South Asia Subregional Economic Cooperation Chittagong-Cox s Bazar Railway Project, Phase 1 (RRP BAN 46452-002) A. Introduction ECONOMIC AND FINANCIAL ANALYSIS 1. The proposed project will construct 102 kilometers (km) of rail track, extending the Chittagong Dohazari section to Cox s Bazar, which is a major tourist attraction in Bangladesh and also the main salt-producing area in the country. The proposed railway line will add a muchneeded, comfortable travel option from Dhaka to Cox s Bazar, and support the long-term growth of tourism in the area. It will also benefit major economic development projects in the catchment area, such as a power plant, special economic zone, and a deep-sea port. The rail line will further provide connectivity to trade with Myanmar once the extension proposed for the next project phase is completed. The project will reduce road traffic by about 40% and reduce the travel time in half with a limited-stop service from Dhaka. The railway will also provide added travel comfort through special coaches for tourists and thus boost the number of tourists visiting Cox s Bazar, which in turn will add to the economic development of the area. 2. An economic analysis was undertaken to assess the economic viability of the project. It compares the benefits and costs of with-project and without-project 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 analysis. Customs duty and value-added tax (VAT) were included in the project cost estimate, but are excluded in the economic analysis. Physical contingencies are included because they are part of the value of resources that will be used for construction, but price contingencies are excluded since they do not reflect the real changes in the volume of resources consumed. The analysis period is taken as 25 years. The exchange rate used in the analysis is US$1 = Tk77.70. 3. A financial analysis was undertaken to assess the financial viability of the project in a similar approach to that of the economic analysis. For the financial assessment, the hurdle rate of return is the weighted average cost of capital (WACC). Based on the funding mix, the interest rates, and inflation rates, the real WACC for this project is estimated to be 2.7%. The project s financial internal rate of return (FIRR) is calculated using the financial terms of Bangladesh Railway costs and revenues with some revisions. Customs duty and VAT are included in the costs. The analysis period and exchange rate used in the financial analysis are same as those used in the economic analysis. B. Project Details: Extension of Railway Line to Cox s Bazar 4. At present, the railway extends up to Dohazari, which is about 47 km from Chittagong in the direction of Cox s Bazar, and consists of a single line. The proposed project will extend this line by 102 km to connect Cox s Bazar. The rail connection to the planned deep-sea port takes off at about 48km south of Dohazari and thus the proposed line can be shared by passenger and freight. The proposed project also includes eight stations and one terminal station with commercial facilities at Cox s Bazar. A key objective of this project is to support the development of tourism, which depends on good access by land and air. Beyond tourism, this project would benefit the entire study area, from Dohazari to Teknaf, which is underdeveloped and largely isolated from the rest of the country. 5. Passenger traffic. Passenger traffic to Cox s Bazar consists of tourist flows and trips by the local population. Total passenger traffic along the road corridor is estimated at 16 million
2 trips a year (in both directions) based on daily traffic near Cox s Bazar. 1 About 58% of bus passengers travel the entire Chittagong Cox's Bazar road distance, which amounts to about 25,000 trips daily or 9 million trips a year in both directions. 2 In the absence of a rail line to Cox's Bazar, travel is mainly by bus at present. By the 2020s, luxury buses are assumed to predominate the tourist segment of the market. Air connection is also available from Dhaka to Cox s Bazar, but the local airport is not certified by the International Civil Aviation Organization. 6. A major driver of travel to Cox's Bazar will be tourism, mainly domestic but with a small percentage of international visitors. The estimated number of tourists to the area is 1.875 million annually based on a survey of hotel accommodation in Cox s Bazar. The feasibility study estimates peak-season daily tourist arrivals at 7,300 and the off-peak equivalent at 3,100, for an annualized average daily tourist inflow of 5,200. Conservatively, this is assumed to grow at 5% per annum based on the sector growth rate. Tourists originate from all over the country, but most trips to Cox's Bazar will start or resume at Dhaka (or Chittagong), so travel costs, revenues, and benefits are tallied from Dhaka. Once the railway line extends to Cox s Bazar, Bangladesh Railway proposes to run trains that are fast luxury service, either nonstop or stopping just at Chittagong (and perhaps at Comilla). The carriages will be air-conditioned and have on-board features to attract passengers away from cars and luxury buses. The journey by train will be faster than the journey by road (by up to 50%). The rail journey becomes part of the holiday experience. By offering a comfortable and fast ride, and a competitive fare, rail s market share could exceed 50% (in theory, it should attract almost 100% of non-car users and a share of car users) but is conservatively assumed at 40% for the analysis. 7. In addition to the tourist trains and tourist traffic, the local population will use the railway for their travel. This amounts to over 5 million passenger trips going to Chittagong or beyond, and over 7 million trips along the corridor. The rail can attract a sizable share of longer-distance passenger traffic with reliable intercity and mail express trains, and also shorter-distance travel with local trains. For the analysis, one-third of the longer-distance passenger traffic and 10% of the shorter-distance passenger traffic are assumed to use the rail in this corridor. 8. Freight traffic. Cox s Bazar is the only place in the country where salt is harvested. Salt production is estimated at about 2.15 million tons per annum. Another major produce from the area is dry fish. Local consultation also indicated freight to be generated from timber arriving from Myanmar and from consumption of bulk commodities in the catchment area. The military cantonment and Bangladesh Border Guard base that is being established in Ramu will generate about three freight trains per month for supplies. Based on consultation, a conservative estimate of rail freight demand is 750,000 tons per year. The large development projects planned north of Cox s Bazar (power plant, economic zone, and deep-sea port) are likely to generate large-scale freight movement in this corridor, which will require a double-line rail service in the future, but this is not factored into the present analysis. 1 ADB. 2014. Final Report, Phase I Feasibility Study for Upgrading of Chittagong Cox s Bazar Teknaf Road (N1) under SRTPPF (Roads Package 2). Consultant s Report. Manila. (ADB Loan 2688- BAN). 2 ADB. 2016. Final Feasibility Study Report for RCIP Subproject 4 Construction of Single Line Dual Gauge Railway Track from Dohazari to Cox s Bazar via Ramu and Ramu to Gundum near Myanmar Border. Consultant s Report. Manila (ADB Loan No. 2688-BAN (SF)).
3 C. Economic Analysis 1. Project Costs and Benefits 9. The costs to be incurred for the project comprise construction costs and operation and maintenance costs. The purchase of rolling stock and passenger coaches is assumed in the case of tourist trains. In the first year of operation, eight train sets will be required to cover peakseason demand, and additional trains are to be procured to cater to growing tourist demand. It is assumed that during off-season, these trains will be used in other sections of the rail corridor. 10. Infrastructure capital costs were estimated based on the detailed engineering design (footnote 2). Rolling-stock prices were taken from the assessment carried out for purchases under the ongoing Railway Sector Investment Program of the Asian Development Bank. 3 Economic costs are expressed in fixed monetary values. The economic costs were derived from the financial cost by removing the transfer costs and applying a standard conversion factor of 0.94 and a shadow wage factor of 0.70 (as adopted in the feasibility study) for unskilled labor. 4 11. Capital costs include the cost of land acquisition. Financial land acquisition costs to build railways in rural areas are very high. The economic value is taken to be the value of crop land, which is the discounted cash flow of surpluses derived from farming the land. Using agricultural models, and adopting assumptions favoring high land values, the economic value of farm land is computed to be about $8,000 per hectare in the feasibility study, which the analysis adopts. To this is added the cost of buildings, trees, and other elements of the land, and allowances for social disruption arising from compulsory acquisition. 12. In the case of trains, catering to local passenger travel (local, mail, and intercity trains) and freight operations is assumed to be an extension of the railway operations, so system-wide capital and operating costs are adopted for the analysis. The economic cost used for passenger and freight trains is shown in Table 1. It is assumed that one passenger train has 22 coaches, and one container train has 32 bogies. Economic prices were derived from financial prices by using a conversion factor of 0.8, which is used for rail projects in Bangladesh. Table 1: Economic Cost of Passenger and Freight Trains (Tk per train-kilometer) Item Passenger Train Freight Train Capital, operation and maintenance cost 904 523 Locomotive fuel expenditure 362 476 Maintenance of permanent way 144 188 Total 1,410 1,187 Source: Asian Development Bank estimates based on data from Bangladesh Railway Information Book 2014. 13. Economic benefits include bus and truck traffic being replaced by the train, and road vehicle operating costs (VOCs), which were estimated by the HDM4 VOC model using input values obtained from the Roads and Highways Department (RHD) of Bangladesh and updated to 2015 prices. The estimates also reflect luxury bus prices. These figures cover vehicle capital as well as operation and maintenance. Road accident cost data published by RHD was used to derive the unit road accident cost per passenger-km (Tk0.180) and per ton-km (Tk0.597) and to estimate the benefit of fewer road accidents that comes with the shift from road to rail traffic. 3 ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility and Technical Assistance Grant to the People s Republic of Bangladesh for the Railway Sector Investment Program. Manila. 4 Conversion factor estimated using trade data from the World Development Indicators available through the World Bank website.
4 14. The benefits considered are VOCs being replaced by the railway carrying tourists and local passengers as well as freight. In addition to the VOC savings, the passengers will save time thanks to faster travel. The journey time is calculated assuming an average speed of 40 km per hour (km/h) for luxury buses and 70 km/h for limited-stop tourist trains. In the case of local passenger traffic, the speeds are assumed at 30 km/h for buses and 50 km/h for trains. For passengers on air-conditioned buses, the value of travel time (updated to 2015 based on per capita income growth) is Tk104.8 per hour. 5 This value is adopted for car passengers as well. The value of time is assumed to increase in real terms based on an increase in per capita income in real terms; for the analysis, a 3% yearly increase is considered. 2. Results of Economic Analysis 15. An economic evaluation was carried out by comparing with-project and without-project options, and the results are shown in Table 2, which gives the EIRR and NPV for the proposed project option. A 4-year implementation period is considered for the construction of the proposed project starting in 2018. The analysis considers a 25-year operation period starting in 2022. A discount rate of 12% is used as an acceptable economic rate of return. The economic life of the project components ranges from 32 to 50 years, and the residual value at the end of the project period is considered by applying a straight-line depreciation. 6 The analysis yielded an EIRR of 14.8%, and the NPV of the project at a 12% discount rate is Tk18,598 million. Year Capital cost Railway line Tourist trains Table 2: Economic Analysis Results (Tk million) Operation /maintenan ce cost Tourist train operation Luxury bus/car operating cost savings Benefits Passenge r benefits Local passenger and freight train operation Local and Freight regional traffic net passeng benefits er net benefits Acci dent Savi ngs Net Benefits 2018 (8853) 0 0 0 0 0 0 0 -(8853) 2019 (22132) 0 0 0 0 0 0 0 (22132) 2020 (25820) 0 0 0 0 0 0 0 (25820) 2021 (16968) 0 0 0 0 0 0 0 (16968) 2022 0 (6224) (494) 4056 3619 1721 884 321 3884 2023 0 (1037) (519) 4259 3863 1872 928 356 9723 2024 0 (1037) (545) 4472 4125 1905 974 393 10288 2025 0 0 (572) 4696 4406 2075 1023 412 12041 2026 0 (1037) (600) 4931 4707 2256 1074 433 11763 2027 0 (1037) (630) 5177 5029 2320 1128 455 12441 2028 0 (1037) (662) 5436 5374 2524 1184 477 13297 2029 0 0 (695) 5708 5745 2613 1243 501 15115 2030 0 (1037) (730) 5993 6142 2843 1306 526 15043 2031 0 (1037) (766) 6293 6568 2959 1371 553 15940 2032 0 (1037) (805) 6607 6982 3205 1439 580 16973 2033 0 (1037) (845) 6938 7423 3338 1511 609 17937 2034 0 (1037) (887) 7285 7893 3613 1587 640 19093 2035 0 (1037) (931) 7649 8393 3776 1635 672 20156 2036 0 (1037) (978) 8031 8926 4084 1684 705 21415 2037 0 (1037) (1027) 8433 9493 4283 1734 741 22619 2038 0 (2075) (1078) 8855 10097 4500 1786 778 22863 2039 0 (1037) (1132) 9297 10740 4866 1840 817 25390 5 Government of Bangladesh. Road and Highways Department. 2005. Road User Cost Annual Report for 2004 2005. 6 The economic life of a railway line is 50 years; for rolling stock, it is 32 years.
5 2040 0 (1037) (1189) 9762 11426 5125 1895 857 26839 2041 0 (2075) (1189) 10250 12156 5407 1952 875 27377 2042 0 (1037) (1189) 10763 12934 5713 2010 894 30088 2043 0 (2075) (1189) 11301 13763 6044 2071 913 30830 2044 0 (1037) (1189) 11866 14647 6204 2133 920 33544 2045 0 0 (1189) 11866 14846 6367 2197 927 35014 2046 36886 16354 (1189) 11866 15050 6533 2263 934 88697 Net Present Value at 12% 18598 EIRR (%) 14.8 ( ) = negative, EIRR = economic internal rate of return. Source: Asian Development Bank estimates. 3. Sensitivity Analysis 16. A sensitivity analysis was carried out for 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%. Table 3: Results of Sensitivity Analysis for Economic Analysis Item Change NPV Switching EIRR (%) (Tk million) Value (%) Base case 0 18598 14.8 Overall investment (+)10% 12570 13.8 +31 All benefits (-)10% 10358 13.7-23 1-year delay 17353 14.6 All benefits and all costs (-/+)10% 4329 12.6 +/-13 EIRR = economic internal rate of return, NPV = net present value. Source: Asian Development Bank estimates. D. Financial Analysis 17. A financial analysis was carried out to assess the viability of the proposed investment based on the incremental earnings and operational costs that would accrue to Bangladesh Railway as a result of the implementation of the proposed project. Passenger fares are the most important revenue generator for the proposed section. Assuming that the tourist train fare will be equal to that for intercity trains, and that local and freight trains will use the fare that is currently charged on other sections, the project will generate sufficient revenue to meet the operation and maintenance expenditure and partially recover the investment made. The projected total revenue is Tk168,503 million, which is nearly six times the projected recurrent operation and maintenance costs of Tk29,190 million for the analysis period. A detailed cost benefit analysis was not performed for the project because neither the current nor the expected tariff is aimed at full cost recovery. The project lending decision is based more on the economic viability than the financial viability. 18. The historical trend of Bangladesh Railway s operating ratio (operating expenses divided by operating revenues) has not improved, mainly because of a static passenger and freight tariff for many years and the fact that Bangladesh Railway has been operating for years beyond the theoretical operating capacity, especially in the Dhaka Chittagong corridor. The operating ratio with subsidy is now at 170% in fiscal year (FY) 2015, after peaking at 216% in FY2012 compared with 161% in FY2008. The improvements in FY2014 and FY2015 were caused by an increase in the tariff approved by the government in October 2012. The adjustment of the passenger and freight tariff was the first since 1992. The ongoing tariff reform will ensure that the operating ratio will improve and remain at an acceptable level; annual adjustments of the tariff will compensate for increased cost, such as fuel prices and expenses for staff.
6 Table 4: Bangladesh Railway s Financial Performance Item Unit Fiscal Year 2013 2014 2015 Financial Performance Total operating revenue Tk million 8,043 8,002 9,345 Total operating expense Tk million (15,624) (16,017) (18,082) Net operating deficit Tk million (7,581) (8,015) (8,728) Ministry of Railways Budget Non-development budget Tk million 15,900 17,110 18,780 Ratio non-development budget to operating expenses % 102 107 104 Development budget Tk million 33,100 38,780 44,850 Total ministry budget Tk million 49,000 55,890 63,630 ( ) = negative Source: Government of Bangladesh, Bangladesh Railway and Ministry of Finance. 19. Bangladesh Railway is supported by a budgetary support committed by the government; the yearly government support is adequate to sustain operations and reflects the systemic importance of Bangladesh Railway. The budgetary support provided to the Ministry of Railways covered 102% of the operating expenditure for Bangladesh Railway in FY2013, 107% in FY2014 and 104% in FY2015 (Table 4). The budgetary support to cover the full operating expenditures of Bangladesh Railway is provided as a separate budget item (non-development budget) and in addition to budgetary support for development projects (development budget) financed by the Government of Bangladesh and development partners.