|Project Rationale and Linkage to Country/Regional Strategy
Regional cooperation and integration is a high priority for Asian Development Bank (ADB), and the strategy for Mongolia includes assistance for stable broad-based economic growth by diversifying the sources and geographical distribution of growth, and stabilizing export earnings. The same thrust on regional integration is underway, for instance, with the construction under the Western Regional Road Corridor Development Project?Phase 1 to increase market integration in western Mongolia and to link road systems in the Russian Federation to those in the People?s Republic of China (PRC). Similar ongoing projects that could have impact on economic integration are in activities like renewable energy, greenhouse gas abatement, and mitigation of air pollution from coal-fired power plants. Meanwhile, as demand for commodities like coal soars, the Government of Mongolia is considering export of energy resources to the PRC to meet its increasing demand that is fueled by rapid economic growth. The mineral resource boom, if effectively managed, could provide Mongolia with an opportunity to address a wide range of the country?s economic problems. In 2006, the mining sector contributed 18% to gross domestic product (GDP) and 76% of the value of export. Exploration activities have identified several new mineral projects, including: Oyu Tolgoi (copper and gold), Tavan Tolgoi (coal), Tsagaan Suvraga (copper and molybdenum), Tumurtei (iron ore), and Ulaan (lead and zinc).
Recently, because of the relatively small size of Mongolian economy, investment for mine development cannot be justified by the domestic demand, nor can Mongolia bear all the demand risk and price volatility of the export market. The development of export-oriented projects is held back because of poor infrastructure (namely, transport, communications and power); and public sector investment is unsustainable because of the extremely low population density (about 0.5 people per square kilometer in southern Mongolia).
The very large mineral and energy markets in the PRC offer a good opportunity to investors to develop the power resources in Mongolia for export. This is reflected in the direct foreign investments and large commercial interest of international mining companies to develop the mines in southern Mongolia. Though the government will benefit from the revenue stream of taxes and royalty, the trade-off would be the transfer of resources because of the foreign ownership of the projects. The estimated cost of some indicative projects are considerably larger than the capacity of the Government of Mongolia, for example, (i) implementation of a clean coal, zero-emission power project to replace the aging combined heat and power plant in Ulaanbataar and export about 2,000 megawatt to the PRC could cost about $15 billion; (ii) the high-grade, copper-gold mine development project with a peak annual capacity of over 200,000 tons per day is estimated to cost $7.3 billion; and (iii) the coal mine project with 30 million tons per annum capacity that is currently under bidding would cost $2 billion. In comparison to the size of these investments, Mongolia with a population of 2.6 million has a GDP of $2.7 billion (2006), which limits its capacity to bear the risk of such commercial investments. In order to understand the value of such investments, it is to be noted that the export revenue would be nearly $2 billion at 2007 average international price of $65 per ton for the smallest of these projects, i.e., the 30 million tons per year coal project.
Mongolia and the PRC have been discussing a proposal to implement a coal mine, power generation and transmission project in southern Mongolia, specifically to export the power to the PRC. It is modeled after the Nam Theun Hydropower Plant in Lao PDR which aims to support a land-locked developing member country (DMC) to generate a secure, long-term flow of revenue to sustain economic development and reduce poverty through regional trading of power. In developing this Regional Power Cooperation Project, there is a need to better understand the impact of such large investments by foreign investors on the domestic economy, and how various beneficiaries would share the benefits under different scenarios. The optimal development path would be to (i) develop the mining resources gradually, (ii) use the tax and royalty revenues to strengthen infrastructure services, (iii) increase the returns and domestic savings that can then be invested to develop future mining projects, and (iv) include higher value addition to obtain higher export revenue.
To examine the sequencing of investments, it is proposed that a Computable General Equilibrium (CGE) modeling framework be developed. The main characteristics of CGE are its endogenous price specification, sectoral consistency, and behavioral specifications for each economic actor included in the model. The model specifications are derived from microeconomics, reflecting its solid theoretical basis. It views the economy as a system of mutually interdependent markets and seeks to analyze the economy from the microeconomics viewpoint of individual markets considered simultaneously. The CGE model is a useful tool to analyze economy-wide effects and distributional implications of a wide range of policy issues and implications. A CGE model for Mongolia would be fairly robust considering the small population and limited number of economic activities. Once developed, the CGE will be a useful tool for examining the impact of large project development, how benefits would flow to the different household categories, and providing the rationale for using public funds and sovereign borrowing to expand infrastructure services and ownership of the companies that result in higher investments.
During exploratory discussions with the Embassy of the PRC in Mongolia, a need was identified for explaining to the civil society and other stakeholders the benefits of integration with the PRC power market. It is expected that the proposed CGE model will provide the analytical basis for such consultation and building consensus on the project concept.
For the specific example, if the design includes clean coal, zero-emission power for export to the PRC, in addition to the benefits to Mongolia, there will be global benefits from the avoided greenhouse gas emissions, and benefits to the PRC on account of enhanced energy security and expanded trade. These can be examined using the modified versions of the available tools, namely the Global Trade Analysis Project (GTAP) Model (first developed by the Center for Global Trade Analysis, http://www.gtap.agecon.purdue.edu) and the CGE Model of the PRC with more emphasis on Mongolia and the rest of the world. Therefore, the analysis could be conducted from the overall perspective of the global, the PRC and Mongolian economies.