Railway Rolling Stock Project (RRP BAN 49094) ECONOMIC AND FINANCIAL ANALYSIS A. Introduction 1. The project involves procurement of 214 meter gauge (MG) passenger carriages, 50 broad gauge (BG) passenger carriages, and 10 MG diesel-electric locomotives. Bangladesh Railway (BR) is experiencing a shortage of passenger carriages due to non-replacement of the outdated carriages and the increasing demand on passenger trains. The newly procured carriages and locomotives will be used to increase the availability of MG and BG carriages and operate more trains. The project will contribute to the efficiency of the BR system by providing modern, safe, and improved carriages and locomotives. 2. Economic analyses have been undertaken to assess the economic viability of the project in accordance with the Asian Development Bank s (ADB s) Guidelines for the Economic Analysis of Projects (1997). 1 The analyses compare the benefits and costs of with- and withoutproject situations to estimate the economic internal rate of return (EIRR) and the net present value (NPV) at a discount rate of 12%. The Bangladesh taka is used as the currency unit in the analyses. Customs duty and value-added tax (VAT) are included in the project cost estimate, but are excluded in the economic analysis. Price contingencies are excluded as they do not reflect the real changes in the volume of resources consumed. 2 A standard conversion factor of 0.8 was used to translate the domestic price of non-tradable components into the border price. A shadow wage-rate factor of 0.8 has been applied to unskilled labour. 3 The analysis period is 30 years. The exchange rate used in the analysis is Tk77.80 = $1. 3. Financial analyses have been undertaken to assess the financial viability of the project using a similar approach to that for the economic analysis. For the financial analysis, the criterion rate of return is the weighted average cost of capital (WACC). Based on the funding mix, the interest rates, and inflation rates, the WACC for this project is estimated to be 2.8%. The project s financial internal rate of return (FIRR) is calculated using the financial terms of BR costs and revenues. Customs duty and VAT are included in the costs. Local costs are not modified by the standard conversion factor. The analysis period and exchange rate used in the financial analysis are the same as those used in the economic analysis. B. Project Details: Procurement of 214 Meter-Gauge (MG) Carriages, 50 Broad-Gauge (BG) Carriages, and 10 MG Diesel-Electric Locomotives 4. The BR rail system runs on a mix of lines, including broad gauge (BG), meter gauge (MG), and dual gauge (DG). The service area is divided into a West Zone and an East Zone. The Jamuna River is the main dividing line between the zones. The railway system is dominated by passenger trains, divided into intercity (IC), mail express (M/E), and local trains. 5. BR is in need of new coaches with modern facilities to replace the aged coaches. At present, there are 312 BG and 1,164 MG carriages. BR considers a carriage over 35 years old 1 ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila. 2 Due to the nature of procurement of goods, there is no physical contingency for this project. 3 The standard conversion factor and shadow wage-rate factor are based on recently approved ADB-financed projects in Bangladesh: (i) ADB. 2014. Report and Recommendation of the President to the Board of Directors: Proposed Loans and Technical Assistance Grant, People s Republic of Bangladesh: South Asia Subregional Economic Cooperation Railway Connectivity: Akhaura Laksam Double Track Project. Manila; and (ii) ADB. 2013. Periodic Financing Request Report, Bangladesh: Railway Sector Investment Program Proposed Tranche 3. Manila.
2 to be economically over-aged. BR data show that 24.1% of BG and 38.6% of MG carriages are over 35 years old. A carriage whose economic life has expired is to be condemned because of its low availability and lack of reliability. However, due to the shortage of carriages, some economically over-aged carriages are refurbished and continue to be used, depending on the individual carriage condition. 6. In addition to new passenger carriages, investment is needed to procure new locomotives. At present, BR owns 97 BG locomotives and 196 MG locomotives. Of the 196 MG locomotives owned by BR, only 125, or 64%, are available for effective service. The remaining 66 MG locomotives are considered ineffective stock, implying that they are awaiting condemnation, under or awaiting repairs, or lying in the traffic yard. 7. BR carriage occupancy rates are very high. For example, IC passenger trains, which account for more than 70% of BR s total passenger traffic, have an average occupancy rate of over 120% in the total system. This indicates that there are people who wish to buy a ticket but cannot get one, or that tickets are sold for standing passengers once all seats have been sold. 8. Given BR s past reluctance to abandon existing carriages and extremely high carriage occupancy rates, it is assumed that new carriages will be added to the existing number of carriages. The deployment of new carriages is assumed to be allocated to the Dhaka Chittagong corridor for MG carriages, the critical corridor of the country, and to the Dhaka Khulna corridor for BG carriages. 9. Without the project, the carriages that have been in operation will continue to operate with no new carriages. The number of carriages will continue to decline as the old carriages are condemned and withdrawn from service. With the project, 264 carriages and 10 locomotives will be the incremental effect. Additional passenger carriages imply more seats and more tickets sold. The project will bring in 1,434 million additional passenger kilometers (km) a year (Table 1). Passenger-km per year is calculated as the product of seats per coach, load factor, carriages number of days in operation per year, km running on the system per day, and the number of carriages procured. For the last 6 years, the number of passengers carried on BR s system increased by 36%, while the number of passenger trains running on the system increased by only 6%. It is assumed that the newly procured passenger carriages will have an occupancy rate similar to that of the existing overall passenger carriages. It is a conservative assumption to use the existing average occupancy rate in the analysis because the new carriages will be allocated to Dhaka Chittagong IC trains, whose occupancy rate is approximately 1.4 times higher than that of overall carriages. Table 1: Seating and Operation of New Carriages Total Passengerkm/year per of Number Seats/ Load Days/ Km/ passengerkm/year carriage factor year day coach (million) carriages (million) MG carriage 48.2 110% 330 272 4.76 214 1,018 BG carriage 76.5 80% 330 411 8.31 50 416 BG = broad gauge, km = kilometer, MG = meter gauge. Source: Asian Development Bank assessment.
3 C. Economic Analysis 1. Project s 4 10. The costs to be incurred for this project include: (i) capital cost, including equipment; (ii) operation and maintenance (O&M) cost; (iii) incremental fuel cost; and (iv) maintenance cost of the permanent way. The project s capital cost estimate is based on a development project proforma/proposal (DPP) prepared in May 2015. The costs over the analysis period were estimated using constant 2015 economic prices. Customs duty and VAT are excluded from the economic costs. The O&M costs were also estimated for each year of the analysis period. Carriage maintenance costs are set to start at 50% of the average maintenance cost in the first year and increase linearly to 150% of the average maintenance cost at 30 years. This means the carriage maintenance cost reaches the average figure at 15 years. A salvage value has been included to capture the remaining value of the investment. A straight-line depreciation method is used to calculate the salvage value of investment at the end of the analysis period. Incremental fuel and track maintenance costs are assumed to increase in proportion to the gross ton-km. 2. Project Benefits 11. The project will result in such benefits to the existing traffic as (i) a change in generalized cost; (ii) savings in vehicle operating cost; and (iii) time savings for road passengers. (i) Change in generalized cost. An important benefit to the project will be a change in generalized costs. In the with-project case, a passenger s perceived cost of travel, or the generalized cost, will be affected. The generalized cost includes the fare, travel time, accident risk, level of service such as comfort, and ability to travel at the passenger s preferred time. The per passenger generalized cost is calculated by comparing and taking the difference between the weighted average generalized cost in Tk per passenger-km for railway passengers and bus passengers. By adding modern and safe carriages, the generalized cost of rail travel for normal passengers, those who are already traveling or would travel in the future in the without-project case, will decrease. A change in demand due to the fare increase is factored in. (ii) Savings in vehicle operating cost. Some passengers will switch from the bus to the train since the trains are cheaper, safer, and more comfortable. A reduction in the number of bus passengers will reduce the traffic volume on the road, which will lead to an increase in the speed of bus operation. The average operating cost per bus passenger has been estimated at Tk1.2 per passenger-km, excluding infrastructure costs. The equivalent for rail can be as low as Tk0.7 per passenger-km for Shovan Class, excluding track costs. Rail provides a more economically efficient solution to the public transport needs of such a densely populated country. Bus revenue reduction due to a reduction in the number of bus passengers is considered in the analysis. (iii) Time savings for road passengers. Bus passengers will benefit from the increased speed of bus operation. The value of this benefit was estimated using valueof-time factors drawn from the Road User s Report 2004 2005 of the Roads and 4 Annual operation and maintenance (O&M) costs for MG trains and the maintenance cost of the permanent way were calculated during the preparation of the Dhaka Tongi project, financed by an Indian line of credit. These costs were updated to 2015 using the consumer price index (CPI) to adjust for inflation.
4 Highways Department (RHD). 5 RHD has been conducting a travel-time cost survey in major divisional cities for both main and feeder roads, and it has estimated a common national set of travel-time costs according to vehicle type. An assessment of the number of travelers in work time and non-work time is made for each vehicle type. The traveltime cost for work time is then taken as the estimated wage rate (net of tax but including employers costs directly associated with employment) and the value for non-work time as a proportion of the wage rate (35%, according to advice from the United Kingdom s Transport Research Laboratory). The recommended financial and economic travel-time cost were taken from the RHD report and updated to 2015 (base year) prices on the basis of an annual price escalation factor consistent with gross domestic product and gross national product growth in recent years. The economic benefit was calculated as the product of recommended economic travel-time cost, time saved per trip, and number of passenger trips. 3. Results of Economic Analysis 12. An economic evaluation was carried out for the project, comparing with- and withoutproject options. The results are shown in Table 2, which gives the EIRR and NPV for the proposed project option. The EIRR is estimated at about 26.4%. The NPV of the project, at a 12% discount rate, is Tk17,886 million. 4. Sensitivity Analysis 13. A sensitivity analysis was carried out over the base case with respect to adverse changes in the costs and benefits. The result of the sensitivity analysis (Table 3) shows that all scenarios have an EIRR of more than 12%. The project is therefore recommended for implementation. Year Capital Coach O&M Table 2: Economic Analysis Results (Tk million) Locomotive Fuel Maintenance of PW Generalized Change VOC Saving VOT Saving Net Benefit 2015-3,821-3,821 2016-3,821-3,821 2017-6,114-6,114 2018-1,528-79 -215-107 2,152 785 34 1,043 2019-159 -430-214 4,305 1,619 60 5,182 2020-161 -430-214 4,305 1,619 117 5,236 2021-164 -430-214 4,305 1,619 178 5,294 2022-167 -430-214 4,305 1,619 242 5,356 2023-169 -430-214 4,305 1,619 311 5,422 2024-172 -430-214 4,305 1,619 385 5,493 2025-175 -430-214 4,305 1,619 463 5,568 2026-178 -430-214 4,305 1,619 546 5,649 2027-180 -430-214 4,305 1,619 634 5,734 5 Government of the People s Republic of Bangladesh, Ministry of Communications, Roads and Highways Department. 2005. Road User s Report 2004 2005. Dhaka.
5 Year Capital Coach O&M Locomotive Fuel Maintenance of PW Generalized Change VOC Saving VOT Saving Net Benefit 2028-183 -430-214 4,305 1,619 729 5,826 2029-186 -430-214 4,305 1,619 829 5,924 2030-188 -430-214 4,305 1,619 936 6,028 2031-191 -430-214 4,305 1,619 936 6,025 2032-194 -430-214 4,305 1,619 936 6,023 2033-197 -430-214 4,305 1,619 936 6,020 2034-199 -430-214 4,305 1,619 936 6,017 2035-202 -430-214 4,305 1,619 936 6,014 2036-205 -430-214 4,305 1,619 936 6,012 2037-207 -430-214 4,305 1,619 936 6,009 2038-210 -430-214 4,305 1,619 936 6,006 2039-213 -430-214 4,305 1,619 936 6,004 2040-215 -430-214 4,305 1,619 936 6,001 2041-218 -430-214 4,305 1,619 936 5,998 2042-221 -430-214 4,305 1,619 936 5,995 2043-224 -430-214 4,305 1,619 936 5,993 2044 1,026-226 -430-214 4,305 1,619 936 7,016 Net Present Value @ 12% 17,886 EIRR 26.4% EIRR = economic internal rate of return, O&M = operation and maintenance, PW = permanent way, VOC = vehicle operating cost, VOT = value of time. Item Table 3: Results of Sensitivity Analysis for Economic Analysis Change NPV (Tk million) EIRR (%) Sensitivity Indicator Switching Value (%) Base Case 0 17,886 26.4 All Investment (+)10% 16,310 24.2 0.88 113 Loco and Rolling Stock (+)10% 16,711 24.5 0.66 152 O&M s (+)10% 17,485 26.1 0.22 446 All Benefits (-)10% 14,457 24.0 1.92 52 Generalized Change (-)10% 15,558 24.7-1.30-77 Road Saving (-)10% 16,782 25.6-0.62-162 All Benefits and All s (-/+)10% 12,909 22.0 2.78 +/-36 One Year Delay 13,312 21.2 EIRR = economic internal rate of return, NPV = net present value, O&M = operation and maintenance. Note: For switching values, the +/- indicate the percentage by which cost increases and benefit decreases to result in an NPV of 0.
6 D. Financial Analysis 14. BR is serving both as a commercial enterprise and as a public utility service provider. As a public utility service provider, BR has a special responsibility to operate specific services that are not commercially viable but are socially necessary. For instance, BR has to bear certain costs, namely a social cost, which includes i) carrying essential commodities and rendering transport facilities to passengers at lower prices than the cost of services; ii) operating uneconomic branch lines; iii) carrying relief materials at concessional rates; and iv) carrying military traffic at a less than normal tariff. BR is compensated under the Public Service Obligation system and has been able to cover its operating expenses by government subsidy. 15. As a matter of government policy, BR has been maintaining a low tariff regime for decades. Passenger fares had remained static for 20 years until the fare increase in October 2012. Despite this fare increase of up to 50%, it is not enough to cover the fuel price hikes in the last 20 years. Since BR plays a vital role in the country s socioeconomic development, serving both as a commercial enterprise and as a public service provider, the government subsidizes BR to cover its operating expenses. 16. A financial analysis has been carried out to assess the viability of the proposed project investment based on the incremental earnings and operational cost savings that would accrue to BR as a result of the procurement of passenger carriages. The analysis was carried out on an incremental basis using the discounted cash flow method, and calculating the internal rate of return of the project. 17. As with the economic analysis, it is assumed that new carriages will be added to the existing number of carriages. The deployment of new carriages is assumed to be allocated to the Dhaka Chittagong corridor, the critical corridor of the country. 18. It is assumed that there will be an increase in passenger fares by 20% in 2020. It is assumed that the Dhaka Chittagong corridor investment projects financed by ADB and the Japan International Cooperation Agency (JICA) will be completed by that time. The 20% fare increase is reasonable because passengers will benefit from a better traveling experience, including a reduction in travel time and enhanced safety and comfort. 19. An improvement in locomotive fuel efficiency of 30% is allowed in the analysis, limited to the newly procured locomotives. There is no change in the fuel efficiency to the existing locomotives. 20. Capital costs are based on the estimated project costs for 2015. The capital cost includes carriages, capital spares, maintenance spares, training, and taxes, but excludes price contingencies and financing charges during implementation. 21. Operational costs and earnings have been computed based on the incremental traffic derived by the project. The net of operational costs and earnings attributable to incremental traffic is considered in the revenue stream. 22. All financial projections are shown in 2015 nominal taka with no adjustment for inflation.
7 23. In the final year of the project, the residual value of investment was considered as per the economic life by applying the straight-line depreciation method. 6 24. The WACC in real terms for the project investment is estimated at 2.8%, as shown in Table 4. Based on recent auctions of 10-year Bangladesh government treasury bonds, the fund provided by the government is assumed to cost 10.8% in nominal costs. The WACC in real terms was used as the desired discount rate to compare the FIRR for the project and calculate the NPV. The with-subsidy FIRR and without-subsidy FIRR estimated for the proposed project was 5.2% and -3.7%, respectively. The results of the financial analysis are shown in Table 5. 25. A sensitivity analysis was carried out over the base case with respect to adverse changes in the costs and benefits. The result of the sensitivity analysis is shown in Table 6. A positive FIRR is only achieved when taking into account the government s subsidy to BR. In conclusion, the project s lending decision is based more on the economic viability than on the financial viability. Table 4: Weighted Average of Capital Description Financing Component ADB (OCR) GOB Total A Weighting 70.18% 29.82% 100.00% B Nominal 3.28% 10.80% C Tax Rate 0.00% 0.00% D Tax-adjusted Nominal 3.28% 10.80% E Inflation Rate 1.00% 6.50% F Real 2.26% 4.04% G Weighted Component of WACC 1.58% 1.20% 2.79% Weighted Average of Capital 2.80% ADB = Asian Development Bank, GOB = Government of Bangladesh, OCR = ordinary capital resources, WACC = weighted average cost of capital. Year Capital Coach O&M Table 5: Financial Analysis Results Locomotive Fuel Maintenance of PW Revenue from new passengers Government Subsidy Net Benefit 2015-5,484-5,484 2016-5,484-5,484 2017-8,774-8,774 2018-2,194-80 -144-134 473 525-1,554 2019-161 -288-267 945 1,049 1,278 2020-163 -288-267 1,134 1,259 1,675 2021-166 -288-267 1,134 1,259 1,672 2022-169 -288-267 1,134 1,259 1,669 2023-172 -288-267 1,134 1,259 1,666 6 In the analysis, 35 years for rolling stock was assumed based on the technical standards with appropriate maintenance.
8 Year Capital Coach O&M Locomotive Fuel Maintenance of PW Revenue from new passengers Government Subsidy Net Benefit 2024-175 -288-267 1,134 1,259 1,663 2025-178 -288-267 1,134 1,259 1,660 2026-180 -288-267 1,134 1,259 1,658 2027-183 -288-267 1,134 1,259 1,655 2028-186 -288-267 1,134 1,259 1,652 2029-189 -288-267 1,134 1,259 1,649 2030-192 -288-267 1,134 1,259 1,646 2031-195 -288-267 1,134 1,259 1,644 2032-197 -288-267 1,134 1,259 1,641 2033-200 -288-267 1,134 1,259 1,638 2034-203 -288-267 1,134 1,259 1,635 2035-206 -288-267 1,134 1,259 1,632 2036-209 -288-267 1,134 1,259 1,629 2037-211 -288-267 1,134 1,259 1,627 2038-214 -288-267 1,134 1,259 1,624 2039-217 -288-267 1,134 1,259 1,621 2040-220 -288-267 1,134 1,259 1,618 2041-223 -288-267 1,134 1,259 1,615 2042-226 -288-267 1,134 1,259 1,612 2043-228 -288-267 1,134 1,259 1,610 2044 1,473-231 -288-267 1,134 1,259 3,080 With-subsidy, Net Present Value at WACC 7,276 With-subsidy, FIRR 5.2% Without-subsidy, Net Present Value at WACC - Without-subsidy, FIRR -3.7% FIRR = financial internal rate of return, O&M = operation and maintenance, PW = permanent way, WACC = weighted average cost of capital. Table 6: Results of Sensitivity Analysis for Financial Analysis Item Change NPV Sensitivity Switching FIRR (%) (Tk million) Indicator Value (%) Base Case 0 7,276 5.2 All Investment (+)10% 4,166 4.1 4.27 23 Loco and Rolling Stock (+)10% 5,284 4.4 2.74 37 O&M s (+)10% 6,159 4.9 1.54 65 All Revenue (-)10% 3,300 3.9 5.46 18 One Year Delay 5,416 4.8 FIRR = financial internal rate of return, NPV = net present value, O&M = operation and maintenance.