Thermal Power Plants (TPPs) #3, #4 and #5 in mechanism which functions as a “virtual� single Ulaanbaatar, Darkhan TPP and Erdenet TPP. buyer. All sales by generators and purchases by • Central Regional Electricity Transmission Grid distribution companies take place through this Company (CRETG). 55 Southern Mongolia infraStructure Strategy account. All money collected from customers by 2009. The line is subsequently expected to be distribution companies is paid into this account upgraded to a 22kV double-circuit line as de- and is then redistributed between energy sector mand in the region increases. enterprises according to pre-determined formulae, • A second phase will link Mandalgobi to Ulaan- approved by the Energy Regulatory Authority (ERA). baatar, strengthening the interconnection with The risk of non-collection is thus shared between the CES, and also extend the line to Tavan Tol- generators and distribution companies. Revenue goi. This is expected to be constructed by 2012. collections have greatly improved in recent years, rising from 76.5% in 2001 to 100% in 2007. 5.2 Demand forecasts At present, generation, transmission, bulk supply, distribution and retail tariffs are all determined by Peak demand drives the need for capacity ERA on a cost-of-service basis. There are plans to additions. Figure 5.1 illustrates the forecast growth introduce a competitive market in which generators of peak electricity demand in the CES and Southern would supply distribution companies under bilateral Mongolia. The derivation of this forecast is set out contracts with imbalances settled through a spot below. More details are provided in the background market mechanism. electricity study. table 5.1 ceS basic statistics gWh unless stated CES generation gross output 3,594 CES generation self-consumption 16.5% CES generation net output 3,000 Imports 130 CES net supply 3,132 Transmission and distribution losses 17.4% CES final supply 2,587 Source: 2007 Licensee statistics, ERA table 5.2 current ceS power plants Plant Installed Self- Available Heat Plant Thermal electricity consumption electricity capacity Gcal/h load factor efficiency capacity (MW) capacity MW TPP#2 21.5 16.4% 18.0 31 62.2% 23.3% TPP#3 136 21.0% 107.4 518 49.3% 34.2% TPP#4 540 14.8% 460.1 1045 52.6% 39.3% Darkhan TPP 48 18.5% 39.1 181 62.0 28.1% Erdenet TPP 28.8 22.8% 22.2 120 56.5% 43.8% The mines of Southern Mongolia that are already figure 5.1 Peak electricity demand forecast, operating are all self-supplied with electricity, with 2007-20 the exception of Shivee Ovoo which is supplied from the CES. MAK plans to construct a 35kV interconnection from Nariin Sukhait to the Chinese grid to meet growing electricity demand. Plans are also well-developed for the interconnection of Omnogovi to the CES: • The Government recently concluded a bidding round for the construction of a 110 kV single- circuit transmission line linking Mandalgobi (which is already connected to the CES) with Oyu Tolgoi. The line is due for completion in 56 Southern Mongolia infraStructure Strategy ceS electricity demand • New towns in the region with a population of an During 2007, CES electricity demand peaked additional 80,000 people will require provision of in December 2007 at 631 MW. This is used as the around 10 MW of CHP capacity to meet electric- base for CES demand forecasts. For purposes of this ity and heating demand. Alternatively, electricity report, demand in the areas currently served by the could be supplied from new large power plants CES is forecast to grow by 3.5% annually. established in the region, with heating needs met from heat only boilers (HOBs). In this case, The assumed CES growth rate is lower than the meeting the demand of a population of around actual growth rate in recent years (ie 4.0% during 120,000 would require approximately 20 MW of 2000-07). Future growth of electricity demand will electricity generating capacity. be affected by Mongolia’s rate of GDP growth, • Demand from the various non-mining industries possibly offset by the impacts of required large tariff that might develop in the region is difficult to increases. Tariff increases in recent years have failed predict, but could reach around 30 MW by 2020. to keep up with inflation, implying significant rises are required. Part of the demand growth could also be met by reducing current distribution losses, which ceS heat demand are at 23% in Ulaanbaatar – well above international Expansions to the CES must be able to meet both standards. electricity and heat demand growth in Ulaanbaatar, In projecting future CES demand growth it is Darkhan and Erdenet. This report assumes that heat important not to double count. A large part of demand grows at 3.0%. In practice, this growth rate economic growth in coming years will be created may not be achievable because of supply constraints by new mining developments, which will be in district heating networks. concentrated in Omnogovi, without increasing 5.3 Supply options electricity demand directly in the areas currently served by the CES. Few projects are likely to be ready, even under optimistic assumptions, by 2012-13 to meet electricity demand in Southern Mongolia expected growth of demand for base-load power. Demand in Southern Mongolia is projected to Of the various supply options considered below, the reach 294 MW in 2012, and 650 MW by 2020, Oyu Tolgoi thermal power plant, Thermal Power based on the following assumptions: Plant #5 at Ulaanbaatar, and Tavan Tolgoi thermal • the first phase of Oyu Tolgoi will commence pro- power plant appear to be those generators that duction in 2012 (with electricity demand of 200 are most likely to proceed and that are suitable to MW), with the second phase following in 2016 meet base load demand. The Newcom wind farm (with demand rising to 300 MW). has a reasonable prospect of being commissioned by • production by Energy Resources will commence 2012, but by its nature will not provide firm capacity. at Uhaahudag in 2009 and ramp up to 10 million With sufficient commitment, it would be possible to tons per year by 2014, at which stage demand commission a thermal power plant at Tavan Tolgoi for electricity will be 100 MW. by 2013-14. • production from the other Tavan Tolgoi deposits existing generation capacity and from Baruun Naran mine will begin in 2012 The current CES generating capacity is 647 and increase gradually to 20 million tons per year MW, which was only just sufficient to meet peak by 2018 (ie demand for around 200 MW of elec- demand of 631 MW in 2007, without an adequate tricity). reserve margin. A reserve margin of 20% would be • Nariin Sukhait and Ovoot Tolgoi will be supplied appropriate in Mongolia. This would be sufficient to by imported electricity from China. cover the loss of one of TPP#4’s units (each of which • The expansion of the Shivee Ovoo mine is de- represent around 13% of available capacity) as well pendent on whether the proposed exporting as an outage of one smaller unit. power plant for the site is developed. If the mine is expanded, its electricity would be supplied The 2002 master plan assumed that TPP#2 from the new export plant. would be retired in 2005, TPP#3 in two stages in • The development of Tsagaan Tolgoi is depen- 2008 and 2011 and Darkhan TPP in 2013, as each dent on whether its output is used to supply plant reaches the end of its operating life. Noting power plants in the region, given that the quality that these plants continue to be necessary to meet of its coal is not sufficient to export. demand, the 2006 NDC forecast expects retirement 57 Southern Mongolia infraStructure Strategy of TPP#2 to be postponed to 2012, TPP# 3 to 2016 The Egiin hydro power plant has a planned and Darkhan indefinitely. Retirement of TPP#4 is not capacity of 220 MW and projected annual output of expected to take place before 2020. Applying the 484 GWh. The project has been delayed because of NDC forecasts, available generating capacity will fall difficulties in financing. to 629 MW in 2012 and 521 MW in 2016. In 2006, China Exim Bank agreed to a $300 Mongolia does have the ability to increase imports million credit to finance the project. At the time, the from Russia. The capacity of the interconnector estimated investment cost was US$ 312 million. But with Russia is up to 255 MW. Assuming this full the bids subsequently received from EPC contractors capacity is used, demand could be met until 2011. ranged from US$400 million upwards. The From 2012, without additional generating capacity Mongolian Government was unable to finance the or imports being added to the system, demand will difference. The project was cancelled in mid-2008 exceed supply. and the Chinese loan was redirected to investments in apartments and the rail network. thermal Power Plant #5 The proposed thermal power plant #5 would be Operationally, the Egiin HPP would be an a new combined heat and power plant, located at important addition to the CES, providing flexible Ulaanbaatar and fuelled by lignite (probably from capacity to respond to unexpected outages or Shivee Ovoo). In July 2008, the Government issued increased volatility associated with wind and a request for proposals for TPP#5 as an urgent renewable energy generation. This report assumes requirement, due to the need to meet heat demand that the project will be restarted, once new financing growth in Ulaanbaatar. becomes available. This assumption would need to be tested with a detailed feasibility study, as well as appropriate environmental impact assessment. The The request for proposals specifies a 300 MW project is unlikely to enter operation before 2015. CHP with a heating capacity of 700Gcal/hour. orkhon hydro power plant For this size plant, the estimated investment cost Orkhon HPP is an alternative to Egiin HPP. was approximately US$ 650 million. The expected The plant would have an installed capacity of 100 commissioning date of the plant is 2013. MW with annual projected output of 219 GWh. Bids closed on January 15, 2009. Only one bid The estimated investment cost, based on a 2000 was received, from the Datang International Power study, would be US$160 million (US$1,600/kW). Generation Co Ltd of China. The bid is now under It is unlikely that both Egiin and Orkhon will be evaluation. Because of the difficulties of negotiating developed in the near future, and as Egiin is more with a single bidder, international experience advanced, this report assumes that Orkhon will not suggests that there is a high risk of delay in the be developed. commissioning of TPP#5. tuul Songino pumped storage plant newcom wind farm As part of the development of the Tuul Songino The proposed Newcom wind farm is being water supply and wastewater treatment complex developed at Saalkhit uul, 70 km southeast of in Ulaanbaatar, the construction of a 50-100 MW Ulaanbaatar. Its installed capacity is 50 MW and pumped storage plant using treated waste water expected annual output is around 116 GWh. has been proposed. Total costs were estimated at Negotiations are ongoing on provisions of the US$55-60 million in 2005. power purchase agreement with CRETG, concerning öA price differential of 5:1 is required between scheduling and dispatch. Once a final PPA is agreed, daytime sales and night-time pumping tariffs for the construction should take around one year. project to be viable. The current price differentials are Given its advanced status, the Newcom wind not sufficient to make the project viable. Although farm is likely to commission in 2010. But given the the project would contribute to operational flexibility unpredictable nature of its output (ie dependent in the CES, it would not make a reliable contribution on changing winds) it will not be a reliable provider to baseload capacity. This report does not take of capacity. Accordingly, it is not considered as a the project into account when considering future candidate option for meeting demand growth. contributions to baseload and peakload capacity. egiin hydro power plant oyu tolgoi thermal power plant The Oyu Tolgoi mine developers have reached an 58 Southern Mongolia infraStructure Strategy advanced stage of preparation for construction of a coal power plant, including selecting suppliers and As discussed in section 2.2, the feasibility of obtaining most of the required permits. The plant electricity exports into China is subject to various would have 3 x 150 MW air-cooled coal-fired units, commercial uncertainties concerning current Chinese supplied from China. The developers’ plans are for coal prices and on-grid electricity tariffs. There are two units to be in operation at any one time to meet also signs that the current economic downturn and the mine’s demand, with the third being available as increased focus on environmental concerns in China a reserve. may reduce interest in major new coal-fired projects. The estimated cost of the plant is US$650-750 Because of the commercial uncertainties, this million (approx. US$ 1500/kW). Expected completion report considers that it is unlikely that Shivee Ovoo will time is 30 months after an order is placed. In the be ready for commissioning by 2012-13, although it interim, it might be possible to supply the mine may become an option in the longer term. through imports from China. tavan tolgoi thermal power plant Coal for the plant would be supplied from Tavan A mine-mouth plant at Tavan Tolgoi has been Tolgoi, or possibly from Tsagaan Tolgoi. If running proposed for development to meet electricity demand at full capacity, the plant would require around 1.8 in Southern Mongolia as well as, potentially, supply million tons of coal per year, or almost the entire electricity to the CES. The plant would be fuelled by potential output from the Tsagaan Tolgoi mine. thermal coal removed to allow access to the coking coal deposits at Tavan Tolgoi. The plant could also be A delay in development of the Oyu Tolgoi mine used to burn coal from Tsagaan Tolgoi. would imply lower demand growth than set out in Figure 5.1. The need for new generating capacity In 2008 the Ministry of Fuel and Energy gave a could be deferred to 2013, although with a negligible presentation proposing the following plant details: reserve margin. • 600 MW plant with annual output of 4,144 Shivee ovoo thermal power plant GWh (79% plant load factor); The Shivee Ovoo TPP is intended to be a 3,600 • Self-consumption would be 8% MW (6 x 600 MW) mine-mouth coal power plant, • Investment cost of US$350 million, or US$ 580/ for electricity export to China. A Memorandum of kW. Understanding for the Shivee Ovoo TPP was signed The estimated investment cost appears between Mongolia and China in 2005. A feasibility unrealistically low, even allowing for Chinese study is expected to be commissioned shortly. The technology. The proposed Oyu Tolgoi plant is also feasibility will be dependent on the prices that can sourced from China, and has involved more detailed be negotiated for electricity in China. cost appraisal. It is costed at US$1,500/kW. In 2008, the Ministry of Fuel and Energy indicated The quality of coal at Tavan Tolgoi is higher than the following proposed details for the plant: that of Shivee Ovoo. Adjusting for heating content, current Chinese coal prices would be equivalent to • The total investment cost is estimated at US$ a coal price of US$ 55/tonne. This suggests that the 2,976 million (US$ 827/kW). proposed Tavan Tolgoi plant is more likely to be • Of the installed capacity, 300 MW would be viable than the proposed Shivee Ovoo development available to meet mining demand in Southern as an export-oriented project. Mongolia. • Annual coal consumption is 13.6 million tonnes. There has been little work on the development of The heating value of Shivee Ovoo coal is esti- this project to date. Allowing for the time necessary mated at 3,150 kcal/kg, implying a plant thermal for completion of the necessary feasibility studies and efficiency of 40%. construction, it seems unlikely that the plant could • Commercial operation would begin 2 years af- be in service before 2013-14 at the very earliest. ter construction begins, with the complex being Because the plant could be largely dedicated to completed 7 years after construction begins. meeting domestic demand, once a decision is made • A 1,300 km, 500 kV DC transmission line to Chi- to develop it, the risks of delay are lower than for the na would be constructed. A 200 kV DC connec- almost wholly export-oriented Shivee Ovoo plant. tion to the CES would also be built. baganuur integrated gasification combined • Over time, it is envisaged that total installed ca- cycle Plant pacity of the complex would rise to 10,800 MW. Two proposals have been made for the 59 Southern Mongolia infraStructure Strategy development of a coal to liquids (CTL) plant at • It is not clear that Russia would supply larger vol- Baganuur – one by a Korean developer and the umes at the same price. other by a joint venture including Petroerch, Petrovis • There are operational difficulties in relying on (the major Mongolian fuel retailer) and Siemens Russian imports, since the contract requires that as a technology partner. The second of these is the import volume be nominated two days in ad- considered here. vance, and there are penalties for deviating from the nominated quantities. The proposed CTL plant would produce around However, imports could provide an important 2 million tonnes per annum of diesel and gasoline. means of meeting demand growth on a short-term Of this, approximately 0.8 million tonnes per annum basis, and to provide system reserves. would be used to meet Mongolian demand, with the remainder being exported to oil retailers in 5.4 Assessment of supply options China. The CTL plant would include a 650 MW integrated gasification combined cycle (IGCC) power A summary of the likelihood of various supply plant, which would be fuelled by the synthetic gas options is provided in Table 5.3, based on the produced as part of the CTL process. Around 400 discussion above. This summary does not assess MW of the plant’s capacity would be required for the relative economic and financial attractiveness of the CTL process, with the remaining 250 MW being different options. Rather it is focused on the state available for sale to the CES. of commercial preparation of the projects, and their ability to be prepared in time for the expected supply A feasibility study is expected to be undertaken shortfall in 2012-13. during 2009, and the project’s sponsors are targeting 2014 for commissioning. Estimated costs of the CTL In assessing commercial preparedness of projects, plant would be around US$3.5 billion. The IGC plant it is assumed that at least one year is required to would cost around US$ 390 million (US$ 600/kW). complete feasibility studies and up to a further year The project sponsors project oil prices at US$35/ for financing arrangements and power purchase barrel are required for the project to be viable. In contracts to be put in place. Expected construction contrast, a 2007 US department of Energy study times are three years for standard commercial found that a CTL project would be viable with oil plants, four years for more complex plants, and prices above US$45/barrel. Current oil prices thus four to five years for large hydro plants. The risks threaten the viability of CTL projects. concerning financial viability and markets for major export-oriented projects such as Shivee Ovoo TPP With current oil prices and the limited and Baganuur CTL mean that these projects are high commercial experience with CTL technology, it is risk, and should not be relied on to meet Mongolia’s likely to be difficult to raise financing for the project. future electricity demand. Internationally, there is currently just one CTL plant operating – in South Africa. Accordingly, this report It appears that only the Newcom wind farm, considers that there is a high risk that this plant will TPP#5, and Oyu Tolgoi TPP could be ready by 2012- be delayed, and will not be commissioned within the 13. The Tavan Tolgoi TPP could, if the Government period needed to meet expected demand growth. begins preparations now, be ready by 2014. The Newcom wind farm will not supply reliable base increased russian imports load. In the short to medium-term, the most realistic Currently, Mongolia has a contract for the import prospects of providing baseload reliable generating of up to 120MW of electricity from Russia, at a cost capacity to meet electricity demand growth in of US$ 204,000 per MW per month of contracted Mongolia are TPP#5, Oyu Tolgoi TPP, and Tavan capacity, and US$18/MWh of energy imported. In Tolgoi TPP. 2007, imports totaled 130 GWh, giving an average price (capacity and energy) of US$38.4/MWh before Of the three plants, the Oyu Tolgoi TPP is the duties and taxes. most likely to be commissioned first and is probably the only plant that could be commissioned by 2012, For several reasons, increased imports are not when new capacity will be required if the Oyu Tolgoi considered as an option to meet Mongolian demand mine is developed on schedule. The risks of delay growth: to this plant are also lower than for other plants, • The Mongolian government is concerned about provided an investment agreement is concluded for supply security risks attached to reliance on Rus- the mine in 2009. sian imports. 60 Southern Mongolia infraStructure Strategy table 5.3 Summary of generation expansion options Plant installed capacity cost earliest date risk of delay (MW) (from project proposals) TPP#5 300 $1300-1400/kW 2013 low to moderate. Bids received in Janauary 2009 and under evaluation. High amount of bidder dis- cretion and single bidder imply extended negotia- tion period. Newcom wind 50 $95,000/kWh 2010 low. Power purchase agreement is in place, but farm some aspects are being renegotiated. Egiin HPP 220 $1420/kW 2015 Moderate to high. EPC bids were obtained, but the project was cancelled due to costs and envi- ronmental concerns. This or a replacement project should be re-started. Orkhon HPP 100 $1600/kW 2015 Moderate to high. Alternative to Egiin HPP. Tuul Songino PSP 50-100 $1600/kW 2012 high. No power purchase agreement is in place and current electricity prices would seem to make the plant non-viable. Oyu Tolgoi 450 $1450-1550/kW 2012 low. Development of plant is tied to development of Oyu Tolgoi mine. Developer commitment ap- pears high. Advanced state of preparation. Shivee Ovoo TPP 3600-10800 $827/kW 2013-2014 high, Development of plant is tied to exports of electricity to China. Viability at current prices is unclear, as is the current level of Chinese demand. Tavan Tolgoi TPP 600 $580/kW 2014 Moderate to high. Little preparatory work has been undertaken. But the plant is less export- dependent than Shivee Ovoo TPP. Baganuur IGCC 250 (net available) $600/kW 2014-2015 high. Development of plant is tied to coal to liquids plant exporting to China. Technology risk is high compared with other options. Viability at cur- rent oil prices is unclear. Increased Russian Up to 255 MW $204,000/MW/ month; n/a n/a. Not considered as long-term supply option, imports $18/MWh due to security of supply concerns. These three projects are not mutually exclusive, Ovoo respectively). In these cases the market but there is some potential for choosing the prices of coal for these generators would be the order in which they are developed. In particular, same as the costs of production and transport. once heat demand in Ulaanbaatar is adequately • It is reasonable to assume that generating ca- supplied, it would be possible to meet part of pacity at Tavan Tolgoi can be supplied using the incremental electricity demand growth with middlings mixed with thermal coal, which would additional generating units located in the CES or in give a cost somewhere between the cost of coal Omnogovi. Within Omnogovi, it may be possible to as a waste product and its market price. that meet demand from either a plant located at Oyu is the price of coal would be approximately the Tolgoi or at Tavan Tolgoi. same as its cost of production. The background paper has compared the costs of these three alternatives. Table 5.4 sets out a If these coal sources are used, the least-cost summary of this least cost analysis. The summary generating option would be TPP#5, followed uses the levelised cost of each plant over its lifetime. by Tavan Tolgoi TPP and then Oyu Tolgoi TPP. Comparison of costs is complicated by the different Although TPP#5 is the theoretical least cost option, values that can be placed on coal supplies. for several reasons it is preferable to commission the Oyu Tolgoi plant first, in order to meet the expected • It is likely that Oyu Tolgoi TPP and TPP#5 will demand growth arising from the Oyu Tolgoi mine: be supplied with coal from sources that are not suitable for export (Tsagaan Tolgoi and Shivee 61 Southern Mongolia infraStructure Strategy • There are concerns over the reliability of supplies which the lost income to the Government would for the Oyu Tolgoi mine, particularly when be around US$ 670 million (assuming a 35% supply is interrupted and choices have to be share). The lifetime savings to Mongolia from made about which customers will be served. replacing the Oyu Tolgoi plant with additional • Unless it is possible to speed up the output from TPP#5 would be around US$310 commissioning of TPP#5 from the expected million. The lost mining revenues greatly exceed date of 2013, this implies a delay in the start of the expected cost savings in power investment full production from Oyu Tolgoi mine (currently and operating costs. expected to be around 2012). The lost revenue • The risk of delay to TPP#5 is higher than for Oyu from a one year delay in commissioning Oyu Tolgoi TPP. Tolgoi mine would be around US$ 2 billion, of table 5.4 candidate power plants unit size life capital annualised o&M thermal fuel fuel Self- levelised cost cost efficiency cost heating consumption cost value installed years uS$/kW uS$/kW/ uS$/kW/ uS$/ kcal/kg uS$/ capacity year year tonne MWh (MW) tPP#5 Regulated coal 300 40 1,240 127 38.0 36.0% 12.0 3,150 5% 32.9 price/ coal production cost Market coal 300 40 1,240 127 38.0 36.0% 37.0 3,150 5.0% 52.8 price tavan tolgoi tPP Coal 300 40 1,110 114 33.0 33.0% 30.0 5,100 7.6% 37.9 production cost Market coal 300 40 1,110 114 33.0 33.0% 55.0 5,100 7.6% 51.7 price Waste product 300 40 1,110 114 33.0 33.0% 0.0 5,100 7.6% 21.3 coal oyu tolgoi tPP Coal 150 40 1,500 153 33.0 32.0% 35.0 5,100 7.6% 47.1 production cost/ market coal price Waste product 150 40 1,500 153 33.0 32.0% 5.0 5,100 7.6% 29.9 coal 62 Southern Mongolia infraStructure Strategy 5.5 Investment plan and costs The suggested investment plan arising from Investment amounts for new plants will typically the least-cost analysis of new generation capacity be disbursed across three years leading up to plant combined with consideration of likely commissioning commissioning. Approximately US$ 550 million dates is set out in Table 5.5. The implications of annually will be required in investment between this investment plan for the balance between supply 2009 and 2012. From 2013 to 2017 annual and demand in the CES and in Southern Mongolia investments of around US$ 200 million will be are shown in Figures 5.2-5.4. required. table 5.5 Suggested investment Plan Additions (MW) a Retirements Available Capacity Investment Cost ($mil- (MW) a (MW) b lion) 2008 902 2009 902 2010 +50 (Newcom) 952 2011 952 2012 +416 (Oyu Tolgoi) -18 (TPP#2) 1350 750 CES-South Gobi interconnector 207 2013 +270 (TPP#5 unit 1) 1,620 450 2015 +220 (Egiin HPP)c 400 +277 (Tavan Tolgoi TPP unit 1) 2,117 450 2016 -107 (TPP#3) 2,009 2017 2,009 2018 +270 (TPP#5 unit 2) 2,279 450 2019 2,279 2020 2,279 a. Available capacity shown. This differs from installed capacity due to self-consumption by units. b. Assumes imports of up to 255 MW. c. Subject to feasibility study and environmental impact of a new dam. The investment plan assumes a target reserve figure 5.2 Supply & demand in the ceS margin of 20%. Supply from Newcom or imports are assumed not to be firm capacity, and are not taken into account in calculating reserve margins. No account is taken of electricity projects intended purely for export. The investment plan assumes that the full 642 km double-circuit 220 kV transmission line from Ulaanbaatar to Mandalgobi and on to Tavan Tolgoi and Oyu Tolgoi is commissioned by 2012, with a reliable transfer capacity of 150 MW. The cost of this interconnector is estimated at US$ 207 million, including lines and substations. Transmitting 150 MW along a 220 kV double circuit over 640 km using 375 mm2 aluminum conductors would result in losses of around 7%. These losses were taken into account in developing the suggested investment plan. 63 Southern Mongolia infraStructure Strategy figure 5.3 Supply & demand in Southern other regulated tariffs and existing transmission Mongolia and distribution charges remain unchanged in real terms, and that transmission and distribution losses are unchanged, tariffs will need to increase by more than 30% in real terms. Separate work by USAID has suggested that transmission and distribution prices may also need to be increased, and that tariffs may need to increase by up to 60%. figure 5.1 Projected generation costs figure 5.4 Supply & demand in the ceS and Southern Mongolia combined Pricing of oyu tolgoi power Developers of the Oyu Tolgoi plant have indicated that it would be dedicated to the supply of the Oyu Tolgoi mine. For the Government, it would be attractive if the reserve capacity of Oyu Tolgoi could be made available to supply other customers 5.6 Tariffs in Southern Mongolia. The investment plan set out above assumes that such supply occurs. To ensure the financial viability of all market participants it is important that tariffs cover the In order for the Oyu Tolgoi plant’s owners to full costs of production, including generation, agree to such an agreement, the price offered transmission and distribution. for the power must exceed the cost of providing it. As a minimum, this should include the variable retail tariffs operating and fuel costs (likely to be in the order Figure 5.1 sets out the projected evolution of of US$ 20/MWh). The owners would also expect a the cost of generating electricity, assuming the contribution to the fixed costs of the plant in order investment plan set out in section 5.5. The costs are to offer capacity. broken into fuel costs and capacity costs. Capacity costs include the amounts that are charged each For the Government, the maximum price that year to cover fixed investment costs (including should be paid for power from Oyu Tolgoi is the amortization and a return on investments) as well as resulting savings from delaying other power plants. operating and maintenance costs. In the absence of supplies from Oyu Tolgoi, it would be necessary to advance the Tavan Tolgoi plant The projected average cost of generation (per by one year, to 2014, and to use more expensive hour of generation) will rise to US$ 62/MWh in generating units in earlier years. The present value 2015, but as demand increases and capacity is of the savings to the public system from purchasing better utilized, the average cost will fall to around power from Oyu Tolgoi rather than advancing US$ 50/MWh by 2020. Tavan Tolgoi would be around US$ 68 million. The Assuming that the projected average cost implied value of power purchases from Oyu Tolgo of generation is passed on to consumers, that all TPP is around $34/MWh. 64 Southern Mongolia infraStructure Strategy These preliminary calculations suggest that the figure 1.2 Supply & demand in the ceS with price for power purchases from Oyu Tolgoi should delayed oyu tolgoi tPP be set somewhere between US$ 20/MWh and US$ 34/MWh (with provision for escalation as fuel and other variable costs increase). 5.7 Impact of Chinese Imports for Oyu Tolgoi The analysis above has been prepared on the assumption that Mongolia would not import electricity from China for the purpose of supplying Oyu Tolgoi. This section reviews how the suggested investment plan above would change, if the Oyu Tolgoi mine is supplied with electricity imports from China during the first four years of its operation. In this section, it is assumed that all demand from the Oyu Tolgoi mine will be met until 2016 figure 1.3 Supply & demand in Southern through an inter-connector with a reliable capacity Mongolia with delayed oyu tolgoi tPP of 200 MW, supplying electricity from China. The Oyu Tolgoi thermal power plant would be delayed until 2016. All other plant commissioning dates are assumed unchanged. It will still be possible to satisfy demand in the CES, provided that TPP#5 is commissioned in 2013. Increased Russian imports will be necessary, as it will not be possible to supply energy from spare capacity at the Oyu Tolgoi TPP to the CES. However, during 2011-2014 reserve margins will fall to very low levels, increasing the risk of temporary supply interruptions. Frequent interruptions are likely, as no generating unit can operate at 100% availability. 5.8 Current Priorities Without the Oyu Tolgoi TPP there would The immediate priorities for electricity are: be difficulty in meeting growing demand in Southern Mongolia. In 2013 and 2014, before the • Ensure timely completion of the CES-South Gobi commissioning of a power plant at Tavan Tolgoi, interconnector. capacity including potential transfers from the CES • Develop a power purchase agreement under would be insufficient to meet electricity demand which the proposed Oyu Tolgoi thermal power in Southern Mongolia. This could be addressed plant will find it financially attractive to sell pow- through additional imports of Chinese power. But er to the CES, OR, alternatively make arrange- this may imply higher costs of electricity supply than ments for increased Chinese imports beyond a local power plant, and there may be problems of those required to serve Oyu Tolgoi. reliability arising through dependence on a single • Complete the bidding process for Thermal inter-connector for supply. Power Plant #5. Hiring an internationally expe- rienced transaction adviser would greatly facili- The following figures show the projected tate the process. demand-supply balance in the CES and Southern • Hire an internationally experienced transaction Mongolia, under the revised plant commissioning adviser to launch a bidding process for Tavan schedule. Tolgoi thermal power plant. • Re-examine the financial and environmental feasibility of the Egiin Hydro power project, or identify an alternative project for commissioning in 2015. 65 Southern Mongolia infraStructure Strategy 6 WatEr rESourcES key PointS • Initial development of the region should rely on abstraction of groundwater reserves. • There is sufficient groundwater potential in Southern Mongolia to accommo- date demand growth at least until 2020. o Demand could reach 350,000 m3/day by 2020. o Estimated groundwater potential is 500,000 m3/day under conservative assumptions, including: 300,000 m3/day of rainfall recharge; and depletion of only those local aquifers which have been studied, by 40-60% over at least 25 years. • Decentralized groundwater supply would have investigation and capital costs in the order of $260 million, compared with over $500 million for a pipeline from the Orhon River. • Over the next decade, more detailed studies are required to determine the extent of groundwater potential: o such studies are likely to reveal additional exploitable water resources. o studies will also determine if at some stage the conveyance of surface water from the Orhon or Kherlen rivers is economically justified. • Resources (at least $2.5 million for a three year startup phase) should be al- located to a groundwater management authority: o To conduct detailed studies of water availability in areas of expected de- mand o To monitor the impact of aquifer abstraction on surface water and the local environment o To manage and enforce rights to water abstraction. 6.1 Demand for water resources figure 6.1 Possible growth of Water demand (m3/day) Figure 6.1 illustrates the potential growth of water demand in Southern Mongolia over the next decade, from current consumption of around 50,000 m3/day to 350,000 m3/day in 2020. Derivation of these estimates is discussed below. The underlying assumptions have been made with the intention of over-estimating the growth of demand, including optimistic levels of mine production, and an annual growth rate of 5% for rural population and livestock water demand. 66 Southern Mongolia infraStructure Strategy urban Water consumption rural Water consumption The towns of Dalanzadgad, Mandalgobi, and Rural water supply in Southern Mongolia is Sainshand currently have a combined population mainly from individual herder wells and from deep of 55,000, and together consume 6,200 m3/day of wells with pipelines which supply the soums. Water water. Their supply is from well fields, with treatment supply in the soums is mainly through kiosks. The where necessary to reach drinking water standards. total rural water supply is estimated at 1,000-3000 The figures in Table 6.1 indicate consumption of m3/day, assuming a daily consumption of 10-30 100-130 liters per capita per day. This reflects a mix liters per day for a rural population of 95,000. of household connections and sales to gers through Assuming a very rapid annual growth rate of 5% water kiosks. for water demand by the rural population (because Growth of urban water consumption in Southern of increased population growth or increased water Mongolia will be determined by population growth. consumption), rural water demand for humans Over the next five years, the population might could grow to 4,200 m3/day by 2015, and 5,400 grow by around 80,000 people. The Ministry of m3/day by 2020. Construction and Urban Development has forecast Livestock watering is calculated using the (MCUD, 2008) a population increase of 110,000 by estimated number of livestock and daily water 2020. Water consumption could grow to around consumption figures. Currently, total water use 150-180 liters/day, as a greater proportion of the for livestock water supply is around 32,000 m3/day population lives in apartments rather than gers. (Table 6.2). Combined with the existing population of around 55,000 people, the total population of Southern Mongolia may increase to around 125,000 people by 2015, and 165,000 people by 2020. This would give rise to urban water demand of 24,300 m3 of water per day by 2015, and 30,000 m3 of water per day by 2020. table 6.1 current Water use in the aimag capitals abstraction number of yield abstraction Population consumption capacity wells liters/sec m3/day m3/day liters/cap/day Dalanzadgad 10 1-15 4,000 2,000 15,000 133 Sainshand 18 0.4-27 5,000 3,200 29,000 110 Mandalgovi 15 1-10 3,500 1,000 10,000 100 table 6.2 current livestock Water use daily water number of animals Water demand (m3/ consumption (l/day) (2003) day) Sheep & goats 4 3,400,000 13,600 Cattle 35 100,000 3,500 Horses 35 260,000 9,100 Camels 45 120,000 5,400 total 3,880,000 31,600 Demand growth is also estimated at the high annual annual growth rate of 5%, suggesting livestock demand for water of 45,000 m3/day by 2015, and 58,000 m3/day by 2020. 67 Southern Mongolia infraStructure Strategy Mining industry Water requirements Applying Oyu Tolgoi’s water demand estimates, Current water demand of the mining industry Tsagaan Suvraga might consume around 41,000 in Southern Mongolia is around 9,000 m3/day (see m3/day. the background paper for details of this estimate). In addition to the coal and copper mines, other Combining estimates of water demand for coal, small mines in the area might consume an additional copper, and other minerals, the mining industry 10,000 m3/day by 2015 and 20,000 m3/day by 2020. could require around 120,000 m3 of water per day by 2015, and 200,000 m3 of water per day by 2020. other Sources of Water demand Industry, commerce and irrigated agriculture Water use in coal mining varies according to currently have low levels of water demand, but it the method of mining. Underground coal mining is possible that as towns are established by 2015, requires water, but open pit mines do not. For these activities could develop in surrounding areas. processing, water can be used for coal washing, For indicative planning purposes, it is supposed dust suppression, plant operation and personnel, that industry and commerce require around 12,500 and power supply. Water could also potentially m3 of water per day by 2020. Irrigated vegetable be used to transport coal by pipeline, but planned production around urban centers might occupy railway construction means this option is unlikely in 1,000 hectares and consume 10,000 m3 of water Southern Mongolia. per day by 2020. Most of the planned coal mines will be open Tourism activities currently require negligible pits, with dust control and small uses being the amounts of water. And no special reservation main water needs. This will result in water demand of water is currently required for environmental of around 100-200 liters of water per ton of coal. purposes. This may change as the region develops. Coal washing would add 400-600 liters of water per It is assumed that tourism and the environment will ton of coal, depending on the process used and the together require 15,000 m3/day by 2020. level of re-use. Assuming that half the mines export unwashed coal, while the other half exports washed 6.2 Groundwater potential supply coal, the coal mines would use on average around 400 liters of water per ton of coal. groundwater concepts Aquifers are layers of water-bearing permeable With assumed annual production of around 20 rock or unconsolidated materials (gravel, sand, silt, million tons of coal by 2015, Southern Mongolia’s or clay) through which groundwater can flow and coal industry might consume 22,000 m3 of water from which groundwater can be usefully extracted per day. By 2020, with production potentially in the using a water well. order of 50 million tons of coal, the coal industry’s water consumption might reach 55,000 m3/day. The occurrence, quality and movement of groundwater in aquifers depend on the type of For the copper industry, Oyu Tolgoi’s plans formation and the recharge mechanisms. The suggest it will require 67,000 m3 of water to process source of recharge is usually rainfall, but it can 110,000 tonnes of ore per day. This equates to 30 also be seepage from rivers, canals or lakes. m3 of water per ton of concentrate. If production Infiltrating water percolates to the water table and reaches 1 million tons of concentrate per year, Oyu flows from the points of recharge to the points of Tolgoi’s water consumption will be around 82,000 discharge. Groundwater systems are dynamic, with m3/day. groundwater in continuous slow motion from zones Copper production at Tsagaan Suvraga might of recharge to zones of discharge. Tens, hundreds reach 500,000 tons of concentrate per year by 2020. or even thousands of years may elapse, especially in arid and semi-arid areas. 68 Southern Mongolia infraStructure Strategy figure 6.2 typical groundwater cycle in an arid region underlain by major aquifers Aquifers can be characterized by their capacity The deep aquifers are the permeable rock for groundwater storage (productivity) and their sections from which groundwater can be abstracted. capacity for groundwater flow (continuity). A Pumping from these aquifers will lower the distinction is usually made between aquifers with groundwater table in the layers above the aquifer high, moderate, and low productivity. Continuous (and its vicinity), and will eventually dewater the aquifers (as in Figure 6.2) extend regionally and aquifer itself. This lowering may affect the wells in are known as major aquifers. In contrast, Southern the upper aquifers and the environmental functions Monglia’s aquifers are smaller, and are known of the shallow groundwater (feeding vegetation, as minor or local aquifers. The more permeable springs, wetlands etc). The rate of abstraction from and productive formations in Southern Mongolia the deep aquifers is defined by the number of years generally have a limited extension and are of pumping and the acceptable lowering of the surrounded by rocks with low permeability. For water table. example, the Gunii Hooloi aquifer, which may be Estimates of the groundwater potential of used to supply water to Oyu Tolgoi, is surrounded the region have been made using three different by granite. methodologies: In some cases, aquifers are cut off from their • A plausible estimate, which assumes up to 1-2% source of recharge, due to geological events or of Southern Mongolia’s surface area is underlain climatic changes. These are called “fossil aquifers�. by aquifers between 50 and 100 meters below Fossil groundwater needs special care as it is a one- the surface, suggests a total groundwater po- time reserve, which is not replenished. tential of 680,000-1,370,000 m3/day. “Groundwater reserve� is the total amount of • A conservative estimate, which takes into ac- water stored in an area. “Groundwater potential� is count the rate of recharge from rainwater based the amount of water that can be abstracted. Since on comparable international studies as well as most of Southern Mongolia’s groundwater is fossil, the results of the existing studies of aquifers in the abstraction potential depends on the extent of the region, suggests groundwater potential of lowering of the groundwater table during a certain 580,000 m3/day. A large number of the existing period of time. studies were conducted in the 1980s and 1990s by Russian and Mongolian experts are a source Southern Mongolia’s groundwater of much information concerning what is cur- Southern Mongolia has aquifers at various rently known about Southern Mongolia’s water depths. Recharge in the region comes from rainwater reserves. These studies assume 40-60% deple- which percolates in the upper (shallow) aquifers and tion of the groundwater reserve in an aquifer is discharged to springs; feeds vegetation, wadis or over a period of pumping of 25-27 years. temporary lakes; or is abstracted by shallow wells. A • Dr Jadambaa, a Mongolian water resource ex- small portion percolates to the deeper aquifers, but pert, estimates groundwater potential is 1.3 mil- the amount is largely unknown. lion m3/day. 69 Southern Mongolia infraStructure Strategy The estimates are discussed in more detail below. meter thickness, or 3,500 billion m3 over a depth of 100 meters (from 50 to 100 meters below ground). extensive estimate of groundwater potential If all this water could be abstracted, lowering Figure 6.3 is a hydrogeological map of the water table over the entire area by 1 meter per Omnogovi aimag. Similar maps are available for the year would produce 35 billion m3 per year (or 96 other aimags of Southern Mongolia. A simplified million m3 per day). But abstraction is only possible interpretation of the map is that the brown and red from rocks with sufficient permeability (aquifers). areas have no or limited groundwater, solid blue The abstraction rate of aquifers is related to the areas are likely to contain highly productive local accepted lowering in a certain period of time. For aquifers, and all other areas include moderately the Gunii Hooloi aquifer (550 km2), the abstraction productive local aquifers. There is vast potential for rate was calculated as 42 million m3/year, for a exploitable aquifers across the whole of the aimag. lowering of the water table by 100 meters during But so far, only a limited number of studies have 40 years. been conducted to test the actual groundwater potential of the geological formations. The underground area of Southern Mongolia The aquifers of Southern Mongolia are known (350,000 km2) consists of a complex variety of to occupy at least 4,000 km2, based on existing different rocks. Below the groundwater table groundwater studies. Assuming that 1-2% of the (50 meters below the surface), all these rocks are region is underlain by aquifers (7,000 km2), the saturated with groundwater. Assuming a porosity figures of the Gunii Hooloi study suggest a total of 0.1, the volume of this water is 35 billion m3 per groundwater potential of 250-500 million m3/year (680,000-1,370,000 m3/day). figure 6.3 hydrogeological Map of omnogovi aimag 70 Southern Mongolia infraStructure Strategy Conservative estimate of groundwater potential • The surface area of Omnogovi aimag is 165,000 km2; Dundgovi is 74,500 km2; and Dornogovi Table 6.3 estimates the groundwater potential is 109,000 km2. A recharge of 1 mm/year rep- in the region as 580,000 m3/day. The estimate is resents 950,000 m3/year storage over the total based on conservative estimates of the probable area. Assuming that 30% of this is effectively recharge rate as well as the results of around 40 local available for use, it represents 300,000 m3/day. studies. Further studies may confirm the presence of • It is unclear how much of this water reaches additional groundwater potential. deeper aquifers, and which part is abstracted by herder wells or discharged locally to springs, riv- table 6.3 groundwater potential (m3/day) ers and local depressions. Omnogovi Dundgovi Dornogovi Deep aquifers (50-170 meters) were studied at more than 40 sites in the latter decades of the 20th Shallow century. A number of them are now exploited for groundwater 135,616 61,233 89,589 urban and mining water supply, including mines at Aquifers 50 – Tavan Tolgoi, Tsagaan Suvraga and Shivee Ovoo. 200 m 60,000 8,500 111,000 The studies were constrained by the maximum Aquifers > 200 depth of drilling rigs at the time (up to 170 meters). m 115,000 For purposes of Table 6.3, it is assumed that the Total groundwater potential of the aquifers amounts to 310,616 69,733 199,589 50% of the water identified in these studies. The Gunii Hooloi groundwater area, studied for Shallow groundwater (<50 meters deep) the Oyu Tolgoi mine, is the first deeper aquifer to consists mainly of granular aquifers in river beds be investigated. The study concluded that 60,000 and depressions and recharged from infiltration by m3/day can be pumped during a 40 year period, rainfall. These aquifers are the main source of water assuming that the groundwater table will not be for rural purposes. Low annual rainfall (100-150 lowered further than the top of the aquifer. That is, mm) limits recharge from rainfall, but spread across the water would be mined from the layers overlaying the large area of Southern Mongolia still amounts to the aquifer from which the water is pumped. For a substantial amount of renewable water. Recharge purposes of Table 6.3 it is assumed that the Gunii of 1 mm per year is assumed across the region, of Hooloi area is the only deeper aquifer in the region, which a usable fraction of 30% is assumed. but future investigations could reveal the presence • Studies in the Gobi Desert in China under com- of other deeper aquifers. parable conditions showed a recharge of 1-2 groundwater estimates by dr. Jadambaa mm per year. A study in the Mandalgobi area Dr. Jadambaa (2007) prepared a recent estimate also found the presence of recharge, at a higher of the groundwater potential based on his experience rate. A recharge of 1 mm/year is consistent with in the region, presented in a classification of the research in other semi-arid desert areas, but is different aquifer productive types. The total figure likely to be a conservative estimate. is about 480 million m3/year, or 1.3 million m3/day. table 6.4 groundwater potential estimated by Jadambaa (2007) aquifer classification Productivity groundwater resources (million m3/year) (liters/sec/km2) omnogovi dundgovi dornogovi Highly productive >1 31 25 19 Moderate to locally highly productive 0.1-1.0 138 77 71 Low to moderately productive 0.03-0.1 89 2 19 Low productive 0.003-0.03 3 3 4 Essentially no groundwater <0.003 0 0 0 total 261 107 113 71 Southern Mongolia infraStructure Strategy cost of groundwater supply Table 6.5 presents an estimate of the cost of developing groundwater supply in Southern Mongolia, based on a hypothetical scenario of supplying 8 rural centers, 2 towns, 10 irrigation projects and 2 mines with a total of 1500 liters/second (130,000 m3/day) of water. Unit costs are derived from Mongolian prices in 2008, supplemented with international unit costs and information from Ivanhoe Mines about the cost of investigations and development of the groundwater in the Gunii Hooloi aquifer. Groundwater feasibility studies typically cost 10-15% of the investment cost. The total cost for the scenario is around US$ 260 million. table 6.5 costs of groundwater supply Parameter rural water town water agriculture Mines total demand demand l/sec 6 50 50 425 number of locations 8 2 10 2 total supply l/sec 50 100 100 850 1500 Million 0.96 1.92 9.6 16.32 gallons/day Production wells well capacity l/sec 5 10 15 35 pumping hours 12 12 12 12 wells Number 20 20 67 49 conveyance distance km 10 25 10 75 pipe diameter inch 4 12 12 30 Storage/treatment storage hours supply 4 6 2 6 m /location 3 86 1,080 360 9,180 treatment chlorination conventional chlorination reverse osmosis unit prices cost per well US$ 200,000 250,000 250,000 300,000 cost of pipeline US$/m3 200 250 250 600 power supply US$/unit 200,000 300,000 400,000 1,000,000 storage cost US$/m3 1,000 1,000 1,000 1,000 treatment cost US$/unit 50,000 3,000,000 500,000 1,000,000 investment cost US$ million 21 26 51 126 224 investigation cost US$ million 2 3 5 25 35 total cost US$ million 23 29 56 151 259 cost per m3 US$ 5,421 3,305 1,290 2,058 installed capacity 72 Southern Mongolia infraStructure Strategy 6.3 Long distance surface water pipelines There is no perennial surface water available in Southern Mongolia. Use of surface water from rivers and lakes would require long-distance transportation from perennial rivers in the center of the country. The Mongolian National Water Programme Support Center has proposed two possible pipelines: the Kherlen- Gobi Project and the Orhon-Gobi Project (error! reference source not found.) figure 6.4: Possible Water Pipelines for Southern Mongolia The Orhon-Gobi Project would pump 2,500 6.4 Comparison of groundwater versus surface liters/second (216,000 m3/day) from the Orhon River through a 740 km pipeline to Tavan Tolgoi and water pipeline Oyu Tolgoi, with side branches to Mandalgobi and Based on a conservative assessment it appears Dalanzadgad. The system would include a 20 MW there is sufficient groundwater potential in Southern hydro-electric power plant. A substantial portion of Mongolia to meet demand over the next decade, the water would be used for irrigation, close to the and quite likely for a significant period beyond. river intake and would not be transported deep into Nevertheless, as the groundwater is abstracted the Gobi area. The Kherlen-Gobi pipeline would over time, monitoring will be required to determine convey 1,500 liters/second (130,000 m3/day) from whether negative environmental consequences the Kherlen River through a 540 km pipeline to are likely. Improved understanding of the extent Shivee Ovoo, Sainshand and Zamin-Udd with a side and nature of Southern Mongolia’s groundwater branch to Tsagaan Suvraga. reserves will permit an assessment of whether and when it might be financially and environmentally In 2005 the estimated cost of the Kherlen-Gobi justified to develop a long-distance pipeline to pipeline was US$ 400 million. A cost estimate is not transport surface water. available for the Orhon-Gobi pipeline, but a longer pipeline would cost proportionately more to install (ie around $500 million). 73 Southern Mongolia infraStructure Strategy For several reasons, the transportation of surface and investigations. The information thus obtained water by long distance pipelines is not a current should form the basis of a Southern Mongolia priority, at least for the purpose of supporting mine groundwater development and management plan. development in Southern Mongolia: This plan should indicate the possible gaps between • Long distance pipelines would have slightly low- groundwater availability and water demands, and er operating and maintenance costs than would indicate how these would be addressed over time. decentralized groundwater supply, but the dif- The new studies should be concentrated in the areas ference in capital costs, more than $200 million, of new mining developments and Dalanzadgad. provides strong financial reasons to favor the Studies could also be initiated in the coming development of groundwater. years to better determine the feasibility of the • Decentralized groundwater supply can be de- proposed surface water pipelines. Issues to be veloped in stages, and so it can be more eas- addressed include the economic feasibility of large ily matched to the development of individual scale irrigation, the social and economic feasibility towns and mines over time. of the rural water supply delivery points along the • Developing a large water pipeline project would pipeline, and the environmental impacts on the pose significant financing and technical capac- Orhon and Kherlen rivers of the projects. ity challenges within Mongolia. Development of several smaller decentralized groundwater proj- institutional Strengthening ects would be easier to manage. A single institution is needed to conduct the • The environmental consequences of water ex- studies, integrate existing information, and manage traction from the Orhon or Kherlen rivers still the development plan. There is currently a wealth need to be determined. of information about the groundwater in the There may be an economic justification for region, but it is spread across different institutions building one or more shorter pipelines in order (Geological Information Center, Institute of to develop agriculture close to the surface water Environment, Ministry of Nature and Environment, intakes, but this would not require a pipeline private sector, and individual experts. extending to Southern Mongolia. The development One possibility would be the establishment of a of agriculture in areas closer to the river intakes has Southern Mongolia Groundwater Management and not been considered for purposes of this report. Information Center, under the Water Authority. This SMG-MIC would act as a focal point for information 6.5 Groundwater management and initiation of new studies, and could develop The groundwater potential estimates give a guidelines for its sustainable allocation and use. This range of 550,000-1,370,000 m3/day (200-500 would help to ensure that groundwater is presented million m3/year). This wide range is caused by the as a single resource. uncertainty in the available data and information. The World Bank Groundwater Management Water demand is currently around 80,000 m3/ Advisory Team (GWMATE) could possibly give day, and could increase to 350,000 m3/day by guidance in the development of a groundwater 2020. These figures lead to the conclusion that the management plan, including the technical, groundwater potential is sufficient to cover water regulatory and institutional aspects, and provide demands at least until 2020, and probably for a information about international experiences. longer period. Policy issues More detailed studies are required in order In addition to the development of new to spatially match water demands with water institutions for development and implementation of resources, and to determine the longer-term water an overall groundwater management plan, there are resource arrangements for the region. Water quality two policy issues of national importance which may also needs to be assessed, since different qualities of warrant review: institutional arrangements for the water can be used for different mining activities, as maintenance of herders’ wells; and the allocation well as for supplying humans and livestock. and pricing of groundwater resources. information gathering The large number of herder wells that are An integrated hydrogeological assessment of currently abandoned suggest current institutional Southern Mongolia is required, integrating all existing problems in ownership, operation, and maintenance. information and complemented by additional surveys A review of alternative operating models could help to find solutions. 74 Southern Mongolia infraStructure Strategy Setting prices at economically appropriate levels groundwater quantity and quality (maps) and would provide the right incentives for mines and identification of the main information gaps; other users to use water carefully. Pricing of water Formulation of the capacity building and training resources is set out under two laws: the law on needs of the SMG-MIC; water and mineral water use fees (2004) and the Definition of the short term water demands (in Law on the amount of expenditure for measures terms of quantity and quality) and its spatial dis- to protect the environment and to restore natural tribution, based on confirmed economic devel- resources out of the fund�. Water resource use in opment plans and mining development; the energy sector, for crop production, for livestock A detailed study of the recharge from rainfall to the and herder water supply, and for domestic water streambed aquifers and the potential to increase consumption are excepted from the water use fees. its use through water conservation and ground- table 6.6 Water use fees in 2006 tugrugs/m3 water use Purpose of water use surface water groundwater Heavy manufacturing 20 30 Manufacturing 10 30 Mining Gold and pewter extraction 100 120 Natural oil, zinc, lead 100 120 Copper concentration, fluorspar 80 120 Food and beverage industry 10 30 Other commercial use 10 30 Water use for hydropower stations, navigation, 1% of market revenue fauna breeding and horticulture, water sports Development of mining in Southern Mongolia water storage systems; will greatly increase the abstraction of fossil • A detailed analysis of the groundwater studies groundwater. This is a non-renewable resource, conducted in the last decades, including the re- which should be managed with great care. An cent studies for the mining industry; economic analysis, having regard to pricing principles • Formulation and implementation of addition- for non-renewable resource extraction, would help al surveys and investigations to complement to ensure that Mongolia’s precious groundwater the overall understanding and potential of the reserves are allocated to the highest value uses. groundwater system, such as recharge studies Allocation to the highest value use implies that the using chloride tracers, a regional isotope study same price is paid for particular classes of water, or airborne geophysical surveys; regardless of the purpose for which that water is • Identification of aquifers with promising poten- used. tial, suitable for further investigations; • Coordination of detailed groundwater investi- 6.6 Current priorities gations in these aquifers, in collaboration with, Immediate priorities for development of a water and co-financed by, potential users in the min- resource management plan in Southern Mongolia ing sector; include: • Preparation of a plan for water supply to herd- ers, rural settlements and livestock. These are • Establishment of a Southern Mongolia Ground- expected to be served from streambed and shal- water Management and Information Center low groundwater, and locally from deeper pro- (SMG-MIC), and collection of all existing infor- duction wells. mation on groundwater resource mapping; • Preparation of a groundwater management and • Review of available information and data, stor- monitoring plan for the areas near new major age of all data in a systematic spatial database, mines and Dalanzadgad, including guidelines preparation of a spatial and lateral overview of 75 Southern Mongolia infraStructure Strategy for the abstraction of fossil groundwater based Upon completion of the initial phase of activities, on an analysis of the environmental impacts of the results could be evaluated and reviewed for groundwater table lowering. expansion to cover the whole of Southern Mongolia, and to contribute to the decision-making process for investments for conveyance of surface water by This work would take two to three years, long-distance pipelines. provided that the institutional structures are in place, and sufficient human and financial resources Two additional reviews, which could be are available. A preliminary costing of $2.4 million conducted by experienced international experts, is set out in Table 6.7. This amount does not could help to improve water resource management include detailed groundwater assessment studies in Mongolia: for specific aquifers, which should be co-financed • a review of institutional arrangements for the by beneficiaries such as coal mine developers. management of herders’ wells; and • a review of pricing for fossil groundwater ab- straction based on economic principles of pric- ing for non-renewable resources. table 6.7 cost estimate for priority groundwater assessment item (for 3 years) unit unit cost number cost (uS$) (uS$) Staff (5 staff members) month 3,000 180 540,000 Support staff & drivers month 1,000 180 180,000 Office costs month 1,000 36 36,000 Transportation month 2,000 36 72,000 Database development 100,000 Hydrochemical survey and analysis 100,000 Isotope study 200,000 Monitoring wells & equipment pcs 20,000 20 400,000 International consultancies month 40,000 12 480,000 Maps, publications etc month 2,000 36 72,000 Meetings, seminars pcs 5,000 10 50,000 Training (invited lectures, short courses) 200,000 total 2,430,000 76 Southern Mongolia infraStructure Strategy 7 Social iSSuES key PointS • New mining development promises new opportunities for many in Southern Mongolia, but the transition may impose costs on some residents. • Transparent arrangements should be established for sharing the benefits of mining development with the local community. • Training institutions can help local residents to take advantage of new em- ployment and entrepreneurial opportunities; • Local governments will play an important role in ensuring that adequate social services (including health, education, and law and order) are provided at the levels required to cope with rapid population influx. • Methodologies for compensating herders who are displaced or lose access to pastures from mining could be reformed to ensure maintenance of livelihoods. • Some degree of conflict between different stakeholders is inevitable – a forum for regular exchange of information and views between multiple stakeholders could help to resolve disputes. The potential social impacts of mining Ulaanbaatar or foreigners. One of the international development are wide-ranging, and do not fall neatly lessons of mining development is that if large into the responsibilities of individual line ministries at revenues are generated and local communities do central government level. And local governments do not benefit, the ensuing social unrest can threaten not have responsibilities for addressing all potential the sustainability of the mines. Benefits can be social impacts, even though local communities will shared through direct financial transfers of a share be the most directly affected. of the mining revenues, and through improved A consultative forum could help to ensure a wide- employment and livelihood opportunities. ranging and coherent response to the social issues. The forum should include local communities, mining Sharing Mining revenues companies, and the different tiers of government. Mongolia’s national Government retains a share An early stage might be development of a strategy of mining revenues, through mining royalties and to assist transition of different vulnerable groups other fees, and as an equity holder in some mines. within the community, as well as comprehensive By law, 20% of mining royalties is supposed to be local development strategies designed to ensure allocated to aimag budgets, and 10% to soum strong local participation in the benefits of mining. budgets. In practice, there is little clarity on the relationship between mining royalties and sub- 7.1 Sharing the Benefits of Mining Development national government budget allocations, nor on the Residents of Southern Mongolia are excited mechanisms for transferring and utilizing revenues about the development of mining, but they are for local development also deeply concerned that they may be left out Mongolia currently has a centralized financial of the opportunities, losing out to urbanites from management system, with local tax revenues channeled back to the center before being 77 Southern Mongolia infraStructure Strategy redistributed to provinces and then soums. Under Permitting citizens to examine the benefits this system local authorities have little or no (and revenues) that are channeled from mining to discretionary funds for local development, and the government and communities can reduce and virtually no retained revenue. Other than under prevent corruption, as well as improving public projects such as the World Bank and European satisfaction with the uses of revenues. Legal Union financed Sustainable Livelihoods Program, tools and institutions available for monitoring, there are very few funds available at the local level transparency and accountability include: for capital investment. The influx of mining revenue • Article 42.3 of the Minerals Law, which allows will likely require a new system to be developed citizens to elect a representative to provide public to reallocate these funds to the local level. The monitoring of the license holder’s activities; Government is currently considering reforms to • Chapter 9 of the Minerals Law, which permits introduce new mechanisms for inter-government access to minerals-related information and transfers to enable the sharing of mining revenues reports; in a transparent manner. • The Extractive Industries Transparency Initiative, Several principles should guide Mongolia as it which seeks to increase knowledge of the develops its system for channeling resource revenues transactions between mining companies and into improved services in local communities. governments; Resources assigned to different levels of government • License Watch (Open Society Forum) which should be linked to the scope of functions devolved provides statistical analysis on the numbers of to them. Thus, a first design step is clearly specifying licenses and the procedure to obtain licenses, the functions to be performed by sub-national information on contracts, and hosts discussions governments, and ensuring that adequate funds are on the uses of mining revenue. allocated for the performance of these functions. And there should be transparent reporting on how aligning Mining company contributions any reserved part of mining revenue is allocated to local communities. with government Policy Mining companies may contribute directly The IMF advises against providing a guaranteed to local communities by, for example, donating share of natural resource revenues to sub-national supplies, donating funds for the construction of governments, because they are volatile (sub-national facilities, or providing bonuses for service providers governments need stable revenue sources) and to work in remote areas. There are many examples tend to be geographically concentrated (creating of foundations established by mining companies to inequality between regions). box 7.1 iMf advice on Sharing natural resource revenues with Sub-national governments The IMF has recently published a paper on fiscal decentralization, providing the following observations. “Even though the availability of large natural resource revenue typically exacerbates demands for decentralization (with producing jurisdictions claim- ing control of such revenue), sharing of such revenue should be avoided. Assignment of natural resource revenues to subnational entities has many disadvantages, especially in small countries. • Attribution of volatile resource revenues to local governments can complicate fiscal management and macroeconomic policy: during price booms, large resource revenue tends to induce unsustainable expenditure levels; while during price downturns, basic expenditures assigned to subnational governments might come under pressure. This is now acutely felt in Nigeria, where the states (which receive a fixed share of the oil revenue) built in unsustainable levels of spending during the recent oil boom. • Geology or geography differences should not determine the distribution of revenues from national resources; when shared on the basis of origin, significant horizontal imbalances would arise. • Resource revenues bring with them little accountability: this problem exists at the national level, but is probably exacerbated in local government. • The size of resource revenues, relative to the size of the jurisdiction, may bring risks not only of absorptive capacity, but also of corruption. The central government is often in a better position to smooth fluctuations in natural resource revenues, provided that these resources are transparently managed. Source: IMF (2009). “Macro Policy Lessons for a Sound Design of Fiscal Decentralization.� 78 Southern Mongolia infraStructure Strategy assist in local community development (eg. Box 7.2). Current education levels in rural areas, and In countries where governments are well organized, outdated vocational training, are likely to place such contributions can act as a useful supplement to many of the direct mining jobs out of reach of local the government’s own activities. Mining companies residents in the short to medium term. Current skill are not, however, a substitute for good government. weaknesses have led to increasing use of workers from Russia and China in the construction and Some soums in rural Mongolia have already mining sectors. The idleness rate of vocational established Soum Development Funds, into which school graduates is 26 percent. Improved training mining companies active in those areas contribute. will be fundamental to ensuring that local and While these funds are welcome, the mechanisms national residents are well-placed for employment. for the utilization of funds are not transparent and they are generally off budget. Clear procedures are The Ministry of Social Welfare and Labor, in needed to identify, prioritize and implement local collaboration with the Ministry of Mineral Resources sub-projects under Soum Development Funds. and Energy, could encourage mining companies to implement training and apprenticeship programs. For sustainable community development, it is Existing programs could be evaluated, improved, desirable that mining company contributions be and scaled-up where possible. aligned with a local development strategy, prepared by the local government with input from local This could be supplemented with a medium to citizens. Desirably also, communities should have long-term training strategy to increase the capacity a clearly defined role for selecting sub-projects of the national labor force. Potential delivery options and monitoring implementation. Donations that could include job training programs delivered include physical investments and equipment should by trainers from mining companies, improved be made in close consultation with relevant line Vocational Training Centers, and potential new ministries to ensure that funds are set aside for regional technical training or higher education recurrent expenses. box 7.2 the yanacocha association and yanacocha Women’s association The Yanacocha Mining Company in Cajamarca Peru established two associations to help with regional economic devel- opment. The Yanacocha Association and Yanacocha Women’s Association assist in areas of health, nutrition, and education. As the associations’ regional development focus expanded, they began to work with thirde party mediators and development agencies, including CARE, the Inter-American Foundation, and others. A rural development office was created to coordinat the actions of all parties in order to create a belt of development around the mine instead of taking on scattered projects. The development office has succeeded in providing expanded drinking water systems, education, and health services, and rural highway renovations. The two associations also established the Yanaocha Food Security Project (Prosay), with a budget of over US$ 1 million. The project’s aims were agricultural development, income generation, health and nutrition, hygiene and potable water, and school breakfast programs. The projected benefited roughly 36% of families in the area. Source: Pasco-Font, Alberto et. al., “Peru: Learning by Doing�. In Eds. Gary McMahon and Felix Remy, Large Mines and the Community: Socioeconomic and Environmental Effects in Latin America, Canada, and Spain. IDRC/World Bank 2001. improving employment opportunities centers with mining-related curricula. Expenditure Mining development offers the potential for new on higher education needs to be supplemented jobs. Around 8,000 people may be employed directly with investment at the secondary level. in the mining industry in Southern Mongolia, and there will be additional jobs involved in the provision of goods and services for the mining companies. Ensuring that the local community benefits to the greatest extent from these opportunities will require improved vocational training, as well as measures to support local entrepreneurs. 79 Southern Mongolia infraStructure Strategy box 7.3 building a base of Mining Professionals in namibia Namibia is facing shortages of skilled professional and technical personnel in mining related fields, in all categories and at all levels. Of note are shortages of mining engineers and geologists in government and both professionals and artisans in the private sector. Across the sector core skills are needed in the follow- ing fields: geology, mining engineering, mineral processing, metallurgy, mineral economics, mine surveying, chemistry, environmental science and mineral policy and investment analysis. Additionally, technician-level skills, such as mining and mineral processing technicians, geo-technicians, laboratory technicians and mine surveyors are required. In 1996 a report noted that most of the professionals in the private sector were expatriates and that the Namibian mining sector needed to develop a skills base within the country to meet both its short- and long-term needs. In response: • A consultative process was established involving the Ministry of Mines and Energy, the academic institutions, and industry to determine requirements and improve the quality of training programs. • The Government also examined means of sharing the costs of training with various stakeholders. The Government: • established a geology department at the University of Namibia. • established Vocational Training Centers, which were designed to provide hands-on training and develop artisans. • encouraged the employment of regional and international experts to train local personnel. • relaxed the work permit regime to bring in specialized instructors and trainers. The mining companies: • provide in-house training programs on mines • provide general information and guidance on career opportunities and educational paths in mining to enhance knowledge of training opportunities. • co-operate with other mining companies in the use of in-house multi-skilling programs. Beyond direct participation in the mining mine, small and medium enterprises are supplying industry, new job opportunities can be created maintenance, haulage, catering, lime, and through the development of broader industries. The transportation services. Local herders may also be Government has been considering various proposals able to tap new markets for animal products. for industry development in the region. These plans Government may be able to assist in the are beyond the scope of the current report, but they incubation of newly formed enterprises with will be an important part of ensuring that the local training in skills such as information technology, residents benefit from regional development. accounting, marketing, promotion, finance, and Supporting entrepreneurs general management. The focus should be on the Local entrepreneurs will be able to profit development of skills that are applicable across a from the outsourcing of goods and services by range of businesses. Mining companies could be mining companies and the provision of inputs for encouraged to publicize their input requirements, infrastructure services (eg building roads, running and to tender locally for services that can be provided restaurants and hotels). For example, at Borro gold within the region. 80 Southern Mongolia infraStructure Strategy box 7.4 Supporting entrepreneurs in kazakhstan A business development center has been established in Kazakhstan, supported by Chevron Texaco and Citigroup Kazakhstan, and implemented by the United Nations Development Program. The center provides drop-in services, seminars, training and workshops for local entrepreneurs. Small businesses can access secretarial support, workspace, legal help and office supplies. The UNDP hired a technical advisor to train local consultants on sound business practices. A pilot micro-credit scheme was established for graduates of the entrepreneurial training seminar offered by the center. The center has advised hundreds of local firms, created 230 business plans, more than $2 million in loans have been disbursed, and 530 new jobs have been created. New businesses have included a private ambulance service, bowling alley, and the city’s first supermarket. Source: Partnerships for Small Enterprise Development. encouraging Women’s Participation in the employment and salaries. Strategies to encourage labor force women’s participation in the labor force could Increasing women’s incomes contributes directly include: training women to move into employment to improved household well-being and security. sectors that are currently dominated by men; From an economic point of view, it makes simple providing incentives to employers to make women sense to harness the productive capabilities of all managers or administrators; and providing child potential workers. Inadequate attention to gender care facilities for women with young children. issues in mining communities can result in greater Efforts to increase the number of women in the income inequality, high levels of prostitution, HIV/ labor force should be reinforced with measures to AIDS and other social ills that impose significant protect women from sexual harassment and violence costs on the local community. To address these once they are in the labor force. Such measures risks, mining companies can employ more women could include: establishment of guidelines defining and use inclusive strategies to bring benefits to all harassment and procedures for complaints and members of their communities. disciplinary action; adopting a zero tolerance policy The Government of Mongolia’s 2007 report to for sexual harassment in the workplace; enforcing the Committee on the Elimination of Discrimination existing labor laws; and challenging employment Against Women points to significant gender gaps in stereotypes in public awareness campaigns. box 7.5 the South african Mining charter The Mining Charter adopted by the South African mining industry in 2002 recognizes that “blacks, mining communities and women� have historically been excluded from the mainstream of the economy. The industry states its intention to adopt a proactive strategy of change at the levels of “ownership, management, skills development, employment equity, procure- ment and rural development.� The Charter states that companies shall establish targets for employment equity and take steps towards “ensuring higher levels of inclusiveness and advancement of women … (with a) baseline of 10 percent of women participation in the mining industry within 5 years.� The industry agrees to setting and publishing of targets in all areas of transformation. Source: IFC (2007), “Integrating Women into Mining Operations� 81 Southern Mongolia infraStructure Strategy 7.2 Providing Adequate Social Services operations because they permit spouses to remain in a major urban center (eg Ulaanbaatar), where they The increase in Southern Mongolia’s population have access to better employment opportunities and will stretch the capacity of local government facilities their children may have better schooling and social and staff. In addition to the physical investments services. But there is some evidence that suggests discussed in Chapter 3, additional government FIFO operations are associated with higher levels expenditures will be required to ensure adequate of divorce and domestic violence, because mine provision of health, education, law and order, and workers’ long periods of absence from the family general administration. home means they do not fully share in the daily accommodation and town Services responsibilities of raising a family. Provision of accommodation and adequate Accommodation options where workers are town services for all residents of Southern Mongolia housed with their families close to mine sites may be is part of the general sharing of benefits of mining better for family life, but may result in lower services development. Failure to provide such services can for spouses and children. Promotion of local family cause social discord. In the worst international cases life will also help to integrate new mine workers into inequality in access to services has threatened mine local communities, and ensure that they have an operations and the basis of regional prosperity. incentive to see the local community develop. box 7.6 Mining Provides no guarantee of Prosperity for all Jobs and improved services need to be provided not only for the existing residents, but also for those who move to the area. Examples of what can go wrong can be seen in many countries around the world. For example, in the early 1980s CVRD established an iron ore mine on a mountain range inside a national park in Brazil’s Amazon forest. It built a gated community to house around 5,500 workers and their families at a cost of over US$ 150 million. To house additional influx, it provided US$3 million for infrastructure in the nearby Vila de Parauapebas, with no promises of annual upkeep. Parauapebas lacks paved roads and most houses lack running water and sewerage. Notwithstanding the low level of town services, the possibility of employment and the absence of services elsewhere attracted extensive squatter settle- ments. By 2006, the population of Parauapebas had reached 110,000 with a population consisting primarily of uneducated and unskilled migrants drawn from Brazil’s poorest regions. South Africa provides another example. The Anglo Platinum mining company provided 55% of its workers at Limpopo with a “living out allowance� intended to provide workers with flexibility in choosing their living arrangements. In practice, many workers ended up in informal dwellings because of severe housing shortages. In 2003, roughly 41% of the mine employees who lived away from the mine itself lived in backyard shacks, backyard brick buildings, or free-standing informal shacks. The informal settlements lack water, electricity, and sewerage. Only half of those with living-out allowances had kitchens. Source: Castalia background paper. To some extent, Mongolian traditions of ger Provision of a mix of mine worker housing settlements will help mitigate any planning failure options in Southern Mongolia will provide individual to provide accommodation. But Mongolia should families with choices, permitting them to decide aim to provide new arrivals with services (eg water which sort of arrangements best suit their families. and sanitation, heating, schools, hospitals, etc) that health and education are at least as good as alternatives elsewhere in the There are already significant weaknesses in country. Although this risks accelerating the rate of the delivery of health and education services in population influx, it is a necessary part of ensuring Mongolia’s rural areas. The addition of a large that the local community benefits from mining influx of new population presents a risk of over- development. The issues associated with developing stretching government capacity. On the other hand, town infrastructure are discussed in Chapter 3. the economies of scale available from increased The choice of model for development of population may actually provide opportunities for townships will have important implications for improved services. families. Some families prefer fly-in fly-out mining Access to health services is constrained by large 82 Southern Mongolia infraStructure Strategy distances and poor transport links. Omnogovi aimag hiv/aidS has in recent times conducted health campaigns, Mining is likely to bring with it an increase in and monthly visits to Bagh by medical staff. The mobile and migrant workers, and with this will Ministry of Health has made efforts to provide come increased risks of widespread HIV/AIDS mobile workers with identity cards to ensure access infection. The costs of HIV/AIDS are tragic for family to health services, and is also promoting the use of and communities, and more generally can impose mobile health services. But there are still significant significant economic costs. Impacts range from gaps in health services. reduced productivity among workers, increased Inadequate facilities, equipment, desks and demands for health care, and increased burden books all combine to lower education levels in rural on women who are often primary care-givers, and areas. And there are few incentives for teachers to higher school drop-out rates as children work in work in rural areas, as pay is lower than in urban order to replace parents’ incomes. areas. The government is investing in improving rural education through its own and donor financed projects, including improving facilities (for instance under the Fast Track Initiative for Education and the Sustainable Livelihoods Program) and improving teacher skills are resources (under the World Bank financed Rural Education Access and Development (READ) project). Addressing weaknesses in health, education, and general government administration will require increased government expenditures in Southern Mongolia. Attention will need to be given to pay levels for public employees, as educated workers will be attractive to mining companies. box 7.7 Social impacts of Western australia’s iron ore boom During 2001-2008, the remote Pilbara region in Western Australia benefited from a boom in iron ore exports. The mines struggled to attract sufficient workers, pushing up wages to around three times those offered elsewhere in the country. The mines’ demand for labor, and ability to pay high wages, made it difficult for small local employers (eg bakeries, cleaning companies, etc) to retain workers. Local schools found it difficult to retain teachers, who were offered relatively low state-fixed sala- ries, and who could be attracted by higher salaries working for mining companies. In turn, this meant potentially lower standards of education for local children. Inappropriate regulations that restricted the release of land limited the development of new housing, and cost inflation pushed up the price of even demountable housing to previously unknown levels. Despite these price and wage increases, the supply of hous- ing did not keep pace with the demand, and many local workers were housed in low quality accommodation with minimal facilities. Some long-time residents who did not own their own housing found their rents increased, and were forced to downgrade their ac- commodation. Many of the new workers in the area considered themselves temporary residents, and did not develop strong ties to the local community. The boom attracted lots of single men. With lots of cash to spend and away from family or other recreational opportuni- ties, their entertainment choices included consumption of alcohol, illegal drugs and prostitutes. For some long-time residents, the new arrivals could seem undesirable. While mining companies made an effort to employ local indigenous Aborigines, there were others who were excluded from the new developments. While the rest of the community got rich from the mining boom, these local residents saw no change in their living standards. Source: ABC Television, Four Corners, The Money Pit, broadcast on 18 August, 2008. The video can be seen at: http://www.abc. net.au/4corners/content/2008/20080818_boom/interviews.htm 83 Southern Mongolia infraStructure Strategy box 7.8 the aidS epidemic and Mobility in Mongolia Around 500-1800 adults are reported to be living with HIV/AIDS in Mongolia, and there have been fewer than 100 deaths from the disease. A rise in mobility of the labor force is likely to increase the incidence of HIV/AIDS: • Nearly 50% of foreign workers in Mongolia work in the mining sector. • Construction and mining accounted for 10% of the labor force in 2006, and this proportion is likely to grow over the next few years. • 51% of mobile men had sex with casual partners in 2005. • Mobile men are the least likely group to be tested for HIV and to know the results. • Mobile men may be particularly likely to use the services of female sex workers. • 36% of sex workers were diagnosed as having a sexually transmitted infection (16 times higher incidence than for low-risk women). Source: Ministry of Health (2006). The Ministry of Health can take a lead in setting include migrant workers who may be perceived as policies for prevention, management and care of taking opportunities from local residents, as well the disease. The Ministry already has experience as women who are susceptible to gender-based in raising awareness of healthy behavior. A more violence (particularly where there is high alcohol structured and coordinated strategy should be a consumption). Perpetrators could include labor priority as mining development accelerates. speculators, camp followers, disenfranchised local residents, and unemployed youth. Mining companies can play also key roles in promoting healthy behavior and reducing infection Of particular note is the potential for violence rates. For example, in South Africa BHP Billiton has against Chinese migrant workers. The United adopted measures including raising awareness, States State Department noted in its 2008 Human offering voluntary counseling and testing services, Rights Report on Mongolia that “A small number promoting care and support, and investing in of nationalist and xenophobic groups threatened research for a vaccine. BHP has also redesigned Chinese residents’ personal safety and businesses, accommodation arrangements, so that workers as well as the safety of any Mongolian women who could live with their families rather than in all-male associated with Chinese men. During the year there hotels. As a result, BHP’s employees HIV prevalence were several credible reports of violence against rate is 7.7%, compared with the general working- Chinese residents. … Chinese construction workers, age population’s rate of 18.8%. when away from their work sites, were sometimes subjected to hostility and suspicion from host- law and order country citizens.� A rapid increase in population and settlements may threaten social cohesion, and may increase Careful leadership at the local and national level criminality and anti-social behavior. Contributing will be required to ensure protection from violence for factors could include unemployment, income all residents, including temporary foreign workers. inequality, price inflation of basic goods, perceptions The provision of adequately resourced police and of skewed benefit sharing, and alcohol consumption other legal services will be a central element of compounded by inadequate recreation facilities. the response. This could be supplemented with information campaigns to encourage tolerance and Law and order concerns could range from raise awareness of the economic contribution made petty to serious crime, domestic violence, fraud, by immigrant workers. and vandalism. Victims of crime and violence could 84 Southern Mongolia infraStructure Strategy box 7.9 backlash against Migrants in South africa High migration rates can lead to tensions between resident and migrant populations. In 2007, violence against foreigners in South Africa led to the deaths of approximately fifty people and the displacement of tens of thousands others. Target popu- lations included African migrants, Chinese speakers, Pakistani migrants and South Africans from minority language groups. The episodes of violence that led to these deaths were a culmination of years of discrimination, prejudice, and latent conflict between South Africans and outsiders. A rapid response survey carried out in an effort to understand the violence uncovered the following themes as critical to the emergence of tensions: 1. role of government • Frustration over the insufficient pace of service delivery and consultation in general, and over housing provision and administration in particular. • Ineffective communication and/or engagement with local citizenry around the violence and its underlying causes. • Perceived corruption and impropriety of government officials, especially in the police service and Department of Home Affairs. 2. the scale of the influx of ‘migrants’ and migration policy • Poor management of cross-border migration. • Unease about the threat posed by undocumented migrants of access to resources such as housing, business opportuni- ties, formal employment and local women. • Perception that foreign nationals arrive in the country with cash, skills and tolerant of low wages and hard work. 3. the impact of migrants on gender dynamics • Perception among locals that menial or ill-paid work undermines the hard-won fruits of democracy (‘entitlement’) and undermines dignity. • Anger that foreign arrivals are ‘showing up’ local men by earning more, working harder and take whatever work they can get. This diminishes the locals in the eyes of local women. 4. the pace of housing policy and the administration of housing • Corrupt housing practices. • Locals rent out their homes to migrants to secure regular cash income. • The slow provision of housing. 5. the politics of economic livelihoods and the competition for resources • Competition for resources such as water, sanitation and health services together with employment and business op- portunities is also a key dimension to the recent spate of conflict. • Further conflict was exacerbated by the local practice of preferring non-South African employees, particularly in the domestic, gardening and construction sectors. • The lack of a minimum wage in the casual labor sector also means locals are undercut by migrants, triggering unhappi- ness. Source: Hadland, A. (2008) Citizenship, Violence and Xenophobia in South Africa: Perceptions from South African Com- munities. (Paper presented to the Department of Home Affairs Imbizo on Xenophobia, Pretoria, 19 August). This paper can be accessed at http://www.hsrc.ac.za/Research_Publication-7627.phtml 7.3 Protecting Vulnerable Groups Not all residents of Southern Mongolia will gain will diminish. All pastureland is state-owned and from mining development, and some will need to managed under an open access system. Herders are make painful transitions. To ease such transitions the dominant users of land, relying on their herds of and to ensure well targeted assistance measures, goat, sheep, cattle, horses, and camels for income, the Government could start with a consultative food, housing, and clothing. Mining activities are process aimed at identifying the groups most at risk. likely to affect directly only a small proportion of the livelihood transitions for herders total land area of Southern Mongolia. Nevertheless, As mining and towns develop in Southern for those herders directly affected by loss of access Mongolia, the land available for grazing livestock to pastures, the impact of new mining development may be substantial. 85 Southern Mongolia infraStructure Strategy While almost all of Southern Mongolia is subject Internationally, land acquisition strategies often to exploration licenses (with relatively small land include individual compensation, asset replacement, impact), a much smaller proportion of exploration livelihood restoration, and transitional assistance. activities will ultimately give rise to production The aim is to ensure that individuals who suffer activities (which have much greater impacts). losses as a result of government actions should be Production licenses currently occupy around 0.7% restored to a position where they are at least as well of the land area of Southern Mongolia. It should off as before the land acquisition. be noted, however, that in some parts of Mongolia Mongolia’s current framework for compensation mineral resources are often in the same river basin and relocation under the Minerals Law does not locations as herders’ winter (and most valueable) address all aspects of international best practice in pasture resources table 7.1 Mining licenses exploration and Production, January 2009 (hectares) Exploration Production Dornogovi 6,407,038 43,957 Dundgovi 2,996,077 5,945 Govisumber 206,084 4,470 Total 39,448,676 234,694 Source: Open Society Forum When land is occupied for mine production, land acquisition and relocation. Mining companies impacts on herder livelihoods may include (i) must provide compensation for assets and relocation migration of herders; (ii) a decrease in income or costs, but no provision is made for any transitional loss of livelihood for herders unable to move to new assistance or livelihood restoration. All grazing land grazing areas or access new income-generating is state-owned, with herders having only informal opportunities; and (iii) competition for natural access rights, and so no compensation is paid for resources including water and grazing land. Chapter the land. There are no guidelines for the calculation 6 stressed the importance of better information in of asset values or relocation costs, or time-frame respect of the impact on mining on water resources. table 7.2 Potential effects of Mining on herders effects Positive negative Short term: Increase in demand for animal products from min- Migration from historically used areas forces herders and ing companies and new settlements opens up new sup- herds to adapt to new grazing sites. This may result in lower ply paths for herders production of animal products Relocation of herders and their herds may permanently reduce production and increase vulnerability leading to impov- erishment of herders Medium- Expanded transport network leads to an increase in Expanded allocation of mining licenses and town develop- term impacts access to markets which can be tapped by herders ment results in lower availability of pasture for grazing Mining development will provide jobs that are di- Increased use of water and pressure on available graz- rectly and in-directly related to mining and jobs in the ing land will contribute to land degradation which in turn will formal and informal sectors reduce incomes as productivity drops. The expansion of the rural economy may lure the The expansion of the rural economy may lure the younger younger generation away from herding and into work in generation away from herding and into work in the mines or the mines or related business resulting in increased and related business resulting in the loss of culture surrounding tra- diversified incomes for individuals and families. ditional herding 86 Southern Mongolia infraStructure Strategy for their payment. Households unable to negotiate mining industry will typically benefit, others who do effectively may be exploited and underpaid. No not see their incomes rise by the same amount may formal mechanism is specified in the Minerals Law suffer. In particular, the elderly or disabled who for grievance channeling or forum for consultation. rely on social security payments or family support, or those on government-fixed salaries may find artisanal and Small-Scale Miners themselves worse off as prices rise but their incomes It is not clear whether the number of artisanal remain the same (Box 7.7). and small-scale miners will increase or decrease as a result of increased large-scale mining. Higher The Government currently adjusts teachers’ productivity in formal mining may permit higher salaries downwards in rural economies, to take salaries, inducing a shift of labor away from artisanal account of the lower cost of living. In future, and small-scale mining. Production licenses granted government fixed salaries and other government to large-scale formal miners may reduce the areas benefits may need to be adjusted upwards to take available for smaller and informal miners. On the account of costs of living that are higher in Southern other hand, increased areas of tailings or areas Mongolia than elsewhere in the country. abandoned by large mining companies may increase unregistered residents the number of artisanal miners. As the population of Southern Mongolia grows Although almost entirely illegal, informal mining it is possible that there will be a significant increase has provided a major and effective stimulus to rural in unregistered residents, including Mongolians livelihoods and rural economies. Informal mining in from other parts of the country as well as foreign Southern Mongolia expanded significantly with the workers. Migrant workers may not have the severe winter (dzud) in 2001-02. Informal mining documents required for registration, they may provides seasonal or regular employment and choose not to register in a new soum, or they may additional cash income for rural people, reducing not be able to afford registration. migration to urban centers. The World Bank (2006) Soums receive financing based on the numbers reports that informal miners have the cash and of registered residents. If the registration process commitment to ensure their children attend school. is inefficient, slow, or does not include certain The negative sides of informal mining are residents, inadequate services will be provided health and environmental risks. Illegal mercury for local residents. Unregistered residents may usage is wide-spread among artisanal gold miners, be forced to pay for their own health care, or go posing direct health risks to workers, as well as untreated. International experience suggests that the wider community when mercury escapes into undocumented workers may be vulnerable to water supplies. Respiratory risks are posed by dust mistreatment by some employers. generated by placer mining, and smoke from tires Soum governments need mechanisms to detect used to melt permafrost. new arrivals and to ensure their registration, and the Government measures could help to mitigate registration system should be simple, cheap, and the negative consequences of informal mining. fast. Providing such services may require increased Whatever the net effect of regional development on resources in soum administration. their numbers, informal miners are likely to remain Mine closure a significant element of Southern Mongolia’s local Particularly for short-lived mines, the economy in the short to medium term. Potential Government should begin developing its strategies measures include increased environmental and now for how to handle eventual mine closure. In technical training, to promote awareness of improved Southern Mongolia, different mines are expected to mining techniques; livelihood compensation for last from 20 years to over 200 years. Even a mine informal miners displaced by large-scale mines; and with an expected life of 50 years will have an impact enhanced public participation in decision-making on the children of today’s decision-makers. If there relating to the development of mining operations. are not alternative economic activities, the local Price effects of a Mining boom community can be left with little or no economic In countries where mining booms have occurred, support. difficulties have arisen in coping with sudden changes The closure of a mine can mean the loss of in relative prices. Labor, goods, and accommodation thousands of jobs, the exodus of skilled residents, the can all be in short supply, pushing up wages and deterioration of service delivery, and the hollowing prices rapidly. While those directly employed by the 87 Southern Mongolia infraStructure Strategy out of once vibrant communities. The impact on service delivery is likely to be particularly severe where the mining company itself is responsible for those services. For example, when Gecamines, a Congolese state-owned mining company, reduced its operations in the late 1990s, the company shut down all the infrastructure services it provided to the surrounding community, including schools, hospitals, clinics and worker housing. box 7.10 Watching the Pits disappear In 1984, the year of the miner’s strike, there were 170 working collieries in Britain. Today there are only eight working pits left in the country. The impact of the devastation of an industry that once employed over 100,000 workers has been especially severe for the communities concerned because in many villages the Coal Board was the sole employer. David Parry, spokesperson for the Coalfields Communities Campaign, comments, “You get 50 jobs created in a place where 2,000 men used to work and this means older men in particular are parked outside the labour market.� Hidden unemployment is a large problem with many former miners existing on sickness benefit, while regionally there are some very real blackspots where not very much has moved in the past 10 years. The fabric of the housing stock has deteriorated and many villages in the former coalfields have become like inner city sink estates except they are in semi-rural isolation. The government has also acknowledged the particular problems faced by ex-mining and coastal communities. An employment report by HM Treasury noted that within regions, though, there remain pockets of high unemployment. A tail of around 15-20 local authority districts have not enjoyed the fruits of recovery seen throughout the rest of Britain. The majority of these areas are in inner cities, but seaside towns and former coal mining areas also feature. Often people from ethnic minorities, lone parents and people with disabilities are disproportionately concentrated within these small areas. They may suffer from poor housing, inadequate transport links and high crime rates, leading to social exclusion. Low employment rates are often both the cause and effect of these areas’ problems. Source: HM Treasury (2000), BBC News Online (April 2009). These impacts can be mitigated if early on in mine development governments focus on diversifying local economies and reducing dependency on extractive industries. Efforts to prepare for mine closure will require the engagement of multiple stakeholders. box 7.11 Preparing for Mine closure local communities Mining companies local government central government donors and ifis and civil Society • Begin planning for • Prepare for post- • Provide an adequate • Participate in closure • Support governments closure at feasibility closure legal and regulatory planning as necessary to: • Work in partnership • Develop sustainable framework for closure • Use income to pre- • Establish a modern with local govern- service delivery as well as monitor- pare for the future legal framework for ments and communi- • Support economic ing and enforcement • Support communities mine closure ties, building capacity diversification institutions in reducing depen- • Finance closure costs and social capital • Responsibly invest dency on the mine and social support • Ensure availability of and distribute fiscal • Engage in service for workers leaving financial resources for revenues from mining delivery where ap- state-owned mining closure • Promote sound local propriate operations • Implement closure in and regional planning • Monitor mining and • Facilitate regional line with laws, regula- closure activity planning tions and agreement • Encourage economic with local communi- diversification ties • Disseminate good practices 88 Southern Mongolia infraStructure Strategy 7.4 Current Priorities It will be difficult to ensure a coherent and - Local governments comprehensive approach to maximizing the social - Ministry of Roads, Transport, Construction benefits of mining in Southern Mongolia. Without and Urban Development being exhaustive, some of the institutions responsible - Ministry of Health for addressing the topics identified above include: - Ministry of Education • Share the benefits of mining revenues, and increase • Ensure law and order the transparency with which they are allocated - Ministry of Interior to ensure adequate • Ministry of Mineral Resources and Energy; policing - Ministry of Finance; - Political leaders to encourage tolerance of - Mining companies; foreigners - NGOs • Ensure livelihood compensation for displaced • Align mining company contributions with herders government policy - Ministry of Mineral Resources and Energy - Local governments to develop local - Mining companies development strategies • Provide information and training on alternative - mining companies to support local priorities; techniques for artisanal mining • Provide training programs and institutions to - Ministry of Mineral Resources and Energy expand skills of local labor • Maintain real levels of government-fixed salaries in - Ministry of Social Welfare and Labor Southern Mongolia - Ministry of Education - Ministry of Finance • Foster local entrepreneurs • Prepare for mine closure - Ministry of Foreign Affairs - Ministry of Mineral Resources and Energy - Mining companies to adopt policies of local - Local Governments sourcing of goods A first step towards a coherent strategy would • Encourage women into the labor force be the establishment of a regular consultative forum, - Ministry of Labor and Social Welfare involving different tiers of government, mining - Mining companies to adopt pro-female companies, local communities, and NGOs. The forum employment policies could provide opportunities for information sharing, • Provide adequate accommodation, health, and decision-making, and dispute resolution. education services box 7.12 international good Practice on Stakeholder consultation • Develop project-specific policies and guidelines for community engagement and engagement with non-commercial stakeholders (com- munity groups, NGOs, non-shareholding government authorities, universities etc) pursuant to the framework of domestic laws and regulations and international obligations, and including company management and employee training, an effective monitoring system and communication of performance to external stakeholders. • Disclose information about project operations and potentially adverse environmental and social impacts sufficiently early in planning of each stage of new operations (conceptual design, feasibility studies, construction, operations and decommissioning) to allow engage- ment with stakeholders on weighing the trade-offs and contributing to design and impact mitigation. • Communicate meaningful information for stakeholders to make informed choices, i.e. information in readily understandable formats tailored to the needs of different stakeholder groups. • Communicate information that is accessible to those stakeholder most affected by business operations. • Identify and inform all relevant stakeholders, with sufficient time (and where necessary facilitation) the interpretation of the informa- tion. • Continually engage with and ‘track’ stakeholder engagement, with emphasis on measuring company performance (i.e. stakeholder satisfaction) and ‘bundling’ of different activities that stakeholder would wish to address collectively, e.g. compensation negotiations, employment opportunities and mitigation of adverse socio-economic impacts. • Maintain oversight of the outcomes of stakeholder engagement undertaken in the name of the company by others, e.g. cases where engagement is undertaken by government (e.g. for asset loss compensation) or contractors (e.g. during Environmental Impact Assess- ment studies). • Involve government agencies and legitimate community groups, NGOs etc. in consultation and other engagement activities to build trust and mutual understanding. • Communicate accessible and safe mechanisms for stakeholders to raise and resolve grievances with the company. • Recognize the need to secure informed consent on decisions affecting indigenous peoples and their domain areas. • Involve community, local government and NGOs in environmental and social monitoring, e.g. of ESIA–related management plans and on-going social management systems. Sources: Source of Good Practices International Finance Corporation - Doing Better Business through Effective Public Consultation and Disclosure; Dow Jones Sustainability Indexes – Guide; AccountAbility - AA1000 Series. 89 Southern Mongolia infraStructure Strategy 8 EnvironmEnt key PointS • Construction of major roads and railways will have serious and regionally signifi- cant impacts on movement of wildlife, including khulan and Mongolian gazelles. Studies to identify appropriate wildlife crossing arrangements are a high priority. • Dewatering of mines will drain ground water from large areas around those mines. Development of bores and springs elsewhere could help to offset the environmental consequences. • Soum and aimag governments could play an important role in environmental impact assessment and environmental management, but will need substantial capacity building to do so. • Mongolia can contribute to global goals on climate change by increasing ef- ficiency of new and existing power plants, increasing reliance on zero-emissions fuels, ensuring appropriate pricing of power, and adopting energy efficiency measures to reduce demand growth. 8.1 Land conversion and mine sites 8.2 Transport infrastructure The most obvious and immediate impact on Roads and railways are a potential barrier to natural systems is conversion of land, for the mines, movement of livestock and wildlife. Development ancillary facilities, and regional infrastructure, plans for transport infrastructure need to take resulting in loss of vegetation, wildlife habitat, and account of wildlife migration and movement pasture. A lower bound estimate of the area that patterns. will be directly affected within Omnogovi aimag is New roads and railways may be highly disruptive 16,500 hectares, or 0.1% of the aimag’s surface to the regional migratory movements of the khulan area. (wild ass) and Mongolian gazelle, and these impacts Mitigation strategies for these impacts are will be irreversible. Even though no improved related to the environmental impact assessments road or railroad yet exists, coal transport between and environmental management plans required Small Gobi Special Protected Areas “A� and “B� for each development. Mining companies will need has already ended periodic migration of khulan to have reclamation plans, and the Government between the two parts of the protected area. With will need to inspect and enforce these plans. Mine their habitat thus restricted, they have been moving sites also present accident hazards to the public, eastward onto unprotected land where they are livestock, and wildlife, mitigation of which requires vulnerable to illegal hunters. The width of the maintenance of site security. informal roadway (close to 100 m in places) the size and number of coal trucks, dust and noise are the factors that prevent the khulan (and, to a lesser extent, black-tailed gazelle) from crossing. 90 Southern Mongolia infraStructure Strategy box 8.1 threats to wildlife Threats to wildlife include: degradation or fragmentation of habitat; physical disturbance; competition with domestic livestock; and illegal hunting and trade. Examples include: • Southern Mongolia is the principal habitat of the regionally-endangered Asiatic wild ass, or khulan, which migrates long distances in search of water and forage. Khulan movements have been disrupted and their habitat fragmented by the fences along the Trans-Mongo- lian Railway, and recently constructed fences along the China-Mongolia border. • Mongolian gazelles are the most numerous of any large mammal in Asia, but their future is uncertain with threats from habitat loss, blockages to historic migratory patterns, and poaching. Mongolia’s gazelle herds are the last significant populations of these animals in Asia. Sub-populations of Mongolian gazelle have been isolated from the main population in eastern Mongolia by the Trans-Mongolian Railway, the highway that parallels it, and the fences along them. Satellite tracking has shown that gazelle move along the railway but do not cross it, despite better habitat on the other side. • An estimated 1500 Great Bustards remain in Mongolia. They will desert otherwise appropriate habitat if powerlines are con- structed, because they perceive the towers as perches for raptors. • In the steppe areas of Mongolia, there was a dramatic decrease in the number of saker falcons, a species that is valuable in the world market and can be legally exported from Mongolia under license. Dundgobi and Dornogobi experienced close to 100 percent population loss. In 2006 the government issued a decree establishing a quota of 300 birds per year and high fees for falcon export. • Snow leopards’ main prey are ibex, wild sheep, ungulates and marmots. Decreases in the populations of these food sources have directly affected leopard populations and have also led to increases in attacks on domestic herds, which in turn have provoked killings by herders. • Permanent human settlements, mining development and fences degrade wildlife habitat by restricting access to water. • Ecotourist encampments are often established near watering places to increase the probability of animal sightings. Their pres- ence disturbs wildlife and, if continued for several days, deprives them of water. • Illegal hunting is related to declining numbers of snow leopard, khulan and Mongolian gazelle (hunted for meat), and wild sheep (hunted for horns). Excessively liberal quotas for legal hunting of wild sheep have also contributed to their decline. • There is a substantial illegal wildlife trade in Mongolia, both internal and for export. Body parts and small numbers of living animals can be found in markets in Ulaanbaatar. Traffic peaks in January, when temporary border crossings are open to facili- tate shopping in China. Shipments move inside tires or in containers under other loads, including coal. Mitigation of this threat will require detailed 8.3 Road traffic assessment of wildlife migration patterns, determination of crossing locations, and appropriate Over the next few years, the coal mines at Tavan design of wildlife crossing facilities. This has the Tolgoi and Nariin Sukhait/Ovoot Tolgoi will generate potential to significantly raise the costs of railway large volumes of road traffic. In 2009 there could be construction. around 600 truck movements per day, increasing to 1,300 truck movements per day or nearly one every Construction of railways and roads will also minute. At Nariin Sukhait, the volume will likely be involve land degradation at quarries, borrow pits, 350 movements per day, or one every four minutes, asphalt plants, construction camps and storage in 2009. These mines will eventually switch to yards. Local environmental authorities must set railways, but smaller mines in the area will continue and enforce appropriate construction standards. to use trucks to transport ore to the nearest railways. Contractors should be required to implement waste Effects of large volumes of road freight include: management plans, and to rehabilitate areas used for camps and yards. 91 Southern Mongolia infraStructure Strategy • Without improved roads, the trucks spread • Ensure fuel efficient technologies in the con- across the landscape, resulting in multi-tracking struction of new coal-fired power plants; and huge expanses of degraded land. • Expand Mongolia’s use of zero-emissions en- • During summer, dust from unimproved roads ergy production, which currently includes wind causes human and animal health problems. and hydro-electric generation; • The presence of large traffic volumes disturbs • Establish policies which encourage reduction of and repels wildlife. energy demand. • Higher traffic volumes increase the risk of ac- Southern Mongolia’s coal-fired power plants cidents with humans, livestock and wildlife. could exceed 2000 MW capacity. Such power plants could produce 50-100 tons of ash per hour, containing large quantities of trace elements such Mitigation of these problems involves improving as phosphorous, chlorides, nitrates, sulfates, and roads and requiring trucks to use the improved arsenic. It is possible to use ash as an input into roads, enforcing loading and speed limits, and cement, but typically the quantities of ash exceed prohibiting road haulage during hours of the day commercial uses, and the remainder must be when wildlife movements are most likely. In the disposed in an environmentally sensitive fashion. medium term, shifting ore freight to railways will significantly reduce the impact of road freight. Transmission lines may cause disruption for endangered bustards, which perceive the towers as figure 8.1 dust generated by a coal truck perches for raptors. 8.5 Water abstraction As discussed in Chapter 5, demand for water resources in Southern Mongolia could reach 350,000 m3 per day by 2020. Some of this demand will be satisfied drawing on natural recharge of aquifers, but there will also be considerable extraction of non-renewable fossil aquifers. This water extraction will result in a lowering of the water table in deep aquifers, potentially affecting the condition of shallow aquifers. This could pose some of the most serious threats to the region’s ecology if it is not Higher volumes of truck traffic will also produce carefully monitored. If negative effects of water greater emissions of carbon dioxide, nitrogen oxide abstraction are observed in a particular location, and carbon monoxide. One truck making a roundtrip alternative sources of water supply will need to be from Oyu Tolgoi to Gashuun Sukhait will produce an considered. estimated 2,020 g CO2, 320 g NOx, and 220 g CO. Across the region and until railways are built, trucks As mine excavation proceeds, water seeps into from Tavan Tolgoi, Oyu Tolgoi, Nariin Sukhait and the mine from neighboring rocks. This water needs Ovoot Tolgoi may produce around 3 tons of carbon to be pumped out in order to prevent the mine dioxide per day, contributing to global warming. from flooding. The process of mine “dewatering� drains water from the surrounding area, potentially 8.4 Energy affecting springs and vegetation in a radius of 3-7 kilometers around a mine. For the mines of Tavan As a signatory to the United Nations Framework Tolgoi, Oyu Tolgoi, Nariin Sukhait, and Ovoot Convention on Climate Change, Mongolia has an Tolgoi combined, the affected area could total obligation to contribute to the mitigation of climate around 31,000 hectares. Mitigation measures for change effects. While Mongolia’s growth is likely mine dewatering need to be put in place as part to be highly dependent on extractive industries, of each mine’s environmental management plan. including coal mining and the export of coal-based Possible measures include planting and protecting electricity, there are various measures that can be replacement vegetation to offset unavoidable taken to reduce Mongolia’s own carbon emissions: vegetation loss. • Ensure appropriate pricing for energy, which as a minimum means that prices should cover the full costs of production; 92 Southern Mongolia infraStructure Strategy 8.6 Urban development occur in soum centers, but much of it will locate along the haul routes from the mines to their Chapter 2 suggests that an additional 80,000 markets. Adverse environmental and social impacts people may need to be housed in areas close to the can be significant if induced development is allowed mines, within the next five years. The new towns to occur without any controls. will have a direct effect on the environment through the land that they occupy, and will also contribute 8.8 Cultural and natural heritage to demands for water and electricity. Local residents are concerned to ensure the Towns also produce large quantities of waste protection of cultural and historically important water and solid waste. Mongolians consume about heritage sites, both for their inherent cultural 120 liters per person per day, and produce almost importance and for their potential tourism value. as much waste water. Mongolians produce about Examples of vulnerable sites and artifacts include 0.6 kg of solid waste per person per day. For an Palaeolithic and Bronze Age artifacts, ancient additional population of 70,000, this implies copper mines, petroglyphs, dinosaur eggs, “ovoo� production of around 8,400 m3 of waste water per (rock piles with traditional cultural significance), and day, and 46 tons of solid waste per day. natural sites with sacred significance. As populations increase it will become increasingly important to treat waste water, because of the figure 8.3 ovoo in ulzit Soum, dundgovi increased risks of contamination of groundwater supplies. Current solid waste management in the area is inadequate (Figure 8.2), and additional population will only aggravate the situation. Proper solid waste management needs to be implemented, including covering solid waste rather than allowing it to be blown across the countryside. figure 8.2 Solid waste dump outside dalanzadgad In some cases, obliteration will be an unavoidable impact of mining, and will need to be considered as part mining environmental impact assessment. The ancient copper mines that are in the future open pit area of Oyu Tolgoi are an example. In other cases, protection and preservation may be possible. The Mongolian Protection of Cultural Heritage Law requires a developer to see the advice of MASIA in the case of projects that could disturb archaeological sites and to obtain its approval before undertaking activities that could damage or destroy 8.7 Induced development them. It may also be possible to relocate small shrines, with the consent of local traditional leaders. Induced development is development that takes place because of the mining but not as part Developers may also be enlisted in the effort of the mine and ancillary facilities or supporting to protect such cultural and natural heritage. For infrastructure. It is, in effect, unplanned, but some example, Ivanhoe Mines is protecting petroglyphs of it is a logical result of the growth in mining, and in its project area, and has contributed funds much of that fulfills needs for essential commodities for restoration of the main stupa that had been or services, such as markets, specialty shops, destroyed at the Demchig Monastery ruins, or workshops, petrol stations, hotels and restaurants. “World Energy Center�. There are also unplanned developments that are predictable but undesirable; this may include prostitution, drug dealing, and illegal trade in plants and animals. Some of the induced development will 93 Southern Mongolia infraStructure Strategy figure 8.4 restored Main Stupa at demchig animal crossings, taking account of the animals’ Monastery ruins, khanbogd Soum preferences and migration routes. • study the migration paths of the herds before completion of new links, to ensure that any changes can be monitored. Table 8.1 summarizes measures that can be taken to address the likely environmental consequences of Southern Mongolia’s development. A significant burden will fall on the soum and aimag governments. Soum governments will have to prepare their towns for rapid increases in population, and deal 8.9 Current Priorities with the associated environmental consequences. Existing soum government staff are small, and do Perhaps the most significant immediate impact not possess all of the skills that will be required, of Southern Mongolia’s infrastructure development including planners, building inspectors, and health will be the construction of major land transport links, officers. Capacity building and enhanced budgets and increases in traffic along these routes. This has will be required for the soums to deal with their new the potential to be highly disruptive to the migration responsibilities. of khulan and Mongolian gazelles. Priority actions to deal with this threat include: Aimag governments will face the same sorts of challenges as soums in terms of capacity and • adapt plans for road and railway construction budgets. They should also be given increased roles to ensure they provide ample opportunity for in approvals processes for environmental impact assessment. table 8.1 responsibilities for impact Management activity Management Measures implementation responsi- oversight responsibility bility • Implement reclamation plan Development of mines and on- • Maintain site security • MNET and SSIA officers • Mining company site facilities • Implement environmental impact assessment and in aimags environmental management plan. • Design and construct facilities for livestock pas- • Ministry of Food and sage Agriculture to design crossings for livestock; roads contractor or mining • MRTCUD to ensure company to construct. highway and railway • Investigate wildlife migration and movement • Academy of Science and designs include crossings patterns. Determine appropriate locations and MNET to design wildlife as recommended. Development of roads and designs of wildlife crossings, and construct them. crossings in collaboration railways with conservation NGOs and other experts. • Use quarries and borrow pits approved by local environmental authorities, and comply with standards for operation and reclamation • Contractor or mining • MNET and SSIA officers • Prepare and implement waste management plans company. in aimags. and restore construction areas. • Offset bustard habitat degradation with im- • Power plant developer. • MNET proved habitat elsewhere • Comply with best available technology to control emissions. • Power plant developer. Development of electric power • Recycle fly ash. Construct and operate ash • MNET and MME infrastructure. disposal facility. • Power plant operator. • Use low-sulfur coal. • MNET and SSIA officers in aimags. • Power plant operator. • MNET and SSIA officers in aimags. • Offset loss of shallow water in the area of mines through restoration, enhancement and protec- tion of other springs and wells. Mine dewatering. • Mining company • MNET officers in aimags. • Monitor condition of trees, irrigate to avoid loss if possible. Plant and protect replacement trees in other locations to offset unavoidable losses. 94 Southern Mongolia infraStructure Strategy • Obtain more complete data on water resources. • Establish a new Ground- • MNET-Water Authority water Management • Limit development in SGR to that which water and Information Center resources can accommodate, or construct pipe- (GMIC) – new institution lines from rivers to the north. • Aimag governors; new • Insist on state of the art water conserving facili- regional development co- Water for coal washing and ties and equipment for all new industrial or com- ordinating body; MRTCUD • GMIC; MNET-Water mineral processing mercial development • Line ministries; aimag Authority government • MNET • Improve road surfaces and thereafter restrict • Mining companies; • MNET trucks to the improved road lanes, MRTCUD • enforce loading and speed limits, prohibit off- • Mining companies; police • MRTCUD; MNET and road driving by truckers; SSIA officers in aimags • assist residents in relocating homes and herds if • Soum governments; min- • MNET officers in aimags dust cannot be mitigated. ing companies • Long-term fix is to shift most hauling to rail. • Mining companies; • MRTCUD MRTCUD • Enforce dust control measures in EIAs for mines • SSIA officers in aimag • SSIA and coal depots. centers • Eliminate transshipment operation at border (to • Government of Mongolia minimize coal dust) Transport of mine products • set and enforce hauling schedule that provides • Mining companies; truck- • MNET by road for no traffic during hours in which wildlife are ing companies; aimag most likely to cross the road. governments; MNET • set and enforce regulations against drinking and • Police at aimag level • MRTCUD driving • make accidents including those involving wildlife • Mining companies • SSIA reportable safety incidents under mining com- pany rules with disciplinary action as appropri- ate, including termination for alcohol-related incidents. • Require mining and trucking companies to • SSIA in aimag centers • SSIA inspect trucks annually and test for compliance with air emission standards • Local government to enforce basic good practice • Soum government • Aimag government in constructing new housing, shops, etc. • Develop new boreholes and provide treatment • Soum government • Aimag government systems for public supply • Construct treatment works for entire soum popu- • Soum governments • Aimag government lation, as on-site systems will not accommodate the larger populations and there are no collection and treatment systems in place now Population influx and develop- • Poor solid waste management already is having • Soum governments • Aimag government ment of towns adverse impacts. Construct solild waste collec- tion and recycling/disposal facilities to serve the entire soum populations. • Design and operate power and heating plants • Soum governments • MNET and SSIA officers according to national standards. Coordinate ash in aimags disposal with solid waste management. • Provide proper storage and treatment/disposal • Soum or aimag govern- • Ministy of Health; SSIA facilities for medical waste and train medical ments personnel in approved methods • Update land use plans and enforce compliance. • Aimag and soum gov- • MRTCUD. Induced development follows • HIV/AIDS awareness and prevention programs. ernors mining and related infra- Enforce prohibitions on illegal activity. • Aimag and soum gover- structure development. nors, Ministry of Health officers in aimags, SSIA MNET – Ministry of Nature, Environment and Tourism MME – Ministry of Minerals and Energy SSIA – State Specialized Inspections Agency MRTCUD – Ministry of Roads, Transport, Construction and Urban Development 95 Southern Mongolia infraStructure Strategy 9 planning and inStitutionS key PointS As a basis for discussion, some possible new institutions are proposed: • Southern Mongolia Infrastructure Council, with stakeholder representation, to provide regular feedback on the Government’s plans. • Southern Mongolia Infrastructure Coordination Unit, to manage and coordinate all tasks associated with developing infrastructure in the region. • PPP Unit, to develop PPP transactions • Risk Management Unit, to manage the government’s exposure to contingent li- abilities in infrastructure PPPs. • International Infrastructure Expert Advisory Panel, who can provide high level ad- vice to the Government from time to time. • Multi-sectoral infrastructure regulatory agency, combining the functions of existing economic regulation agencies. • Southern Mongolia Groundwater Management and Information Center to gather information about the extent of water resources, and propose management guide- lines. There is a need for single high level agency which is responsible for taking the lead on development of Southern Mongolia’s infrastructure, and ensuring that other agen- cies meet timetables. Developing and implementing a detailed towns infrastructure strategy for Southern Mongolia will • For each of the main mining areas, develop a require an assessment of the tasks to be performed, separate town development plan: identification of the skills required to perform • Make projections about the likely mine worker those tasks, and the establishment of institutions populations and additional influx over the next that mobilize skills in an effective fashion for the 5 years. performance of the tasks. • Decide what sort of township development will be used (eg FIFO, integrated community, etc). 9.1 Tasks to be performed • Decide who will be responsible for developing The preceding chapters have suggested a specific town development plans. number of high priority actions required in order to • Consider all of the plans together, and consider permit the major mines of Southern Mongolia to whether there will be adequate facilities for con- be developed in a timely fashion. Additional actions struction workers who may move from mine to may eventually be required for the longer-term mine. development of the region, such as decisions about • Decide whether financial contributions to town- how to develop more value-added industries in the ship development will be sought from the asso- region, or the development of additional railways. ciated mining companies, and on what basis. But simply achieving the immediate infrastructure • Develop financing, construction and operational priorities will represent a huge organizational plans for the provision of town services (ie what challenge. High priority actions identified in previous will be the roles of mining companies, different chapters include: tiers of government, and specialist private infra- structure service companies?) 96 Southern Mongolia infraStructure Strategy • Implement the particular infrastructure service • Ensure transparent and equitable sharing of model decided for each particular form of in- mining revenues; frastructure (eg a PUSO might provide water, a • Provide adequate town services, including ac- private firm might supply town electricity, a min- commodation, urban infrastructure, health, ed- ing company might build housing for its own ucation, law and order, and general administra- workers, and private property developers might tion; be given the right to develop housing for other • Identify vulnerable groups, and develop strate- new arrivals). gies to assist their transition. electricity: environment: • Procure a private investor for power plant num- • Identify appropriate arrangements for wildlife to ber 5 – hiring of an internationally experienced cross road and rail facilities; transaction adviser is recommended; • Provide environmental offsets (ie watering points • Complete negotiations with China concerning and trees) to compensate for areas affected by the development of a power plant at Shivee mine de-watering; Ovoo – again, an internationally experienced • Expand involvement and capacity of soum and adviser is recommended. aimag environmental staff to improve environ- • Investigate plans for the development of export mental impact assessment and management. power plants located in Omnogovi (for example, a 2000 MW power plant, using coal middlings at Tavan Tolgoi). 9.2 Functions and required skills • Launch the process of development of a power Implementing a detailed infrastructure strategy plant to serve the Tavan Tolgoi area (either re- will require several stages of decision-making, quire a mining company to build an appropri- each with its own specialist skills. Stakeholder ately dimensioned plant, or procure an indepen- consultation is required to build a national dent operator); consensus around what needs to be done, and who will be responsible for what. As a consensus about land transport: the main options emerges, decision-makers need • Prepare licenses for private railways, ensuring sufficient information to choose between options, that the operating licenses facilitate the devel- and sufficient authority to commit to particular opment of a competitive mining industry. options. Resources need to be mobilized to • Build up regulatory capacity within the Mongo- permit the implementation of the chosen strategy. lian Railways Authority. Different strategy choices will imply different sorts of required skills for the implementing agency. For example, a decision to enter into PPPs would require Water resources: skills which are currently in very short supply within • Collect and compile all existing information on the Mongolian Government. groundwater resources; • Conduct new studies and investigations to bet- Stakeholder consultation and consensus ter determine the availability of water resources building in areas close to the main demand centers; The quality of policy decisions can be improved • Produce and regularly update a water resource through information about the concerns of various management plan for the region; stakeholders. Seeking the inputs of stakeholders • Monitor the abstraction of water from deep can alert decision-makers about issues and concerns aquifers. they may have overlooked. It also helps to build up acceptance of the final decisions by the broad community. Stakeholder consultation does not Social impacts: mean that the stakeholders views need to be • Establish training and education institutions to accepted, and it may not be possible to reach address the labor skills needed by mining and complete agreement. associated industries; • Provide business incubation and support facili- Having identified a particular topic on which ties to assist local entrepreneurs; stakeholder input is sought, affected stakeholders should be identified. Depending on the issue, 97 Southern Mongolia infraStructure Strategy relevant stakeholders could include: be conveyed to the stakeholders in writing, or in a special public event? The communications strategy • members of Parliament; should include a means of reporting the views • the different tiers of Government (ministries, of those consulted, and stakeholders should be aimags, soums); informed about how the information they have • mining companies; provided will be used, and when decisions are • local communities; expected. • the general Mongolian public; • private infrastructure investors; Where public events are organized, special • infrastructure financing institutions; skills can be required to gather people’s views and • non-government organizations focused on spe- ensure that all views are fairly represented. Where a cific issues; lot of time is required from stakeholders, it may be • neighboring countries affected by particular de- desirable to pay for the time of individuals who can cisions; represent their groups. • the international donor community. financial Planning and risk Management Financial planning is required to ensure that For stakeholder groups with many individual adequate resources are available for implementation members, such as local communities, decisions need of strategy. Indicative financial estimates should be to be made about whether all members should prepared to permit decision-makers to understand be consulted or whether it is possible to identify the cost of different policy options. individuals who can represent the views of the Table 9.1 suggests that over US$ 5 billion of whole group. infrastructure investment will be required by 2015. A communications strategy is needed to ensure The estimate draws from the previous chapters, and that the stakeholders are aware of the issues that is focused only on the highest priorities required are being debated, and informed about the choices to commence major new mines and house the which are under consideration. For example, will associated population. It does not include, for stakeholders be informed by email, advertisements in example the cost of a power plant at Shivee Ovoo, the media, letters, etc? Should detailed information or the cost of railways other than the proposed ERR and MAK railways. table 9.1 infrastructure investment needs (to 2015) US$ million Observations towns 1,454 Buildings 1,277 Drinking water 10 Options include financing and delivery by governments, PUSOs, mining Waste water 28 companies, and/or property developers. A complex series of decisions Power and heat 125 is required. Town roads 4 Solid waste management 4 There are likely to be several different transactions involved in securing investors for Transaction management 6 different services for different towns. Complexity and diversity of approaches will raise transaction costs. land transport 800 Tavan Tolgoi – China 700 Will be financed and operated by Energy Resources Rail Nariin Sukhait – China 100 Will be financed and operated by MAK Roads 350 Includes Road Master Plan roads, plus Nariin Sukhait to Dalanzadgad sealed road. Some sections will be privately constructed. electricity 2,711 Oyu Tolgoi 450MW 750 Will be financed by Ivanhoe Mining South Gobi interconnector 207 TPP #5, Ulaanbaatar, unit 1 450 Although an IPP is planned, at least some risks will be borne by the Government. Oyu Tolgoi plant 450 Likely to be financed by Ivanhoe Mining Tavan Tolgoi plant, unit 1 450 This plant could be privately developed. A much larger plant could be built to export power to China. Egiin HPP 400 Likely to be largely government financed. Transaction advisers for an IPP, including all the necessary studies, can cost over $1 million Transaction management 4 per transaction. Water resources 262 Investment 224 Some investigation and investment will be financed by mining companies. Investigation 35 Institutional strengthening 3 total 5,177 98 Southern Mongolia infraStructure Strategy The starting point in developing a financing events occur and involve no immediate cost to the plan for Southern Mongolia’s infrastructure is an government, they can seem attractive to political estimate of how much money the Government is decision-makers, and they rarely appear in the able to commit from its own revenues. Mongolia government accounts or have funds budgeted to can also consider the mobilization of donor cover them. resources. Donors typically provide funds at varying But guarantees do come due. If there is a 5% degrees of concessionality, ranging from grants probability of an event occurring which triggers through to rates somewhat below market interest payment by the Government of a $50 million rates. As Mongolia’s economic development guarantee, and the probability is spread evenly proceeds, donors will reduce the availability of the across 5 years, then in any individual year the most concessional forms of financing. However, for expected payment is $500,000. But if the event projects linked to mining developments, it should actually occurs, the Government’s liability is $50 still be possible to obtain loans from donors at million. attractive interest rates. In addition, donors will be able to help Mongolia to leverage private funds by providing guarantees to cover particular risks. When the Government makes guarantees it In allocating resources, including Mongolian should ensure that it has the financial capacity to fiscal revenues, donor funds and private financing, honor them. The amount that should be set aside is trade-offs need to be made between Southern a subject of debate, and relates to the Government’s Mongolia’s infrastructure versus and other possible willingness to take risks, as well as an assessment government activities elsewhere in the country. of the probabilities involved. At a minimum, the Medium-term expenditure planning would help to Ministry of Finance should report publicly on the identify the availability of fiscal and donor resources guarantees that are given and the maximum liability that can be devoted to Southern Mongolia’s of the Government. The Ministry could also be infrastructure. involved in assessing the probabilities of guarantees coming due, and setting limits on the extent of risks Almost all of the infrastructure required for undertaken. Southern Mongolia’s development could be built, financed and operated by the private sector – Policy formulation either mining companies or specialist infrastructure For new policies to be adopted, someone must companies. Given Mongolia’s current fiscal deficit, have authority to make decisions, and that person private financing of infrastructure is likely to be or agency must be given the information needed to attractive. But private investment in infrastructure make a well-informed decision. can only be secured if private investors are The issue of who has authority to make confident they will earn a reasonable return on decisions can become difficult when decisions cut their investments, implying that tariffs should cover across institutional boundaries, either because they costs. Particularly where infrastructure services involve multiple sectors or because they involve will be provided to retail consumers (eg drinking multiple tiers of government. For example, decisions water), the implied tariff levels may cause political about where towns should be located in Southern difficulties in gaining acceptance for private Mongolia will involve multiple government agencies investment. Decisions about whether or not to rely as well as all tiers of government. Even if it is clear on private finance for infrastructure must balance who should make the relevant decision, ensuring the the fiscal pressures facing the government against decision is well-informed will require inputs from all a candid appraisal of whether the political system of these different stakeholders. It will be a complex can provide a sufficiently attractive environment for process to gather the necessary information to private investment. make decisions, and to build consensus about those Reliance on private investment will bring with decisions. it demand for new skills in the Ministry of Finance Policy development is more effective if decision- related to the evaluation of contingent liabilities. makers are given a range of options to choose Particularly for the initial PPP transactions, private from, with the advantages and disadvantages of infrastructure investors will require government each option clearly explained. In most countries, the guarantees in respect of certain classes of risks. skills to present policy options can usually be found Because guarantees come due only if particular within ministry staff. 99 Southern Mongolia infraStructure Strategy Where ministry staff can sometimes be weak, • Legal: knowledge of both the local legal frame- however, is in their consultation and project work and best international practice in the draft- management skills. As discussed above, most ing of legislation and contracts. governments could improve their policy-making • Technical: knowledge of the engineering and through the use of stakeholder consultation. The operational aspects, including investment re- process of policy development and coordination quirements. should be regarded as a task of project management, • Other specialist services: for example, public recognizing that a whole series of inter-related relations, human resources, environmental and decisions and actions need to be undertaken. For social analysis. example, reliable information about expected One of the first steps in developing a proposed mining company employment is required in order to PPP is to determine the nature of private sector make sensible decisions about town locations and involvement (investment, ownership, operation), the services that will be provided there. Activities contractual form (full ownership, concession, lease, that are on the critical path need to be regarded management contract), duration, and potential as high priorities, and an individual with sufficient regulatory oversight. Advice on these issues is usually authority should be responsible for ensuring that given by economists experienced in PPP design. all of the necessary pre-conditions are achieved in It is possible that project-specific legislation or order to meet critical deadlines. licenses will be required to permit a private firm development of PPP transactions to invest in or operate an infrastructure service. Particularly where private investment is sought, Development of these legal instruments requires the Government will need to develop new skills in specialist technical and economic expertise to advise transaction preparation and management. Where a on their content, and legal skills to ensure they particular infrastructure project is to be implemented effectively implement the desired choices. by the public sector, the Government of Mongolia Internationally experienced financial advisers can call on the traditional skills of line ministries and are typically required to ensure the success of a state-owned enterprises. But different approaches PPP bidding process. They will be closely involved will be required to introduce PPPs. in the design of the proposed contract prior to the The quality of project preparation is key to a bidding process, as well as the terms and conditions successful PPP transaction. Before potential bidders of the bidding itself. Public relations advisors will be are invited, the Government should have a very involved when the government is in a position to clear idea of the services it wants performed by the alert potential investors of a specific project. private sector, and should provide potential bidders Lawyers will draft the bidding documents, and with detailed information about the parameters of will have primary responsibility for ensuring that the the project. final commercial agreement is properly reflected The main skills required include: in the binding PPP contracts, including possible supplier, construction and maintenance contracts. • Overall transaction management: project man- Lawyers may also be involved in reaching financial agement skills are required to bring all of the close. Contracts will often involve a set of conditions different pieces of work and advisers together in that must be met before the contract is fully effective. timely fashion, and with adequate quality. These may relate to finalizing, for example, the • Economic: knowledge of economics (and es- finance or concluding subsidiary contracts. The legal pecially regulation, pricing and the incentives advisor will verify that these conditions are met. created by difference market and industry struc- tures). Any one reform is likely to have a num- The ultimate success of a PPP project depends ber of inter-linked elements to it – establishing on the government. But governments embarking a market and industry structure, deciding on an on introducing PPPs need not, and should not tackle appropriate form of ownership and setting a le- the reforms unaided. Specialist advisors can provide gal and regulatory framework. Economic exper- the requisite expertise and experience to ensure the tise should be fed into all these areas. success of the reform process. Key factors in the use • Financial: knowledge of the process of intro- of specialist advisers include: ducing the private sector, the sale or lease of • setting a realistic timetable; A consultancy proj- infrastructure assets and the impact of reform ect undertaken over too short a time runs the decisions on the ability to attract private finance. risk of generating inappropriate advice. Equally 100 Southern Mongolia infraStructure Strategy important, rushing to implement correct advice advance, and bids are made on who will provide can cause problems (e.g., potential investors are the best price, there should be little requirement for not sufficiently informed about the opportunity commercial negotiation, and the Government can and thus do not bid; or stakeholders feel they assure itself of a good deal. were not consulted and so resist the reform ini- But there will be cases where negotiation tiative). skills are required in the development of Southern • setting a realistic budget for advisers. A well- Mongolia’s infrastructure. In such cases care should prepared project will have little difficulty in find- be taken to entrust the authority to undertake and ing finance. A poorly prepared project is unlike- conclude negotiations to individuals with the right ly to be financed by the private sector, and may skills. In some cases, the importance of the matter languish for years. When procuring hundreds of will require that the outcome of these negotiations millions of dollars of infrastructure investment, should be ratified by the Parliament. Where it is worthwhile spending a million dollars to get Parliament seeks reassurance about the negotiated good quality advice. Table 9.1 includes a rough terms, reference should be had to the advice of estimate of the funding that could be needed to outside experts. If Parliament does not ratify the prepare various PPP transactions. negotiations, the matter should be returned to a • providing the right incentives for advisers. At- specialist negotiator with revised terms of reference. tention is needed to the process of procuring advisers, to ensure that good quality advisers are regulation obtained, and to ensure that their contract pro- Economic regulation of infrastructure services vides them with incentives to assist the Govern- has three main aims: to protect consumers from ment reach financial closure on the best possible abuse by firms with substantial market power, to terms for the Government. box 9.1 ifc advisory Services in infrastructure IFC’s Advisory Services in Infrastructure, part of the World Bank Group, provides assistance to national and municipal govern- ments for structuring and implementing sustainable private-sector participation in infrastructure and social infrastructure. Established in 1989, IFC’s Advisory Services in Infrastructure has completed over 165 transactions in more than 60 countries and is the only multi- lateral institution to offer direct advisory services to governments on implementing private-sector participation transactions. IFC’s reputation for competence, transparency, and fairness, allows it to play the role of neutral partner to balance each party’s interest in a transaction, reassuring foreign investors, local partners, other creditors, and government authorities.· IFC promotes good corporate governance principles and high environmental and social standards in every transaction it undertakes. Some examples of transactions led by IFC Advisory Services include: • When the state of Ceará in Brazil sought private sector investment in its power sector, IFC privatized the state power utility, structured and bid out a 240MW independent power project, and set up a regulatory agency to ensure transparency in the sector. Ceará reaped $880 million for the utility, 27% above the minimum price. • When the city of Bucharest’s municipal water company had poor performance investment needs of more that $1 billion, IFC designed a 25 year concession with strict obligations for improving coverage, water quality and customer service. IFC generated strong interest in the tender from well-qualified bidders, and the winning bidder was selected based on the low- est average tariff bid for the life of the concession. The tender resulted in reduced rates and a strong institutional partner. • When Air Tanzania was in financial difficulties, IFC advised the Government of Tanzania on its privatization. South African Airways was the winning bidder, paying $20 million for a 49% stake. SAA shares the Government’s objective of building Dar-es-Salaam into a hub for regional and intercontinental traffic. commercial negotiations support investment by protecting investors from Commercial negotiations require special skills, arbitrary action by government, and to promote and those with the strongest commercial skills are economic efficiency.3 unlikely to work in government or in Parliament. Carefully managed bidding processes can minimize Regulating infrastructure is complicated by three requirements for commercial negotiation. If the related considerations. First, prices for infrastructure government pre-selects a group of suitable quality services are usually political. There are no votes in bidders, specifies all terms and conditions in raising prices of electricity or water. 3 This section draws from Warrick Smith (1997), “Utility Regulators – Roles and Responsibilities�. 101 Southern Mongolia infraStructure Strategy Second, investors are aware of these pressures mation required to decide the nature of services and of the vulnerability of their usually large, that will be provided in new towns); long-term, and immobile investments. Unless a • provide a focal point for the development of government has made a credible commitment to new skills, and ensure that limited capacity is rules that ensure an opportunity to earn reasonable concentrated in one institution with the scope returns, private investment will not flow. Weak to be applied widely (eg PPP transaction prepa- credibility will be reflected in higher capital costs for ration; economic regulation of infrastructure). new projects, and thus higher tariffs. Southern Mongolia Infrastructure Council Third, the long-term nature of most In order to ensure systematic and regular infrastructure investments makes creating credible consultation with stakeholders, a Southern Mongolia commitments difficult. Highly specific rules, if Infrastructure Council could be established, with considered sustainable, can provide assurance to representation from the national government, investors and lower the cost of capital. But they aimag and soum governments, mining companies, make it difficult to adjust regulation to unforeseen and NGOs. The council would hold regular meetings developments, including changes in technology in which the stakeholders discuss their plans. and market conditions. They also make it difficult One model for the Council would be purely to tailor responses to situations and to provide as an advisory body, and forum for stakeholder incentives for efficiency. There is thus an important consultation. For example, in Western Australia, tradeoff between reducing the risk of expropriation, the Pilbara Development Commision, a state and with it the cost of capital, and retaining the Government agency, established the Pilbara flexibility to pursue efficiency and other objectives. Dialogue. The Dialogue consists of roundtable In designing regulatory agencies, most countries discussions between senior representatives from opt to retain some degree of flexibility in setting prices the resource sector, State and Federal Government by entrusting a degree of discretion to a decision- agencies, Local Government and other relevant maker. Many countries, including Mongolia, have stakeholders. The discussions are intended to entrusted this discretion to regulatory agencies promote coordinated strategies and actions that are intended to be independent from political between stakeholders involved in the development influence. To guard against misuse of this discretion, of the region. regulators are typically required to make their An alternative model would give the Council decisions having regard to various technical factors, the authority to make decisions and to finance such as complicated calculations about the costs infrastructure. If the Government seeks large of service delivery, the amount of capital invested, financial contributions from mining companies to and reasonable rates of return. Performing these the development of the region, it may be desirable functions require specialist economic, accounting to give mining companies more than an advisory and legal skills. role in the development of plans for how the 9.3 Possible new institutions money will be spent. The development of Subic Bay in the Philippines presents an example of how The following are some suggestions for new private companies can play a decision-making role institutions which could help to perform the in infrastructure development and financing. functions identified above. The proposals are for discussion purposes, and are not intended as Southern Mongolia infrastructure coordina- World Bank recommendations. In many cases, the tion unit functions of these proposed institutions could be Existing planning for Southern Mongolia has performed by existing ministries. But establishment tended to focus on long-term visions for the region’s of new institutions may be desirable in order to: development. In order to get to the long-term, there is a need to focus on the short-term, with plans that • perform new functions which are not currently identify what needs to be done this year, next year, performed (eg systematically consult affected and the next three to five years. A possible way of stakeholders; manage exposure to contingent achieving this would be to establish an coordination liabilities in PPPs); unit with project-management skills, the ability • better coordinate between functions that are to bring together information from a variety of currently performed across multiple government government agencies and other sources, and the agencies (eg bringing together all of the infor- authority to compel other agencies to act. 102 Southern Mongolia infraStructure Strategy box 9.2 Subic bay Metropolitan authority When the US Government’s lease on Subic Bay expired in 1992 the Government of the Philippines created the Subic Bay Freeport Zone (SBFZ) to fill the void left by the US Military’s departure. Together with the neighboring Clark Air force Base, Subic Bay Naval Base was, after the Philippines Government, the largest employer in the country. The Clark and Subic Bases directly employed more than 68,000 Filipinos and injected $28 million a day to the local economy. Control of the SBFZ was given to the Subic Bay Metropolitan Authority (SBMA), a 15 person board appointed by the President of the Philippines with the mandate of developing SBFZ into a self-sustaining industrial, commercial, financial, and investment and academic center. The board includes two representatives from national government, five from the private sector, and eight from local government units. The Privatization and Commercialization Office (PCO) was established as a subsidiary of SBMA. The PCO was established to aid SBMA in privatization of four primary sectors. In 1997, the PCO oversaw the first public private partnership in the Philippines water sector with the privatization of SBFZ’s water supply and sewerage system. The Subic Water and Sewerage company serves as the treatment and service provider to the SBFZ as well as the nearby city of Olongapo. SBMA is the regulator of water service provision. The electricity distribution system has also since been privatized, and a number of private generating stations have been planned for the SBFZ. A similar arrangement was implemented at the former Clark Air force Base. Control of the new Clark Special Economic Zone was handed to the Clark Development Corporation (CDC). Sources: see the background paper on urban development for references. Existing planning is fragmented across multiple actual exercise of such a power would be highly government agencies, with little effort to ensure disruptive to timely project delivery. To be effective consistency. In a workshop organized in May 2008 in the Mongolian context, it is suggested that a to discuss the Southern Mongolia Infrastructure coordination unit could be given responsibilities for Strategy, it was notable that the various line a specific set of tasks, with a requirement that line ministries had very different assumptions about what ministries report to the coordination unit with any infrastructure the various mines would need, and necessary information. Such an institution would different visions for how that infrastructure would require strong backing from the Prime Minister, and be provided. Systems have not yet evolved for the the support of other ministers. regular sharing of information between government Possible locations for the coordinating unit agencies, or for coordinated decision-making. might include the Ministry of Mines and Energy; the Ministry of Finance; the new National Development • A Coordination Unit could take various possible and Innovation Committee; or as a separate forms: institution reporting directly to the Prime Minister. • it could simply gather information and monitor If a coordination unit is given powers to manage the activities of line ministries, which would re- policy and project development and is located in a main responsible for the delivery of infrastruc- large central ministry, it will be important to limit ture projects. the responsibilities to specific tasks associated with • it could be given “step-in� powers to take over development of Southern Mongolia’s infrastructure. control of activities for which other line minis- If there are not some limits around the powers, the tries are responsible, when adequate progress is Unit would leave little role for other ministries, and not being made. would be too large and cumbersome to be effective. it could be given powers to manage all stages of policy development and project management for Rather than establishing a large planning Southern Mongolia’s infrastructure. department, it may be more effective to establish a small coordination unit with a small team with Mere monitoring and reporting may not be world class skills, direct access to the top level of sufficient to ensure timely project delivery. Without government, and a large budget. A recent review decision-making authority, line ministries may tend of the most successful reforming countries (only to ignore a weak coordination unit. “Step-in� 15 countries graduated from low income status powers might act as an incentive for line ministries to middle income status between 1965 and 2006) to improve their performance, but it is likely that 103 Southern Mongolia infraStructure Strategy found that many have relied on such small reform In Mongolia, the main PPPs to be developed teams. currently fall within the responsibility of the Ministry PPP unit of Mines and Energy, and the Ministry of Roads, A specialist unit could be established to assist in Transport, Construction and Urban Development. developing PPPs for the provision of infrastructure Some possible PPPs may also lie within the services. Internationally, there is a range of models responsibility of sub-national governments. If a of PPP Units, with functions ranging from the single PPP unit is established, it could be located in provision of advice to line ministries, through to either of the two national ministries, or in a central leading transaction development and approving the agency, such as the Prime Minister’s Office, Ministry final deal (Box 9.3) of Finance, or the proposed Planning Department. Mongolia does not have significant experience In many countries line ministries have resisted the in development of PPPs, nor does it have a large transfer of responsibility for PPP development to a number of potential PPPs. As discussed above, a central unit. If Mongolia wishes to establish a central wide range of specialist skills are required to manage PPP Unit it will require strong decision-making from a successful PPP transaction. Accordingly, it makes Government leadership, and/or good agreement sense to concentrate Mongolia’s scarce PPP skills in between the main line ministries affected. a single institution. Box 9.3 International Experience with PPP Units Around the world, Governments are turning to the private sector to provide a range of infrastructure services through public-private partnerships (PPPs). When well prepared, PPP transactions can lower lifetime costs of service delivery, improve service quality, and lower government financing requirements. But good preparation of transactions requires project management, careful background studies, con- sideration of a range of possible long-term consequences, and careful contract specification and bidding. The skills required to manage PPP preparation typically differ from traditional public sector skills. Many countries have had poor results from PPP programs, because they did not mobilize the right skills to manage PPP transactions. An increasingly common way to mobilize the right skills is to establish PPP units, as new agencies or as special cells within a cross-sectoral ministry such as finance or planning. Different governments have established PPP units to perform a wide variety of roles: • In some cases PPP units play a leading role in organizing and managing PPP transactions, with responsibility for taking the deal all the way to financial closure. • In other cases PPP units play a role in the approval of PPP transactions developed by line ministries. For example, in South Africa the Treasury relies on the PPP Unit to assess whether line agencies and provinces can meet the costs of proposed PPPs within their future budgets. • Many PPP units provide advisory support and funding to line ministries developing PPPs. This usually involves PPP unit staff act- ing as resources who can work with line ministries, but it can include additional funding to pay the costs of transaction advisors. • Most PPP units provide information and guidance on PPPs to other government agencies. This can include general resources on PPPs, such as international experience and customized guidance such as standard contracts or detailed procedures for procuring PPPs. Re- PPP Project- Fund- Project Contract Ap- source guidance specific ing for PPP developer monitoring proval center material advice preparation Andhra Pradesh, India ü ü ü ü British Columbia, Canada ü ü ü ü ü Gujarat, India ü ü ü ü ü ü ü Ireland ü Italy ü ü ü Netherlands ü ü ü ü Philippines ü ü ü ü ü ü South Africa ü ü ü ü ü ü United Kingdom ü ü ü ü ü ü ü Victoria, Australia ü ü ü ü If a line ministry has many PPP transactions to develop, it may make sense for the ministry to develop its own PPP capacity. But if a country has only a limited number of infrastructure PPPs to develop, it makes sense to gather the scarce transaction skills together in a single central unit. Source: Dutz, Harris, Dhingra, and Shugart (2006) 104 Southern Mongolia infraStructure Strategy risk Management unit Multi-Sectoral infrastructure regulatory The Ministry of Finance could consider the agency establishment of a Risk Management Unit (RMU), in As the role of the private sector increases in connection with its debt management functions. As Mongolia’s infrastructure, the role of economic a minimum, the RMU should report annually on the regulation of infrastructure services will become extent of any contingent liabilities created through increasingly important. Mongolia already has guarantees for infrastructure PPP projects. The RMU an Energy Regulator and a Railways Authority, could also report on the expected liability, having both of which are intended to perform functions regard to estimated probabilities of guarantees of economic regulation. As Southern Mongolia being called. The RMU might also play a role in the develops there may be a growing requirement for establishment of caps on the overall exposure to contract monitoring and economic regulation of contingent liabilities, and in the approval of project- additional infrastructure services. specific requests for government guarantees. Consideration could be given to consolidating Requests for guarantees to cover specific risks the various regulatory functions into a single in proposed infrastructure PPPs could be handled infrastructure regulation agency. Many countries using the following schema: have established multi-sectoral regulatory agencies 1. Implementing agency notifies RMU of intention for infrastructure services, such as state-level to apply for a guarantee. regulators in the United States, Australia, and Brazil, 2. RMU participates in the preparation of the proj- and national regulators in Jamaica and Costa Rica. ect Potential advantages of having a single agency 3. Implementing agency files a formal request for a include: guarantee • Sharing resources. Economists, financial ana- 4. RMU: lysts, and other professionals can work across verifies that required documentation is complete industries, and administrative staff and facilities - verifies compliance with criteria can be shared. This is particularly important in countries where regulatory expertise is scarce. - calculates contingent liability • Facilitating learning across industries. All utility - calculates project exposure industries have unique features, but the main issues in their economic regulation are substan- 5. Cabinet reviews and decides whether to issue tially the same: administering tariff adjustment the guarantee rules, managing the introduction of competition 6. Guarantee contract is drafted by the RMU and into traditionally monopolistic industries, and executed by the Ministry of Finance managing relationships with stakeholders. Hav- 7. Implementing agency competitively tenders the ing a single agency aids the transfer of insights project and experience between industries. 8. Private firm is selected • Reducing the risk of industry capture. A key 9. Guarantee contract becomes effective. challenge in utility regulation is to guard against the agency’s capture by the regulated industry. international infrastructure expert advisory If the industry and the regulator develop too Panel close a relationship, the industry may be able At various times the Government and the to divert regulatory effort to promote its own Parliament may be concerned about whether they interests rather than the public’s. The broader are getting the best possible advice, or whether the responsibilities of a multi-industry agency help outcomes of commercial negotiations represent to reduce this risk. a good deal for Mongolia. To assist in such circumstances, the Government may wish to hire Southern Mongolia groundwater Manage- a panel of internationally respected infrastructure ment and information center experts, paid on a retainer, who can be called upon The case for a groundwater management from time to time to review particular matters. and information center was laid out in Chapter 6. Current information about water resources is spread 105 Southern Mongolia infraStructure Strategy across multiple institutions. It needs to be brought 9.4 Current Priorities together to determine what is already known about the extent of groundwater potential. A program Priorities for overall planning and institutional of drilling, investigation, and studies is needed to design include: give a complete picture of groundwater potential, • Develop a financing plan for the various ele- and to make longer-term decisions. This program ments of the Southern Mongolia Infrastructure will be expensive, costing more than $200 million Strategy: what financial resources are available over several years. A suitable agency is required to to the Government? which works will be funded manage the program. from the budget? what will be donor-financed? The Groundwater Management and what will be privately financed? Information Center could be established under the • Develop a preliminary Government action plan Water Authority. It would act as a focal point for for tasks to be performed in support of the information and initiation of new studies, and could Southern Mongolia Infrastructure Strategy. develop guidelines for its sustainable allocation and • Identify the tasks to be performed under this ac- use. This would help to ensure that groundwater is tion plan, and the skills required. presented as a single resource. • Establish new institutions which pool together the available skills in order to support the Gov- ernment’s action plan. Ensure clear allocation of decision-making responsibility between Parlia- ment and Government ministries, and between ministries. • Develop staffing and capacity building programs for each of the new institutions. 106