China Eximbank provides preferential buyer’s credit for Phase 1 of Western Regional Road Corridor Development Project

Project narrative

On June 1, 2010, the Export-Import Bank of China and the Government of Mongolia signed a $300 million general loan agreement (line of credit) for various projects to be approved through subsequent individual (subsidiary) loan agreements. China Eximbank and the Government of Mongolia then signed a subsidiary preferential buyer’s credit (PBC) agreement on October 9, 2010 for Phase 1 of the Western Regional Road Corridor Development Project The borrowing terms of the PBC are unknown. However, it is known that the proceeds of the PBC were to be used by the borrower to finance 85% of the cost of a $59.02 million commercial contract with China Gezhouba Group Company Limited (CGGC), which was signed on August 4, 2010. The purpose of this project was to upgrade an 85.3 km road segment from Mankhan (Манхан сум or Manhan) Soum to Khovd (Ховд) and a 60 km road segment from Olgiy (Өлгий or Ulgii) Province to Khashaat Davaa route (Khashaat pass) within Tolbo Soum (Толбо сум). The project involved upgrading the original earth road (or gravel road) to a 7 meter-wide asphalt concrete road with a 10 meter-wide roadbed. A ceremonial foundation-stone laying ceremony took place on September 19, 2010. However, the project officially commenced on May 11, 2011. The Olgiy-Khashaat section was completed and opened to traffic on December 8, 2013 and the Mankhan-Khovd section was completed and opened to traffic on December 9, 2013. The originally expected project implementation start and end dates were October 19, 2010 and October 15, 2014. This project is part of a larger project (co-financed with the Asian Development Bank) to develop a 748.4 km road corridor through Mongolia’s western region connecting Yarant at the border of the People’s Republic of China (PRC) to Ulaanbaishint at the Russian border via Khovd and Olgiy, the aimag centers. As part of Asian Highway 4 and the Asian Highway Network, the road corridor was to facilitate the flow of goods and passengers between the three countries. The road corridor was to be developed in two phases. In phase one, a 431.2 km road from the PRC border to Khovd aimag center was to be developed, while phase two was to develop the road from Khovd aimag center to the Russian border. An Environmental Impact Assessment was prepared in September 2011 by SMEC Asia Ltd. for the project. The EIA was prepared following Mongolia's environmental regulations and included an Environmental Management Plan to be carried out during the duration of the project. In addition, Ministry of Roads, Transportation, Construction and Urban Development for the Asian Development Bank prepared a Resettlement Framework in September 2011 and an Indigenous Peoples Planning Framework in October 2011 to be carried out for the project. At appraisal, the projected economic internal rate of return (EIRR) of the Yarant– Bulgan–Khovd section of the project was 13.6%. However, upon completion of the project, the EIRR was re-calculated as 6.6%, which is lower than the Asian Development Bank’s 12% hurdle rate. The lower EIRR was attributed to the substantial cost overruns, implementation delays, and lower traffic volumes. However, the improved road did benefit the regional supply chain and travel time on the Takeshiken (Xinjiang Uygur Autonomous Region)–Yarant–Khovd route fell by 12 hours. The project also reduced the time and cost required for regional trade, as indicated in the CAREC Corridor Performance Measurement and Monitoring Annual Report 2018. Upon completion of the project, lighter and more fuel-efficient trucks capable of speeds of up to 100 km per hour were being used, which stimulated tourism from China and higher exports of coal and minerals from Mongolia.