PAD - LGED

Annex 8: Economic Analysis
Bangladesh: Second Rural Transport Improvement Project (P123828)
1. A Cost-benefit analysis has been carried out for the main investments components of the
project: (i) Rehabilitation and Periodic Maintenance (including pilot for PBMC), and Upazila
and Union Roads Improvement; (ii) GMC and ghats improvement; and (iii) RWT improvement.
The sections below describe the methodology, main results of the economic appraisal, and
sensitivity analysis for each of the component.
A. RMP and Upazila and Union Roads Improvement components:
i) Methodology and main assumptions:
2. A cost-benefit analysis was carried out for the candidate roads identified under the UZR
and UNR improvement component. Only roads for the first year of the RPM component have
been selected, therefore the cost-benefit analysis is limited to those identified roads.
3. Both, the RPM and road improvement components are expected to produce benefits of
the form of improved access for rural communities in the area of project influence, reduced
transport cost for the road users, more efficient marketing of rural products, and ultimately
increased employment and income generation. The benefits have been compared with the
economic costs of the roads sub-projects components over the project life (assumed to be 20
years), in order to determine their economic internal rates of return (EIRR), and economic net
present values (ENPV).
4. The project life was assumed to be inclusive of the construction and maintenance periods
for each improved asset and thus defined the period for the project appraisal. In the case of the
roads sub-projects, a construction period of 18 months was assumed.
ii) Measurement of economic costs:
5. Recent biddings and contract rates for LGED projects which now being implemented
were used as the basis for computing the average unit capital costs to be applied in the appraisal
of selected RTIP-II sub-projects, inflated to mid-2012 values. However, for some UZR
improvement sub-projects for which detailed survey, design and cost estimation has been
completed, these cost estimates have been used. These unit costs, expressed in financial values,
were converted to economic values through the application of a Shadow Pricing Factor (SPF).
6. In previous LGED projects, a standard SPF of 0.80 was applied in order to remove the
tax and duty components, as well as to adjust for any market distortions (such as subsidies) in
financial prices. To ensure consistency with other projects, a SPF of 0.80 was used for the
determination of economic costs in RTIP-II. At this level, the SPF makes adequate allowance for
the importation of some construction materials (such as asphalt) which will carry higher rates of
tax.
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