Tuesday, May 19, 2009

Truly Bizarre MCC Project Dies

In a bizarre report, an RFP issued by MCC for modernizing the Mongolian rail system has crashed and burned. The result should not have been a surprise - the fact that it ever even got past the drawing board (or indeed past the first snicker in the board room) is beyond the pale. To protect the innocent, I have not identified the source; but the source is very reliable.

The MCC issued an RFP to modernize the rail system for the purpose of preparing it to carry an increased load of minerals from mines, including heavy strikes of gold, copper and uranium. The rail system is owned 50% by the Mongolian government. The other 50% is owned by the Russian Federation.

What could be the problem with this? Anyone...anyone...Bueller?

To implement the project a leasing company would be established that would be wholly owned by the Mongolian government. MCC would acquire the rolling stock, signaling and track maintenance equipment, which in turn would be provided to the leasing company. The leasing company would retain title to all the equipment and lease it to the railroad.

So, what is wrong with this?

I'm glad you asked.

The leasing company, wholly owned by the Mongolian government would be leasing the equipment to the railroad - 50% of which is owned by the Russians. Did anyone at MCC pass this by the Russians even if it was a wise deal (which it was not)? Apparently, no.

On May 18 MCC cancelled the entire program. The Russians - astoundingly - would not agree to an audit of the railroad's books. That must have shocked the experts in Washington. To be fair, MCC had included the audit provision as a condition to moving ahead with the project. But...

MCC has put a bunch of people and firms to a great deal of effort and expense preparing proposals but they did not vet this first with the Russian owners? This should have been a major consideration in having the project move forward, but as is all to frequently the case, the funding agency, in this case MCC, simply made at best, a dangerous assumption or, at worst, was negligent and should pay the firms for their time and costs in developing bid proposals.

The failure by the MCC would be excused under several scenarios. First, if the MCC had revealed all the above (and I have not read the RFP)and the bidders did not ask any questions, then the bidders assumed a major risk. Second, if the railroad parties and the Mongolian government agreed to the audit, but lied, then everyone was deceived; and, third, if the bidders knew all the risks and assumed them, well - greed is not often a virtue.

The story, however, gets a little worse. The Mongolian rail system is not only 50% owned by the Russian, but it is considered "sovereign territory" and therefore exempt from Mongolian laws. So, to actually make any contracts enforceable, conditions would need to have been attached to the MCC agreement and the leasing contract that Mongolian commercial (at the least) laws would apply.

Finally, my contact said, as reported in the news, that Putin was in Mongolia last week, offering the Mongolian railroad loans to buy rolling stock from the Russians and - yes it gets worse - recommended that the rail system purchase equity stakes in the mines that they intend to serve.

What was MCC thinking? And - how would a default in the leasing agreement be handled by MCC or the leasing company (such as a repo of rolling stock). Does anyone remotely think the Russians would honor the contract?

Many thanks to my source.

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