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The Financial Express

Estimating the economic impacts of Padma Bridge

| Updated: December 15, 2020 20:25:39


Estimating the economic impacts of Padma Bridge

Construction of Padma Bridge is expected to generate welfare for the people of Bangladesh in general and the people of Southwest in particular. The benefits are expected to arise from the greater integration of regional markets within the Bangladeshi national economy.

Moreover, given the interdependence of economic activities/sectors, the direct impacts of the Padma Bridge on individual sectors and factor markets are likely to induce a chain of changes in the rest of the sectors of the economy. In this exercise, attempts have been made to quantify the economic as well as welfare implication of Padma Bridge using four different types of methodologies. Although strict comparisons of the outcomes of these models are not usually advocated, they have been used in this exercise to examine the robustness of the project benefit outcomes.

  1. Although it is customary to use 'traffic' models to estimate the benefits of transport project (e.g. Padma Bridge), reliance only on the traffic model may underestimate full benefits of the project since such a model can only capture primary or direct benefits in the form of efficiency gains arising out of cost and time saved.
  2. The secondary benefits of a transportation project are also substantial. The secondary effects may be generated due to multi-sectoral productivity gain through structural change occurring in the economy from improved productivity made possible by the bridge. The well known models for capturing secondary benefits are SAM based fixed price and CGE models.
  3. Hence in addition to adopting the traffic model, both SAM based fixed price and CGE models are employed to estimate full benefits of the Padma Bridge project. In this context the full benefits would thus compose of efficiency gains of the traffic model and the economy wide benefits of the SAM and CGE models.
  4. Because of its location in the South West region of Bangladesh, Padma Bridge is expected to have larger impacts on these regions compared to the other parts of Bangladesh. A regional CGE model, although not an impossibility, has not been possible because of lack of required region-specific parameters and elasticity values. However, a regional SAM model was formulated to assess the impacts of Padma Bridge on the Southwest (SW) region of Bangladesh.

Social Accounting Matrix (SAM) constructed for Bangladesh economy as well as for the Southwest region served as the databases for the above three economy wide models. Following simulations were carried out to examine the benefits of the Padma Bridge. More specifically, four simulations have been conducted for the SAM-based model. They are:

Simulation 1A (National): Total investment cost of building Padma Bridge will be around 2.9 billion USD, out of which 2.1 billion USD will roughly be injected into the national economy. The rest of the total cost will consist of imported inputs, interest charges etc. 2.1 billion USD is expected to be injected into the economy in the following way: construction sector 1.4 billion USD, utility 0.1 billion USD, trade 0.1 billion USD, transport and communication 0.15 billion USD, different kinds of services (professional, financial, public administration, social etc) 0.3 billion USD and food 0.05 billion USD. This total injection figure would exclude foreign imports, contingencies, IDC etc from the total cost of the bridge. All other exogenous elements remain unaltered.

  1. Simulation 1B (Regional): In order to simulate the impact of the Padma Bridge within the Regional SW SAM model, we performed similar injection of $2.1 billion into the regional economy. We did two alternative scenarios for the regional economy-one scenario assumes that 100 per cent of the investment stimulus will be felt in SW region and the other scenario is that 70 per cent of the stimulus will be operative in SW region. All other regional exogenous elements remain unaffected.

Operation of Jamuna Bridge suggests that additional demand may arise for consumer goods, energy and utility services as well as transport services. These demand effects are due to bridge construction and associated services activities. Therefore, in line with the Jamuna Bridge impact analysis exercise, further simulations were carried out (i.e. 2A and 2B) to capture the economic impacts of demand created by the investment stimulus of $2.1 billion. The simulation set ups are explained below:

III. Simulation 2A (National): Increase in sectoral demand of other crops by 10 per cent, Fisheries by 10 per cent, Utility by 5 per cent and Transport by 20 per cent at the national level.

IV. Simulation 2B (Regional): Increase in sectoral demand of other crops by 20 per cent, Fisheries by 20 per cent, Utility by 10 per cent and Transport by 50 per cent at the regional level.

Construction of Padma Bridge is likely to lessen time needed to move goods leading to reduced transport margins. In line with the study on Jamuna Bridge a similar simulation is conducted under the CGE framework where sectoral transport margins are reduced and its impacts on resource reallocation, sectoral output and consumption, poverty and income distribution situation of the representative household groups are examined. The simulation is as follows:

V. Simulation 3: In the CGE simulation base values of the sectoral transport margin rates are reduced by 50 per cent. The base values of all other parameters are retained.

Although outcomes of all types of models are positive, the results show variations due especially to size of shocks. The results are summarised below.

  1. In the Traffic model, road users benefits are estimated based on the saving on vehicle operation costs (VOC) and savings in travel time cost (TTC). Total road user benefit is estimated to be about 1,295,840 million BDT (18,512 million USD) over the 31 year period.
  2. As for economy-wide (secondary) benefits, use of national SAM with injection of 2.1 billion USD into the economy (i.e. Simulation 1A) produced economy wide (secondary benefits) value addition of 453,670 million BDT (6481 million USD) over a period of 31 years, which represents 10.6 per cent growth. This would give an annualised growth rate of 0.33 per cent of national base GDP. This is obtained by dividing the total economy-wide benefits by 31 to get an average annual incremental flow of value and dividing that figure by base GDP figure, we get this (0.33 per cent) annual figure. If the WEB figure is added to with direct (traffic) benefits, the annual size of the benefits of the bridge, in relation to GDP, would be larger, as noted later.
  3. Compared to national GDP the average annual increase in SW regional base GDP because of WEB alone will be 2.3 per cent. This is on the assumption that 100 per cent of the shock will occur within the regional economy. However, if we assume that only 70 per cent of the shock would be operative in the region (and not full 100 per cent), the equivalent of the annual rate of growth of regional GDP would be roughly 1.66 per cent. The annual equivalent rate of growth was calculated keeping in view the 31 years as the time taken to fully realise the impact of the bridge. If we took a shorter time horizon for fully realising the benefit of growth, then the annual equivalent rates could be larger. Given that SAM based model assumes excess capacity (which may be a reasonable assumption in a country like Bangladesh with under-utilised resources), the size of impacts varies with the size of injection or shock.
  4. To sum up, using the Traffic model, road users benefit is found to be 1,295,840 million BDT (18512 million USD). We consider value added increase of 453,670 million BDT ($6481 million) derived from the national SAM model (i.e. simulation 1A) as economy-wide benefits of the project. Thus, total project benefit is estimated to be 1,749,510 million taka or 24993 million USD. The breakdown is: Total (1,749,510 million taka or 24993 million USD) = Road User Benefit (1,295,840 million taka or $18512 million) + WEB (453,670 million taka or $6481 million). This implies that total project benefit is 39 per cent relative to the base national income (i.e. 4,468,549 million taka or 63836 million USD). Assuming the 31 year full realisation timeframe, total project benefits per year is then 1.26 per cent relative to the base national income. The base year GDP figure would not remain the same over 31 years. Assuming 5 per cent GDP growth over (as experienced in recent years) the 31 year period, an alternative estimate of base year is done. The total project benefit (i.e. 1,749,510 million taka or 24993 million USD) is only 0.56 per cent relative to the alternative base national income. Under certain assumptions, the relative size of annual increase of output for the SW region would be 1.66 per cent considering the WEB alone. If the total benefits were taken into account, the relative size of annual flow of benefits in comparison to regional GDP would, of course, be larger and, would depend on how much of the traffic benefits would accrue to the SW region.
  5. Further assessment of the total project benefits (explained above) in terms of conventional project appraisal measures suggests that the project is economically viable. More specifically, the project is viable with:
  •  a net present value of 1234 million USD;
  • a benefit-cost ratio (BCR) of 2.01 million USD; and
  • an economic internal rate of return (EIRR) of 19 per cent
  1. The application of constrained optimisation model such as CGE model outcomes also vindicates the findings of the traffic model and SAM based model. More specifically, 50 per cent reduction in transport margins may lead to a welfare increase by 0.78 per cent compared to the base value.
  2. Under certain assumptions (Simulation 1A), the construction of the Padma Bridge would lead to an annualised reduction in head-count poverty at the national level by 0.84 per cent and at the regional level by 1.01 per cent. Other simulations also indicated a reduction in poverty in different magnitudes.

 [The article presents the summary of the findings of the paper titled Estimating the economic impacts of the Padma bridge in Bangladesh published by University Library of Munich, Germany.]

Dr Selim Raihan is Professor of Economics, University of Dhaka and Executive Director, SANEM. [email protected]

Dr Bazlul Haque Khondker is Professor of Economics, University of Dhaka

and Chairman, SANEM.

[email protected]

 

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