South Subregional Economic Cooperation -Sylhet Corridor Road Investment Project (RRP BAN 53382)

SUBREGIONAL ECONOMIC IMPACT

A. Introduction

1. This appendix supplements the economic analysis of the investment project by evaluating the wider economic impact of the project road. The analysis was undertaken with the Geographical Simulation Model developed by the Institute of Developing Economies.1 Simulation with the model estimates gross domestic product (GDP) increase by the investment project at a subnational district level, which considers the multimodal shift of transportation and the effect of industry agglomeration. It presents the economic impact in as well as outside the country to provide the regional benefit of the investment project.

B. Model and Methodology2

2. Data. The model uses a dataset for the simulation that covers 169 countries and/or economies and 3,262 subnational districts, and includes GDP data for agriculture, mining, food processing, garments and textiles, electronics and electric, automotive, and other manufacturing and service sectors in 2010. Transport network data include distance and vehicle speed information for 20,031 routes (12,837 land routes, 1,341 sea and inland waterway routes, 2,659 air routes, 3,119 railway routes, and 75 high-speed railway routes).

3. Methodology. Simulation is performed by comparing two scenarios. One is a baseline scenario, which assumes that no specific infrastructure development will take place. The other is a development scenario, which includes implementation of an infrastructure development project for which we would like to estimate the economic impact. The economic impact is defined as the difference between the district GDP in two scenarios in 2027.

4. In the baseline scenario, the speed of a truck on the road between Dhaka–Tamabil is set at 38.5 kilometer per hour (km/h). The speed at the Sylhet–Tamabil section, which is being supported by the Asian Infrastructure Investment Bank (AIIB), is assumed to be 60 km/h in the baseline scenario so that we can estimate the economic impact of the investment project only under the environment where the AIIB project is completed.3 Under the development scenario, it is assumed that the speed is increased to 50 km/h at the beginning of 2025 for the Dhaka–Sylhet section as a result of the investment project.4

C. Simulation Results5

5. Economic impacts. The simulation results estimate that the project road will generate an economic impact of $462.8 million in Bangladesh and $9.1 million in India in 2027. Accumulation of the annual economic impact over the years is expected to be substantial. The economic impact will benefit not only the districts along the project road, but also the Chattogram district which is a logistics gateway for export as well as the northeast region of India. The project generally benefits

1 Kumagai et al. 2013. Geographical Simulation Analysis for Logistics Enhancement in Asia, Economic Modelling. 34. 145–153. 2 For more details on the data and methodology, please refer to the appendix in T. Hayashi et al. 2020. Economic Impact Analysis of Improved Connectivity in Nepal, South Asia Working Paper Series No. 75. Manila: ADB. 3 Asian Infrastructure Investment Bank. 2020. Project Document of the Asian Infrastructure Investment Bank (Sovereign-Backed Financing): People’s Republic of Bangladesh, Sylhet to Tamabil Road Upgrade Project. Beijing. 4 While the design speed of the project road upon completion is 80 km/h, for the purpose of the simulation, the 50 km/h was adopted as the actual operating speed in a realistic scenario. 5 The simulation results are planned to be published as a South Asia Working Paper. 2

the northeastern region of India, while there is minor negative impact in limited areas in West . These simulation results indicate that the project road will be developed as a major trade route for the northeast region of Bangladesh and India for exports through the Chattogram port.

Top 5 Districts in India and Bangladesh which benefit from the project ($ million) Economic No. Country District benefit in 2027 1 Bangladesh Dhaka 135.9 2 Bangladesh Sylhet 92.8 3 Bangladesh 23.3 4 Bangladesh Maulbibazar 21.8 5 Bangladesh 20.1 1 India Kamrup 4.4 2 India Cachar 2.4 3 India East Khasi Hills 2.3 4 India West Imphal 1.9 5 India Aizawl 1.5 Source: Institute of Developing Economies-Geographical Simulation Model.

6. Possible synergies with other projects. The above simulation focused on the economic impact of the road investment project. Other projects to improve transport infrastructure and trade facilitation will have positive benefits for the economic impact, but these are not included in the above estimates. It is expected that projects such as the South Asia Subregional Economic Cooperation (SASEC) Integrated Trade Facilitation Sector Development Program under preparation will have synergies with this road project and will strengthen its intraregional and interregional economic benefit especially in Bangladesh and India.6 The program will improve Bangladesh border infrastructure and the trade facilitation environment including international transit cargos.

7. Conclusions. The simulation confirmed that the investment project will generate economic benefits not only in Bangladesh but also in the northeast region of India, thus demonstrating its regional impact as a regional cooperation project. The project impact will be leveraged with other relevant interventions both in infrastructure development and policy reforms undertaken simultaneously on both sides of the border. The SASEC program therefore takes a corridor development approach so that various aspects of connectivity will be developed simultaneously and effectively. The Dhaka–Sylhet–Tamabil road section is included under SASEC Road Corridor 5 to ensure its development from a broader perspective including in the northeast region of India.

6 The SASEC Integrated Trade Facilitation Sector Development Program with $200 million is programmed for 2021 in the country operations business plan for Bangladesh, 2021–2023.