Khulna Sewerage System Development Project (RRP BAN 49329-007) ECONOMIC ANALYSIS A. Introduction 1. Bangladesh recorded impressive average annual economic growth of 6.8% during 2011– 2018.1 The pace of Bangladesh’s urbanization has also increased markedly, from 24.1% in 2001 to 36.6% in 2018, with urban population growth of 3.8% per annum.2 This rapid urbanization has contributed to economic growth but has also led to unmanaged growth in urban areas, resulting in environmental degradation, pollution, and an increase in urban poverty. 2. The Khulna Sewerage System Development Project will establish a sustainable and inclusive sewerage system in Khulna, the third largest city in Bangladesh, to contribute to ensuring that peoples’ basic needs are met amid rapid urbanization and growth. The project will support the establishment of a sewer network, two sewage treatment plants (STPs), and a fecal sludge treatment plant, covering commercial and densely populated residential areas in Khulna city with a population of about 880,000 by 2028. B. Rationale 3. Rationale for the government intervention. The rationale for government involvement is sound as the project will focus on urban basic services (sewerage system), wherein: (i) there is a natural monopoly, and (ii) the services are public goods managed by the government. Inadequate tariff for cost recovery and large up-front investment costs have prevented private investment in urban infrastructure in Bangladesh, which justifies government involvement. 4. Government capacity and associated policy. The Government of Bangladesh has implemented projects financed by the Asian Development Bank (ADB) and other external agencies in energy, transport, education, and urban development.3 The major urban infrastructure development policies of the government include: (i) National Policy for Safe Water Supply and Sanitation (1998);4 (ii) National Hygiene Promotion Strategy for Water Supply and Sanitation Sector (2012);5 and (iii) Perspective Plan of Bangladesh 2010–2021.6 In addition, the government will create a dedicated project management unit within the Khulna Water Supply and Sewerage Authority (KWASA) to implement the project before ADB’s approval, underlining the capacity of the government to manage the project. C. Demand Analysis 5. Khulna has been experiencing persistent urban service limitations, particularly in sewage management. There is no centralized sewerage system in Khulna and no sewerage tariffs. All households in Khulna depend on on-site sanitation systems such as pit latrines (36%) without 1 Government of Bangladesh, Ministry of Planning. 2019. Statistical Year Book Bangladesh 2018. Dhaka. 2 World Bank. 2019. Urban Population – Bangladesh. Washington, D.C. 3 ADB has provided $20.4 billion for 279 loans; $258.4 million for 432 technical assistance projects; and $787.1 million for 35 grants to Bangladesh since 1973. 4 Government of Bangladesh, Ministry of Local Government Rural Development and Cooperatives. 1998. National Policy for Safe Water Supply and Sanitation. Dhaka. This policy provides guidelines to ensure that all people have access to safe water and sanitation services at an affordable cost. 5 Government of Bangladesh, Local Government Division. 2012. National Hygiene Promotion Strategy for Water Supply and Sanitation Sector in Bangladesh. Dhaka. This strategy focuses on improving hygienic practices. 6 Government of Bangladesh, Ministry of Planning. 2012. Perspective Plan of Bangladesh 2010–2021: Making Vision 2021 a Reality. Dhaka. This plan defines the social and economic progress the country aspires to achieve by 2021. 2 treatment, or septic tanks (64%) with higher maintenance costs.7 Among households using septic tanks, only 2% (about 4,000 households) are provided with fecal sludge collection by the Khulna Municipal Corporation. Others either depend on private service, with higher costs for cleaning septic tanks; or are directly connected to open drains without connecting soak pits. As a result, untreated sewage and fecal sludge enter groundwater or surface drains, causing clogging and serious environmental problems. Untreated sewage and polluted surface run-off also contaminate rivers near Khulna—a serious concern for the environment and public health. Because of these unhygienic conditions, the impact of waterborne diseases is serious. According to a baseline survey in 2014,8 52.5% of households were affected by waterborne diseases in Khulna; the major diseases include diarrhea, dysentery, typhoid, and gastroenteritis. In addition, 3.8% of the household income was spent on medical expenditures, while sick days resulted in additional income loss to households. With the population projected to increase in the project area (from 0.8 million in 2020 to 1.0 million in 2035), these health and environmental problems will become worse in the “without-project” scenario. Demand for the project is therefore strong. With the project, a sustainable and inclusive sewerage system will address environment and health issues and benefit about 140,000 households (0.85 million people, or about 65% of Khulna’s population) by 2025. D. Alternative Analysis 6. Alternative designs were assessed for cost-effectiveness in the detailed project report. A least-cost analysis has mainly considered: (i) optimizing sewer network design using gravity- based flows as much as possible; (ii) selection of pipe materials (high-density polyethylene/ductile iron pipes for smaller diameters and reinforced concrete pipe for larger diameters) after considering four different materials; (iii) technology selection for STPs (extended aeration) from five options to suit local conditions, and (iv) improved FSM services for non-sewered areas. Selection of the above options were considered along with other considerations including economic, environmental, and social safeguard issues, and availability of materials and ruling specifications during project design.9 As per the comparison study, the project was found to be the most economical option for meeting demand in terms of scale, technology, and timing. E. Cost–Benefit Analysis 7. The economic analysis assessed the economic viability of the project by its economic internal rate of return and its economic net present value in accordance with ADB guidelines.10 8. Economic costs. The following assumptions were made for the economic analysis: (i) all costs were expressed in 2020 constant prices and converted at $1 = Tk84.9; (ii) projections covered from 2021 to 2049, including 4 years of construction,11 and assets created were assumed to have a 25-year life span upon completion; 7 Households spend Tk3,900 per septic tank and Tk650 per pit latrine on annual maintenance. 8 Government of Bangladesh, Local Government Engineering Department. 2014. Report on the Baseline Study of City Region Development Project, 2014. Dhaka. 9 Detailed Project Reports (DPRs) have considered all technical options discussed, cost alternatives, safeguard issues, material availability and design specification requirements in arriving at the final design and costing. Thus, the project costs included DPRs were adopted for the economic analysis. 10 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 11 Out of the implementation period (2021–2027), construction will be completed in 2024 and the remaining 3 years will be for O&M of created assets by the contractors. 3 (iii) all costs, including capital and operation and maintenance (O&M) costs, were valued using the domestic price numeraire;12 tradable inputs and unskilled labor costs were further adjusted by the shadow exchange rate factor of 1.06 (Table 1) and the shadow wage rate factor of 0.78;13 and (iv) the economic opportunity cost of capital was assumed to be at 9% in real terms. Table 1: Shadow Exchange Rate Factor Details 2013 2014 2015 2016 2017 Average Exports ($ billion) 23.15 27.61 29.07 30.01 30.93 28.15 Imports ($ billion) 33.28 40.96 40.46 39.78 44.48 39.79 Customs duties ($ billion) 3.73 4.00 4.04 3.99 5.03 4.16 Standard conversion factor (SCF) 0.94 0.94 0.95 0.95 0.94 0.94 Shadow exchange rate factor 1.07 1.06 1.06 1.06 1.07 1.06 Note: Shadow exchange rate factor = 1+ (customs duties) / (exports + imports) Source: Government of Bangladesh, Bangladesh Bureau of Statistics. 2019. Statistical Yearbook of Bangladesh – 2018. Dhaka. 9. By excluding financial charges, price contingencies, and taxes and duties, investment costs and physical contingencies were considered to estimate the economic costs. Foreign costs were separated and converted to economic costs using the shadow exchange rate factor (1.06). For local costs, the component of unskilled labor (22%) was further segregated and converted to economic cost using the shadow wage rate factor (0.78). Economic costs were estimated separately by component (foreign, unskilled labor, and remaining local costs) to derive the economic costs for the project, translating into 60.3% of the financial project costs (Table 2). Table 2: Details of Project Costs ($ million) Capital Costs O&M Costsa Implementation O&M Project Economic Project Economic (Years) (Years) Item Costs Costb Costs Costb Sewerage system 264.7 159.7 84.8 53.3 2021–2024 2025–2049 a O&M costs increase of 1% annually has been considered for additional maintenance requirements. b Excludes taxes and duties, price contingencies, and financial charges. Source: Asian Development Bank estimates. 10. Project benefits. The construction of a 269-kilometer sewer network, two STPs with a combined capacity of 80,000 cubic meters (m3) per day, and 27,000 property-level connections will be included in the project. In addition, a fecal sludge treatment plant with the capacity to treat 160 m3 per day of sludge collected from households not connected to the sewer network will be part of the project. In total, the sewer network, STPs, and a fecal sludge treatment plant will benefit about 0.88 million people by 2028. The project will: (i) reduce loss of earnings because of sick days caused by waterborne disease, (ii) reduce health expenditures related to waterborne disease, and (iii) reduce septic tank maintenance costs (Table 3).