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Railway Rolling Stock Operations Improvement Project (RRP BAN 50312-003)

ECONOMIC ANALYSIS

A. Introduction

1. Economic rationale. has been a major mode of since its independence in 1971. However, as a result of inadequate investment in physical , and increasing competition from road transport, the market share of in passenger and freight traffic declined from 30% in 1975 to about 4% in 2005.1 Rail transport is generally considered cheaper, safer, more fuel-efficient, and more sustainable than road transport. The government recognized the need for scaling up railway infrastructure investments in its Five-Year Plan for fiscal year (FY)2016–FY2020, with the aim to increase rail market share to 10% for passenger transport and 15% for freight by 2020.2

2. Network and rolling stock fleet. Bangladesh Railway’s network consists of 2,609 kilometers (km) of meter gauge tracks, 1,000 km of broad gauge tracks, and 575 km of tracks. Bangladesh Railway faces chronic operational issues and inefficiencies due to the aging of its and freight wagons. At the end of FY2016, it owned 278 diesel locomotives, 1,249 coaching vehicles, and 8,677 freight wagons. However, most locomotives are over 30 years old and exceed their economic lives. About 90% of freight wagons are over 30 years old. As the rolling stock continues to age, reliability, performance, and fuel efficiency decrease, and the maintenance and running costs increase. For instance, broad gauge locomotives are estimated to break down unexpectedly 0.79 times per year on average. Significant investments are thus required to maintain and improve service levels across the networks.

3. Project details. The Railway Rolling Stock Operations Improvement Project is proposed to procure 40 broad gauge locomotives, 50 broad gauge and 75 meter gauge luggage vans, and 420 broad gauge and 580 meter gauge freight wagons. By providing modern, safe, reliable, and efficient locomotives and freight wagons, the project is expected to significantly contribute to (i) sustaining and improving service levels for existing demand, (ii) adding sufficient capacity to cater for the increase in freight and passenger demand, (iii) improving the operational efficiency of Bangladesh Railway, and (iv) improving the financial sustainability of Bangladesh Railway. In addition, the project will finance the detailed design studies of one shed and three maintenance workshops, which are required to sustain the investments.

B. Demand Analysis

4. Travel demand. Passenger and freight demand forecasts were based on recent and projected macroeconomic growth trends. The estimated elasticity of passenger demand to economic growth rate was conservatively assumed at 1.0.3 Passenger demand growth forecasts were subsequently assessed by gauge type, passenger service type, and rail line. Freight demand growth forecasts were based on the per capita consumption of key commodities in relation to economic growth, on the modal share of railway services by commodity, and were prepared by commodity type, gauge type, and origin–destination.4 Table 1 shows the estimated population and economic growth rates and Table 2 summarizes the projected passenger and freight demands.

1 G.M. K. Alam. 2015. Strategy for Infrastructure Sector. Background Paper for the Seventh Five-Year Plan. Dhaka. 2 Government of Bangladesh. Planning Commission. 2015. Seventh Five-Year Plan, FY2016—2020. Dhaka. 3 As increasing income levels result in higher trip rates per capita, the growth potential for railway passenger traffic is significantly higher than the growth of gross domestic product. The elasticity of passenger demand to economic growth is estimated to be 1.5 to 2.0 if the railway system can supply enough capacity to cater to travel demand. 4 Based on the assessment under ADB technical assistance project: ADB. 2014. SASEC Railway Connectivity Investment Program. Project preparatory technical assistance report. Manila. (TA8597-BAN). 2

Table 1: Estimated Population and Economic Growth Rates 2016– 2021– 2026– 2031– 2036– 2040– Category 2020 2025 2030 2035 2040 2045 Population Growth Rate (%) 1.2 1.1 1.0 0.8 0.6 0.4 GDP Growth Rate (%) 7.0 6.2 5.5 5.0 4.5 4.2 GDP per capita Growth Rate (%) 5.8 5.6 5.1 4.6 4.3 4.0 GDPGDP = gross domestic product. Source: Asian Development Bank estimates.

Table 2: Projected Railway Passenger and Freight Demand Service Unit 2015 2025 2035 2045 Passengers millions 67.5 125.5 207.4 316.5 Liquidcarried Bulk ‘000 tons 890 1,608 2,327 2,995 Dry Bulk ‘000 tons 2,149 4,573 6,391 8,345 Container ‘000 TEU 262 533 1,029 1,798 TEU = twenty-foot equivalent unit. Source: Asian Development Bank estimates.

5. Rolling stock requirements. Rolling stock requirement forecasts were based on (i) existing and forecasted passenger and freight demand; (ii) existing timetables and operational performance of Bangladesh Railway, such as gauge mix, wagon loading, and train availability; (iii) operational improvements assumptions, including longer , reduction of cycle times, and increase in availability due to investment in maintenance capacity; and (iv) the age profile and planned retirement of existing rolling stock. The project will procure a total of 40 broad gauge locomotives and 1,125 broad gauge and meter gauge luggage vans and freight wagons. These will help improve the operational performance of Bangladesh Railway by renewing timeworn rolling stock and providing additional capacity to cater to the increase in freight and passenger demand.

Table 3: Rolling Stock Requirements and Procurement Plan Effective Unitsa Units Required for Operation Units to Procure 2017– 2026– 2036– Type Gauge 2016 2025 2035 2045 2025 2035 2045 BG 78 115 236 375 86 118 139 Locomotives MG 127 172 84 64 111 0 0 BG 350 747 2,353 4,176 560 1,627 2,024 Coaches MG 779 1,398 786 676 932 0 0 BG 553 1,830 2,984 5,431 1,622 1,187 2,447 Wagons MG 1,549 1,754 1,947 1,357 580 603 0 BG = broad gauge, MG = meter gauge. a Numbers of effective units are estimated by subtracting the unavailable units for operations from the number of units on book of Bangladesh Railway. Sources: Bangladesh Railway and Asian Development Bank estimates.

C. Economic Analysis

6. Key economic assumptions. The economic analysis has been conducted by (i) comparing costs and benefits in with- and without-project scenarios in accordance with ADB guidelines; 5 (ii) using the domestic price numeraire; (iii) valuing all costs and benefits in monetary

5 Asian Development Bank. 2017. Guidelines for the Economic Analysis of Projects. Manila. 3 terms as of 1 April 2017, expressed in economic prices, in Bangladeshi Taka, and discounted to 1 July 2017; (iv) using a discount rate of 9%; (v) assuming 4 years of implementation (2019–2022) and 30 years of operation on a rolling basis (2020–2052); (vi) calculating residual values using a straight-line depreciation method based on the economic life of the project’s assets; (vii) using a shadow exchange rate factor of 1.061, calculated using international trade statistics for Bangladesh;6 (viii) using a shadow wage rate of 0.72 calculated from wages followed in the garment industry for unskilled laborers;7 and (ix) using an economic price of diesel of Tk47.04/liter, which excludes duties, subsidies, and value added tax. The project cost included physical contingencies, but excluded price contingencies and financing charges.

7. Project costs. The project costs include the capital costs and operation and maintenance (O&M) costs of 40 broad gauge locomotives and 1,125 luggage vans and freight wagons (Table 4), and consulting services costs. O&M costs per unit are assumed to be equal both in without- and with-project cases. The analysis used current system-wide costs of Bangladesh Railway on a passenger-kilometer and ton-kilometer basis, covering costs for fuel, staff, general administration, and maintenance of rolling stock, and and other fixed assets (Table 5).

Table 4: Project Capital Costs Financial Cost Economic Cost Units (Tk million) (Tk million) Item BG MG Total BG MG Total BG MG Total Locomotives 40 – 40 14,434 – 14,434 11,487 – 11,487 Luggage Van 50 75 125 1,604 2,085 3,689 1,276 1,659 2,936 Van 300 400 700 2,486 3,047 5,533 1,978 2,425 4,403 Bogie Wagon 120 180 300 882 1,203 2,085 702 957 1,659 Total – – – 19,406 6,335 25,741 15,444 5,042 20,485 BG = broad gauge, MG = meter gauge, Tk = taka. Source: Asian Development Bank estimates.

Table 5: Current Operating Cost of Passenger and Freight Trains Train Service Unit Cost Broad Gauge Meter Gauge Total Passenger Services Tk per Train-kilometer 1,520.4 1,354.2 1,402.3 Tk per Vehicle-kilometer 93.5 67.9 74.3 Tk per Passenger 474.3 328.2 363.1 Tk per Passenger-kilometer 3.41 2.68 2.87 Freight Services Tk per Train-kilometer 354.0 389.3 379.0 Tk per Wagon-kilometer 63.9 75.2 71.8 Tk per Ton 927.7 3,269.0 1,939.1 Tk per Ton-kilometer 5.38 10.98 8.56 Tk = taka. Source: Asian Development Bank estimates.

8. Project benefits. The project will replace 40 broad gauge locomotives that have reached the end of their economic lives, and procure 1,125 luggage vans and freight wagons to support the increase in freight demand across the country. The project benefits were assessed based on the opportunity costs of operating and maintaining 40 existing broad gauge locomotives beyond their economic life, and transporting freight with road-based modes. The project benefits include (i) lower maintenance costs due to lower breakdown rates of newer rolling stock, (ii) travel time savings from increased speeds and efficiency of passenger and freight operations, (iii) fuel

6 International Monetary Fund. International Finance Statistics and Global Financial Stability Report. http://www.imf.org/en/Data (accessed 4 April 2017). 7 Bangladesh Bureau of Statistics. 2015. Statistical Yearbook 2015, Prices and Wages. Dhaka.

4 consumption savings due to the improved fuel efficiency of new locomotives, (iv) vehicle operating cost savings of freight transported by rail instead of road modes, and (v) carbon dioxide (CO2) emissions savings.

9. Operating and maintenance benefits. The fuel efficiency of new broad gauge locomotives was estimated to be 33% higher than existing locomotives, which use 2.2 and 5.5 liters of diesel per train-kilometer for passenger and freight services. New locomotives will be equipped with an auxiliary power unit, which will decrease fuel consumption of idle engines from 22 to 3 liters of diesel per hour. In addition, new locomotives are estimated to require only 0.16 unplanned maintenance operations per year, compared to 0.79 for the existing locomotives.

10. Time and vehicle operating cost savings. Based on the rolling stock procurement plan and on a detailed analysis of cycle times (including higher performance of newer rolling stock, improved rolling stock availability and service time, improved loading and unloading operations, and improved wagon utilization), the project was conservatively assumed to result in an annual increase of (i) train-kilometers of 1.0%, (ii) average travel speeds of 1.5%, and (iii) ton-kilometers of 2.0%. The work value of time of train passengers was derived from the monthly income per earner of urban households, using data for skilled and non-skilled workers.8 The value of non- working time was estimated at 25% of the work value of time. The value of time was estimated at Tk49.4 per hour and was assumed to increase in line with the increase in gross domestic product per capita. The time value of cargo was based on the estimated inventory costs at 80% of the freight tariff charged by Bangladesh Railway on a ton-kilometer basis. Lifecycle vehicle operating costs of road-based modes were estimated at Tk31.2 per kilometer, using the Highway Development Model IV based on the surveyed market prices of vehicle, tire, lubricants and fuel, and data from the Roads and Highways Department. 9

11. Emissions reductions and other benefits. The project will result in significant CO2 emission reductions as a result of higher fuel efficiency, procurement of auxiliary power units, and shift from road to rail. The reduction of CO2 emissions was estimated at about 128,549 tons in 2023, and at $36.3/ton in 2016 values, increasing at 2% per annum in real terms. Furthermore, the project will contribute to increased mobility of the population in Bangladesh, improving the access to social, health, education, and employment facilities, and to the reduction of accidents.

12. Economic analysis. The economic internal rate of return (EIRR) of the project is estimated to be 14.5% (Table 6). Table 7 presents the net economic cost and benefit streams of the project. Sensitivity tests were conducted to assess the sensitivity to adverse changes in costs and benefits in the following cases: (i) capital costs increased by 10%, (ii) benefits reduced by 10%, (iii) capital costs increased by 10% and benefits reduced by 10%, (iv) fuel savings decreased by 20%, (v) travel time savings reduced by 50%, and (vi) CO2 emissions reduction excluded from the benefits. The EIRR of the project remains above 9% in all scenarios, which demonstrates the robustness of the project to adverse changes in costs and benefits. The most sensitive factor is a 50% reduction in travel time savings, with the EIRR decreasing to 11.1%. This factor is considered unlikely due to the significant potential for operational efficiency improvements, notably through the higher train speeds, lower breakdown rates, and higher freight loading ratio that the project will deliver. The project is therefore recommended for implementation on the basis of its economic benefits.

8 Bangladesh Bureau of Statistics. 2011. Repaort of the Household Income and Expenditure Survey 2010. Dhaka. 9 Ministry of Communications, Roads and Highways Department. 2005. Road User Costs Report 2004-2005. Dhaka. 5

Table 6: Economic Analysis Results EIRR NPV Switching

Scenario (%) (Tk million) Valuea (%) Base Case 14.5 14,001 (i) 10% increase in capital costs 13.4 12,175 76.7 (ii) 10% decrease in benefits 13.5 11,133 (48.8) (iii) 10% increase in costs and 10% decrease in benefits 12.5 9,306 29.8 (iv) 20% decrease in fuel savings 14.4 13,645 n/ab (v) 50% decrease in travel time savings 11.1 4,787 (76.0) b (v i) Exclusion of CO2 emission savings 13.0 10,245 n/a EIRR = economic internal rate of return, NPV = net present value, ( ) = negative values, n/a = not available. a Switching values indicate the percentage by which cost increases and/or benefit decreases result in an EIRR of 9%. b Switching values cannot be calculated: the EIRR remains above 9% even with a 100% decrease. Source: Asian Development Bank estimates.

Table 7: Economic Costs and Benefits of the Proposed Project (Tk million) Net Capital RS O&M Travel Time Fuel VOC CO2 Emissions Year Costs Saving Savings Savings Savings Savings Benefits 2019 2,813.2 105.1 19.2 18.4 48.6 39.3 (2,582.5) 2020 8,232.3 420.4 112.3 76.6 194.4 160.9 (7,267.8) 2021 8,232.3 735.7 266.0 139.1 340.1 288.0 (6,463.4) 2022 8,232.3 1,051.1 491.0 206.0 485.9 420.7 (5,577.5) 2023 – 946.0 614.9 209.8 485.9 429.8 2,686.4 2024 – 840.9 753.0 213.6 485.9 439.1 2,732.5 2025 – 735.7 906.8 217.5 485.9 448.6 2,794.6 2026 – 630.6 1,074.0 221.5 485.9 458.4 2,870.4 2027 – 525.5 1,258.8 225.6 485.9 468.3 2,964.1 2028 – 420.4 1,462.9 229.7 485.9 478.5 3,077.4 2029 – 315.3 1,688.0 234.0 485.9 488.9 3,212.1 2030 – 210.2 1,936.2 238.3 485.9 499.6 3,370.1 2031 – 105.1 2,203.6 242.7 485.9 510.5 3,547.8 2032 – – 2,496.9 247.2 485.9 521.7 3,751.7 2033 – – 2,818.4 251.8 485.9 533.1 4,089.2 2034 – – 3,170.4 256.5 485.9 544.8 4,457.6 2035 – – 3,555.6 261.3 485.9 556.8 4,859.6 2036 – – 3,962.8 266.2 485.9 569.1 5,283.9 2037 – – 4,405.9 271.2 485.9 581.6 5,744.6 2038 – – 4,887.8 276.3 485.9 594.5 6,244.5 2039 – – 5,411.8 281.4 485.9 607.6 6,786.7 2040 – – 5,981.1 286.7 485.9 621.1 7,374.8 2041 – – 6,575.4 292.2 485.9 634.9 7,988.4 2042 – – 7,217.8 297.7 485.9 649.1 8,650.4 2043 – – 7,911.8 303.3 485.9 663.5 9,364.6 2044 – – 8,661.4 309.1 485.9 678.4 10,134.7 2045 – – 9,470.5 314.9 485.9 693.6 10,964.9 2046 – – 10,305.8 320.9 485.9 709.1 11,821.7 2047 – – 11,202.9 327.0 485.9 725.1 12,740.9 2048 – – 12,166.2 333.3 485.9 741.4 13,726.8 2049 – – 13,200.3 339.6 485.9 758.1 14,784.0 2050 – – 12,879.1 311.5 437.3 697.7 14,325.6 2051 – – 9,300.4 211.7 291.5 475.7 10,279.3 2052 – – 5,033.3 107.9 145.8 243.2 5,530.1 Economic Internal Rate of Return (%) 14.5 Net Present Value @ 9% 14,001.5

( ) = negative values, CO2 = carbon dioxide, O&M = operations and maintenance, RS = rolling stock, VOC = vehicle operating cost. Source: Asian Development Bank estimates.