South Asia Subregional Economic Cooperation Dhaka-Sylhet Corridor Road Investment project (RRP BAN 53382) ECONOMIC AND FINANCIAL ANALYSIS A. Introduction 1. Economic rationale. Road transport is Bangladesh’s dominant mode of transport, and the road network serves as the backbone for domestic connections and regional and international trade. Bangladesh is experiencing positive economic growth, rising incomes, increased domestic consumption, and additional trade activities resulting from deeper engagement in the global value chain, causing road traffic to increase at an average rate of 6.6% per year between 2016 and 2020.1 However, the limited capacity and deteriorating condition of roads—about 25% are in poor condition—have served as major obstacles to stable economic growth and caused serious road safety issues. To resolve these issues, the Government of Bangladesh is upgrading its major roads, especially those that constitute subregional trade corridors, to international standards, with the goal of facilitating international trade. 2. Project road. The Dhaka–Sylhet–Tamabil corridor is part of National Highway No. 2 and Asian Highway No. 2 and is considered a critical international trade corridor. As a result of customs policy reform and trade and transport infrastructure development, the importance of Sheola and Tamabil land ports in regional trade is expected to increase, along with the traffic on the corridor connecting the border with the national capital city of Dhaka. However, the existing road has only two lanes with no provision for slow-moving and nonmotorized vehicles; is of poor quality because of a multiyear maintenance backlog; and poses a significant safety risk. The proposed investment project will finance construction works to widen about 210 kilometers (km) of the road to a four-lane carriageway, with design features to assist the elderly, women, children, and differently abled persons. 3. Economic analysis. An economic evaluation of the proposed project components was undertaken using the Highway Development Model 4 (HDM-4), and following Asian Development Bank (ADB) guidelines. 2 The model requires input data on traffic, road geometry, condition, pavement structure, and material characteristics of the existing road; maintenance and road improvement costs; and vehicle operating cost (VOC) and value of time parameters. The improvement of road corridors will result in savings to road users and the society as a whole in the form of reduced VOCs and travel time costs for passengers and freight traffic. The costs to the road agency and road users in the “without” and “with” project cases were estimated and used to derive the project’s net costs and benefits and to calculate the economic viability of the project road sections. B. Demand Analysis 4. Traffic demand. The project road was divided into six homogeneous sections. The length of each section and the base year (2020) average annual daily traffic (estimated based on the traffic counts conducted on each section of the project roads) are in Table 1. 5. Traffic growth. Traffic growth forecasts were prepared for the analysis period by vehicle class based on the economic growth outlook and the elasticity calculated by comparing historical registered vehicle growth trends and observed gross domestic product, population, and per capita income during 2011–2019. The impact of the proposed economic corridor development was also considered in forecasting the freight demand.3 The derived traffic growth rates are summarized in Table 2. 1 ADB. 2021. Country Assistance Program Evaluation for Bangladesh. Manila. 2 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 3 ADB. Manila:. Bangladesh Economic Corridor (Draft Report). Unpublished. 2 Table 1: Base Year Traffic on Project Road Sections AADT Length AADT Non- (km) Motorized Traffic Motorized Traffic SN Road Name Total Urban Rural Total PV Bus FV 1 Dhaka–Narsingdi 33.78 15.77 18.01 20,142 5,960 5,227 8,955 4,848 2 Narsingdi–Bhairab 32.85 17.58 15.27 14,624 4,417 3,602 6,605 1,247 3 Sarail–Jagdispur 34.80 7.66 27.14 17,449 5,067 2,138 10,244 1,420 4 Jagdispur–Sayestaganj 34.60 10.14 24.46 10,890 4,593 2,663 3,634 313 5 Sayestaganj–Sherpur 35.70 10.80 24.90 10,610 4,391 2,244 3,975 228 6 Sherpur–Sylhet 35.90 9.94 25.96 17,640 3,767 3,245 10,628 135 AADT = average annual daily traffic, FV = freight vehicle, km = kilometer, PV = passenger vehicle. Source: Asian Development Bank’s estimates. Table 2: Traffic Growth Rates by Vehicle Class 2020–2024 2025–2029 2030–2034 2035–2039 2040–2044 Parameter Growth Rates (%) GDP 7.00 6.80 6.60 6.40 6.20 PCI 5.53 5.38 5.23 5.09 4.94 Population 1.39 1.35 1.30 1.25 1.20 Traffic Growth Rates (%) Motorcycles 15.1 13.9 12.8 11.8 10.8 Auto-rickshaw 7.7 7.1 6.6 6.1 5.6 Car, jeep, or van 6.8 6.3 5.8 5.3 4.9 Bus 4.9 4.5 4.1 3.7 3.4 Goods vehicles 8.9 9.9 7.4 7.4 4.3 PCI = per capita income, GDP = gross domestic product Source: Asian Development Bank’s estimates. 6. Diverted and generated traffic. There are no routes in direct competition with the project road, and therefore local diverted traffic was not considered in this analysis. However, the project road is part of Asian Highway No. 2, and diversion to the project road is anticipated for freight moving between (i) other areas of India and its northeastern states, and (ii) Chattogram port and the northeastern states of Bhutan and India. Such diverted traffic is conservatively estimated at 10% of the freight demand based on the travel time reduction resulting from the road condition improvement, which does not include likely future increase that may occur with further improvement of bilateral and multilateral trade among Asian countries. In addition, an estimated 10% generated traffic is also applied for both privately owned passenger vehicles and freight vehicles, as the improvement will (i) encourage communities to travel for jobs that are currently difficult to access, (ii) open new markets for communities to sell agricultural products at competitive prices and in turn increase production levels, (iii) motivate inhabitants to attend better health and educational facilities, and (iv) facilitate cross-border trade activities. C. Economic Analysis 7. Key assumptions. The economic analysis was conducted in the domestic price numeraire (Bangladesh taka). All costs and benefits were valued in monetary terms as of February 2021 and expressed in economic prices. A discount rate of 9% was used for calculating the net present value. Key economic analysis assumptions are summarized in Table 3. Table 3: Input Parameters Used for the Analysis Parameter Value Analysis period from opening year 20 years Discount rate 9% Construction period 5 years for the first two sections; 6 years for the rest Construction start year 2022 Opening year for road traffic 2027 for the first two sections; 2028 for the rest Source: Asian Development Bank estimates. 3 8. Construction cost. The economic cost of constructing the project road was estimated based on the financial estimate provided by the Roads and Highway Department (RHD) of Bangladesh. 4 The economic cost of construction includes the costs of civil works, construction supervision, project management, land acquisition and resettlement, and physical contingencies, but excludes price contingencies and removes taxes and duties. A shadow exchange rate factor of 1.028 was applied to traded goods in civil works cost, VOCs, and emission costs. A shadow wage rate factor of 0.79 was applied to unskilled labor components, based on wages in the construction and agriculture sectors. The economic cost of relocation and resettlement is based on the economic value of resettlement allowances given to displaced families and of replacement of structures. The cost of land acquisition is calculated based on the loss of agriculture crops during the entire analysis period and discounted to the present value. In addition, the cost of the institutional strengthening of the RHD is included as part of the construction cost in this analysis. Table 4 presents the estimated economic cost of construction per km for the homogeneous sections by urban and rural subsections. Table 4: Economic Cost of Construction (Tk million per km) Economic Cost Number Road Name Urban Rural 1 Dhaka–Narsingdi 905.42 591.20 2 Narsingdi–Bhairab 838.10 545.19 3 Sarail–Jagdispur 866.91 564.39 4 Jagdispur–Sayestaganj 840.34 546.67 5 Sayestaganj–Sherpur 963.86 629.02 6 Sherpur–Sylhet 806.66 524.22 km = kilometer, Tk = taka. Source: Asian Development Bank estimates. 9. Maintenance costs. The periodic and routine maintenance costs are based on the estimates provided by the RHD. The economic cost of periodic overlays for existing roads was estimated at Tk1,177 per square meter and for improved roads at Tk1,471 per square meter. The periodic overlay was applied following the prevailing maintenance strategy and guidance received from the RHD. The economic cost of annual routine maintenance for existing roads was estimated at Tk82,400 per km, and for improved roads at Tk164,800 per km. 10. Residual value. The project includes newly constructed elements that have a usable life much longer than the analysis period of 20 years. Thus, a residual value of 20% at the end of the analysis period was estimated by using straight-line depreciation method assuming a usable life span of 40 years for structures; 25 years for embankments, base, and sub-base; and 20 years for all other elements, including the bituminous course. 11. Project benefits. The quantified benefits of the project include travel time savings and VOC savings for motorized vehicles resulting from higher vehicle speeds and improved riding quality with the project (Table 5).