Outer Islands Transport Infrastructure Investment Project (RRP KIR 53043) ECONOMIC AND FINANCIAL ANALYSIS A. General 1. The proposed project will finance several activities to improve the safety of interisland navigation and provide resilient outer island access infrastructure for four outer islands in Kiribati. The project scope includes a hydrographic survey to establish digital chart coverage of the outer islands to make navigation safer in the country’s waters in accordance with international conventions and small-scale maritime interventions, which are needed to improve the delivery of basic goods and services to the outer islands. The project will finance rehabilitation of causeways in these islands to reduce transport costs within the islands and improve resilience to climate change and disaster risks. 2. The four islands considered for the project investment are Abaiang, Nonouti, Beru, and Tabiteuea South. Kiribati’s 33 islands are scattered over a large area of central and western Pacific Ocean and constrained by geographic isolation, a small population, and high transport and shipping costs. The nation depends on maritime transport to import essential manufactured goods, export agriculture and fishery products, and connect and resupply outer island communities. Only two ports are capable of handling international shipping—one in Betio and the other in Kiritimati and the outer islands, which are served by domestic (interisland) shipping. Safe navigation aids are limited and defined island access infrastructure nonexistent. The proposed project will tackle these constraints and ease safer access to the outer islands. 3. Standard demand analysis to calculate the project benefits is not applicable for some project components. Therefore, cost-effectiveness analysis or cost–benefit analysis was used for individual subprojects, depending on whether the benefits of the subproject were quantifiable or not.1 For example, the installation of aid to navigation (ATON) is essential but does not lead to direct economic benefit or reduced operating costs. In these cases, the cost-effectiveness analysis defines the needs that must be met by each subproject, develops alternative options that can satisfy these needs, and ensures that the chosen option is the most cost-effective among the mutually exclusive and technically feasible alternative interventions. Where options have different cash flows over time, discounted cash flow techniques were used to compare them on a net present cost (NPC) basis. In some cases, alternatives will have similar NPCs, in which case other, nonquantifiable criteria must be used to make the final selection. In cases where benefits of the subproject are quantifiable, a cost–benefit analysis was used. In the project economic analysis, cost-effectiveness analysis was used for hydrographic surveying, maritime ATONs, and island access infrastructure, and cost–benefit analysis was used for rehabilitation of island-crossing causeways. B. Assumptions and Parameters 4. All costs and benefits were valued in 2019 constant prices, and all analyses used world price numeraire expressed in United States dollars, adjusted in accordance with standard cost– benefit procedures, a review of previous Asian Development Bank (ADB)– and World Bank– funded Kiribati project analyses, and ADB guidelines. Financial prices were converted into economic prices by removing all taxes. The currency is pegged 1:1 to the Australian dollar. There are no taxes on imports and exports so a standard conversion factor of 1.0 was applied. A shadow wage rate factor of 0.6 was applied to the unskilled component of labor-based wage rates. 1 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 2 5. For the cost-effectiveness analysis, the alternatives were compared using NPCs with the ADB-recommended discount rate of 9% in real terms over 20 years of project appraisal. For the cost–benefit analysis, cost and benefit streams in the with- and without-project scenarios were compared and the economic internal rate of return estimated from the net benefit stream over the analysis period, following ADB guidelines. C. Economic Assessment of Project Components 6. Project component 1: Hydrographic surveying. Most of the waters surrounding Kiribati are not surveyed to a standard needed for safe navigation. This represents a significant safety issue and a constraint on development and maintenance of infrastructure in all islands. Hydrographic survey work will entail establishing accurate tidal predications in the outer islands and will be used to design infrastructure and plan and schedule shipping operations. The Kiribati 20-year Vision 2016–2036 prioritizes hydrographic surveys to enable connectivity and accessibility between islands and deliver social and economic benefits.2 7. The United Kingdom Hydrographic Office (UKHO) is the primary charting authority for Kiribati, producing the official navigational charts on behalf of the Government of Kiribati. The UKHO has prepared a scoping study to assess options for conducting the hydrographic survey in the project islands. Three alternative survey methods were considered: (i) vessel-based, (ii) airborne, and (iii) combined (airborne and vessel). The airborne laser bathymetry would provide the highest standard of accuracy. Vessel-based surveys are not useful without airborne surveys and are dangerous. Vessel-based surveys alone have not been considered as an option but only to supplement airborne surveys as needed. Tidal observations and chart compilation are needed. Table 1 shows the one-time cost to establish the charts. The airborne surveys would deliver charts of sufficient quality to enable much improved safety of navigation and are recommended for the project at a cost of about $5 million. Table 1: Summary of Cost-Effectiveness Comparison for Hydrographic Surveying Options Task Airborne Surveys Combined Airborne and Vessel- ($ million) Based Surveys ($ million) Nonouti 0.917 1.334 Beru 0.767 1.354 Abaiang 0.747 1.594 Tabiteuea South 1.364 2.129 Tidal observations 0.196 0.196 Chart compilation 0.248–0.372 0.248–0.372 Project management 0.216–0.552 0.216–0.552 Total 4.455–4.915 7.071–7.621 Source: United Kingdom Hydrographic Office. 8. Project component 2: Resilient outer island access infrastructure. This component will have three subcomponents: (i) maritime ATONs, (ii) island access infrastructure improvement, and (iii) rehabilitation of island-crossing causeways. 9. Project component 2.1: Maritime ATONs. For safe shipping to the outer islands, mariners require visual references or ATONs such as beacons, buoys, and lighthouses. Many ATONs in the outer islands of Kiribati are missing, meaning that dangers are unmarked. The technical needs assessment carried out by the International Association of Lighthouse Authorities in 2016 recommended several ways to improve capacity and identified the greatest needs, which 2 Government of Kiribati. 2016. Kiribati 20-Year Vision, 2016–2036. 3 are in designing a more enduring lagoon ATON structure, resourcing the materials to fabricate them, accessing a reliable workboat for installation and monitoring, and establishing a proper system of ongoing asset management and maintenance. The proposed project will establish 45 ATONs and provide training for design, installation, and maintenance at an estimated cost of $2 million. The ongoing maintenance will be undertaken by the Marine Division of the Ministry of Information, Communication, Transport and Tourism Development (MICTTD). The incremental cost of maintenance is considered negligible with training provided under the project. The ATONs are essential for shipping safety. No technical alternatives can be considered and, therefore, no cost-effectiveness analysis was undertaken. 10. Project component 2.2: Island access infrastructure improvement. No maritime infrastructure for ship-to-shore transfer, such as jetties or ramps, is available in any of the outer islands. The ocean sides of the islands oriented to the east are exposed to large waves coming from the prevailing wind direction, making vessel berthing and navigation unsafe. The lagoon sides of the islands are oriented to the west but have extensive and extremely shallow sandbanks or rock outcrops, making ship access possible only during high tide. In general, the topography and bathymetry of the islands are unfavorable to shipping and present challenges to safe and efficient ship-to-shore transfer. Several options were explored in each island: (i) In Abaiang, two sites were considered: Tabontebike and Taburao. Tabontebike (South West Abaiang) is a favored vehicle reception point as the lagoon does not have to be navigated to access the shore, However, Tabontebike is an hour away from the population center of Taburao and it is unlikely that a purpose-built jetty will be regularly used. Taburao is a population center, to which general goods are regularly delivered and where passengers regularly board and disembark. The jetty and ramp in Tabontebike would be less beneficial because of its long distance from the main population center. The most cost-effective site is Taburao (Table 3). (ii) In Beru, Tebikeriki (north), Taboiaki (south), and Weneete beach (northwest end) sites were studied. Tebikeriki is the primary shipping point on Beru. Tebikeriki is the only location among all project islands where dredging is feasible, considering the significant improvement of current operations. Dredging of Taboiaki channel in Beru could worsen erosion, diminishing