Case 3: World Bank revives $1.

2 billion loan
The case highlights one of the important topic of Managerial Economics, i.e. how to optimize net benefits. Review the news report in The Daily Star, World Bank revives $1.2 billion loan (http://www.thedailystar.net/newDesign/latest_news.php?nid=41004) and the paper on Padma Multipurpose Bridge Project below. Visit The World Bank, Asian Development Bank, Japan International Co-operative Agency (JICA) and Islamic development Bank (ISDB) websites. You are also welcome to review any other reports on Padma bridge financing. Based on your review, please write a short paper no more than 5 (five) typed pages that should include: 1. Why the World Bank cancelled and subsequently revived the Padma bridge financing? 2. Was the World Bank justified in cancelling the loan? 3. What are the costs and benefits of alternative financing: e.g. i) Malaysian proposal; or ii) Domestic resources 4. How would you like the bridge to be financed? 5. Corruption is everywherewhy should you worry about it?.

Padma Multipurpose Bridge Project (RRP BAN 35049)

FINANCIAL ANALYSIS 1A. Introduction 11. A financial analysis assessed the viability of the proposed project investment based on the capacity of Bangladesh Bridge Authority (BBA) to generate sufficient revenues to cover the capital costs of the project. The analysis was carried out on an incremental basis, using the discounted cash flow method and measuring the financial internal rate of return of the project. 1B. Project Cost 12. Taking into account the financial costs, the total amount needed to finance the Padma Bridge Project is presented in Table 1. Table1: Project Financing Plan ($ million)
Component World Bank ADB JICA IDB Government Total A. Main Bridge A1 Main bridge and viaducts A1.1 Main bridge and viaducts 500.0 300.0 300.0 239.8 A1.2 Construction yards 57.5 A2 Approach roads and bridge-end facilities A2.1 Mawa side 35.0 A2.2 Janjira side 35.0 140.0 18.9 Subtotal (A) 570.0 300.0 300.0 140.0 316.2 B. River Training Works 275.0 248.0 276.9 C. Implementation of SAP and EMP C1 SAP 206.3 66.9 C2 EMP 18.7 Subtotal (C) 225.0 0.0 0.0 0.0 66.9 D. Consultancies for Supervision D1 Construction supervision and project 65.0 management support D2 M&E and supervision of EMP and SAP 7.0 Subtotal (D) 72.0 0.0 0.0 0.0 0.0 E. Project Management, TA, Training E1 Project management support and audits 7.0 E2 BBA strengthening, TA, POE, and training 14.0 E3 Strategic studies 5.0 Subtotal (E) 26.0 0.0 0.0 0.0 0.0 Total Project Cost 1,168.0 548.0 300.0 140.0 660.0 Financing Costs 32.0 67.0 Total Project Cost 1,200.0 615.0 300.0 140.0 660.0

1,339.8 57.5 35.0 193.9 1,626.2 799.9 273.2 18.7 291.9 65.0 7.0 72.0 7.0 14.0 5.0 26.0 2,816.0 99.0 2,915.0

ADB = Asian Development Bank, BBA = Bangladesh Bridge Authority, EMP = environmental management plan, IDB = Islamic Development Bank, JICA = Japan International Cooperation Agency, POE = panel of experts, SAP = social action plan, TA = technical assistance. Sources: Government of Bangladesh, Asian Development Bank estimates 2

13. Project financing needs were determined with the financing terms shown in Table 2. For the purpose of analysis, the term of the ADB loan from the ordinary capital resources is 25 years with a 5-year grace period. Item Table 2: Financing Terms ADB World Bank OCR 539 ADF 76 1,200 0.75% 300 0.01% 140 LIBOR +1.2% 0% 20 4 JICA IDB

Loan or credit amount ($million) Interest rate

LIBOR 1.0% +0.3% 1.5% floating 0.15% 25 5 0% 32 8

Other fees and charges Loan period (years) Grace period (years)

Fixed at the end of construction 0% 0% 40 10 40 10

ADB = Asian Development Bank, ADF = Asian Development Fund, IDA = International Development Association, IDB = Islamic Development Bank, JICA = Japan International Cooperation Agency, LIBOR = London interbank offered rate, OCR = ordinary capital resources, SDR = special drawing right. Sources: Asian Development Bank estimates 1C. Traffic Forecast 14. Using detailed information on socioeconomics and travel patterns, a transport model was developed to forecast traffic volumes and revenues for the Padma bridge. The basic steps involved in the transport modeling are to (i) build the base and future year networks; (ii) determine base year river crossing demand using an origindestination survey undertaken in May 2009 and calibrate it to current conditions of road traffic; (iii) determine growth in future demand by forecasting growth in car ownership and changes in socio-demographics, including population and employment; (iv) calculate, based on the relative costs of each mode, how mode choice may change for future year demand; (v) assess freight movements; and (vi) assign motorized traffic to a representation of the road network. 15. Two traffic scenarios have been analyzed. A high-traffic scenario, considered the base case, results from the traffic model run and is based on sustained traffic growth rates as well as a high diversion rate of approximately 80% from other ferry crossings, mainly the Paturia ferry crossing. As part of a sensitivity analysis requested by the cofinanciers, a low-traffic scenario is also presented. This scenario is an adjusted result based on lower traffic growth rates, especially for 20102020, and on a 70% diversion rate from Paturia. The lower diversion rate from Paturia has a significant impact, as diversion from Paturia should contribute approximately 65% of Padma bridge traffic.

16. In both cases, the following toll increases agreed by the government were applied: a graduated increase in toll rates from the current Jamuna bridge schedule of 40% in 2011, 80% in 2016, and 100% in 2021 (over 2009 levels). Vehicle type Table 3: Toll Rates Taka per Vehicle 200 9 935 795 400 30 2011 1,309 1,113 560 42 2016 1,683 1,431 720 54 2021 1,870 1,590 800 60

Truck Bus Car Motorcycle

Source: Design Consultant calculations. 3 11. High-Traffic Scenario (Base Case) Table 4: Traffic Forecast for Padma (Base Case) (annual average daily traffic) Year Truck Bus Light Vehicle Total 201 3,389 2,812 1,491 7,835 4 201 4,323 3,413 2,015 9,944 5 201 5,257 4,013 2,539 12,054 6 201 6,192 4,614 3,063 14,163 7 201 7,285 5,294 3,701 16,272 8 201 8,572 6,074 4,471 18,382 9 202 10,086 6,969 5,402 20,491 0 202 14,094 9,474 7,731 28,928 4 202 18,910 11,041 12,267 38,602 9 203 23,204 12,032 16,816 48,691 4 204 28,060 13,081 22,205 60,460 0 Source: Design Consultant calculations. 12. Low-Traffic Scenario

Year 201 5 201 6 201 7 201 8 201 9 202 0 202 4 202 9 203 4 204 0

Truck 1,868 2,685 3,802 4,334 4,941 5,633 9,513

Table 5: Traffic Forecast (annual average daily traffic) Bus Light Vehicle Total 1,533 825 4,300 2,191 1,193 3,088 1,697 3,490 1,952 3,943 2,245 4,259 2,716 5,794 5,822 6,176 8,738 9,948 11,325 12,831 21,508 33,747 39,719 44,925

14,755 7,320 11,084 17,249 8,080 13,703 19,425 8,835 15,892

Source: World Bank calculations. 1D. Financial Analysis 17. A financial benefitcost analysis was undertaken over a 30-year period following the opening of the Padma bridge. All costs and revenues were expressed in nominal prices. Surplus revenues from operation of the Jamuna bridge were incorporated in the analysis. 18. As the timeline for building a railway line across the Padma bridge has yet to be confirmed, the corresponding cost and benefits were not included in the analysis. However, the implementation of the railway line during the life span of the bridge, assuming a bridge life of 100 years, is highly likely. 11. Weighted Average Cost of Capital 19. The appropriate discount rate to use in the financial evaluation is the weighted average cost of capital (WACC). This rate serves as a proxy for the financial opportunity cost of capital to assess the financial viability of projects. It represents the cost incurred by the government in raising the capital necessary to implement the project. 4

110. Table 6 shows the calculation of the project WACC following Asian Development Bank (ADB) guidelines. The cost of government funds has been taken as the yield on the 20-year Bangladesh Government Treasury Bond, which was 8.97% in July 2009.1 Table 6: Weighted Average Cost of Capital (%) Item ADB ADB World JICA IDB Govern- Total OCR ADF Bank ment Amount ($ 539 76 1,200 300 140 660 2,915 million) Weighting 18.51 2.61 41.21 10.30 4.81 22.56 100.0 Nominal cost 5.20 1.50 0.75 0.01 4.40 9.00 Tax rate 0 0 0 0 0 0 Tax-adjusted 5.20 1.50 0.75 0.01 4.40 9.00 nominal rate Inflation rate 0 0 0 0 0 6.00 Real cost 5.20 1.50 0.75 0.01 4.40 2.83 Weighted 0.96 0.04 0.31 0.00 0.21 0.64 component WACC 2.16 ADB = Asian Development Bank, ADF = Asian Development Fund, IDB = Islamic Development Bank, JICA = Japan International Cooperation Agency, OCR = ordinary capital resources, WACC = weighted average cost of capital. Source: Asian Development Bank calculations. 12. High-Traffic Scenario (Base Case) 111. The deficits and surpluses will have to be analyzed against the current financial situation of BBA. Although it is suspected that BBA may have a significant revenue surplus at present, this will have to be confirmed after reviewing the latest audited financial statements, which are under preparation. In the following tables, it is assumed that BBA has no reserve. Table 7: Net Surplus/(Deficit) for the High-Traffic Scenario ($ million) Item Year Ending June 20112015 20162020 20212025 20262030 Padma bridge 0 30 (8) 24 Jamuna (68) 103 171 249 bridge Total (68) 133 163 273 Source: Asian Development Bank calculations.

112. Considering the revenue stream presented in Table 7, the financial internal rate of return (FIRR) is 7.9% in nominal terms, and the payback period is 17 years, to fiscal year (FY) 2027. 13. Low-Traffic Scenario Table 8: Net Surplus/(Deficit) for the Low-Traffic Scenario ($ million) Item Year Ending June 20112015 20162020 20212025 20262030 Padma bridge 0 (172) (226) (137) Jamuna (86) 84 174 304 bridge Total (86) (88) (52) 167 Source: Asian Development Bank calculations. 1 Source: Bangladesh Bank (2009). 5 113. Considering the revenue stream presented in Table 8, the FIRR is 6.5% in nominal terms, and the payback period is 19 years to FY2029. 14. Conclusion 114. In the low-traffic scenario, which constitutes a worst-case scenario for the Padma bridge, the critical period for the project is 20112015 and, most importantly, the first 10 years after the Padma bridge opens. As such, the low-traffic scenario cannot be used as a basis to determine toll levels, as they would be unreasonable. However, ADB could contribute to improving financial sustainability during the critical period by extending the grace period, currently set at 5 years. If the government wished to pursue its objective to maintain BBA as a self-sustaining entity, the final recourse would be to keep maintenance at a minimum, which needs to be avoided. 115. Considering the revenue stream presented in table 9, the financial internal rate of return (FIRR) is 6.5% (in nominal terms); and the payback period is 19 years (FY2029), identical to the scenario with a 5 year grace period. Table 9: Net Surplus / (Deficit) for the Low Traffic Scenario with 7 year grace period (US$ million) Item Year Ending June 20112015 0 (86) (86) 20162020 (152) 84 (68) 20212025 (220) 174 (46) 20262030 (126) 304 178

Padma Bridge Jamuna Bridge Total

Source: Asian Development Bank calculations. 116. The above analyses are based on the assumption that BBA currently has no cumulative income surplus. However BBAs financial statements for financial year 200910, which have not been audited yet, appear to have a cumulative surplus in the order of $ 100 million equivalent. With this amount of cumulative surpluses, the objective of maintaining BBA as a self sustaining entity would be achievable, subject to appropriate financial management of BBAs resources.