ECONOMIC ANALYSIS. excluded from subproject economic analysis, but were included in the project assessment.

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1 Assam Integrated Flood and Riverbank Erosion Risk Management Investment Program (RRP IND 38412) ECONOMIC ANALYSIS A. Introduction 1. The economic analysis examines the economic viability of the three subprojects included in the Assam Integrated Flood and Riverbank Erosion Risk Management Investment Program, following the Guidelines for the Economic Analysis of Projects of the Asian Development Bank (ADB). 1 The analysis draws on the socioeconomic survey carried out under the project preparatory technical assistance (TA) and other available secondary data collected from line departments and district administration offices. 2 The approach and basic assumptions include the following: (i) using the world price numeraire, financial prices based on mid-2009 prices and exchange rates are converted to international prices; (ii) the Indian rupee is the unit of account with an exchange rate of Rs44.8 per US dollar; (iii) a standard conversion factor of 0.90 is used, with a shadow wage rate of 0.75 for unskilled labor; and (iv) each subproject is assumed to have an economic life of 30 years including construction. The financial analysis focuses on the impacts on the incomes of subproject beneficiaries. 3 B. Economic Costs and Valuation 2. Methodology. To derive the economic costs, conversion factors were applied to the capital investment and recurrent costs, including capacity strengthening and project management accrued to the subprojects. 4 Annual operation and maintenance (O&M) costs have been estimated at 2% for earthworks, riverbank protection, and other structural works, plus other recurrent costs of subproject management including staffing and office operations. The total economic capital cost of the subprojects is Rs1,076 million for the Dibrugarh subproject, Rs453 million for the Kaziranga subproject, and Rs2,304 million for the Palasbari subproject. The annual O&M cost is Rs10.6 million for the Dibrugarh subproject, Rs5.7 million for the Kaziranga subproject, and Rs48.6 million for the Palasbari subproject. 3. Alternatives and least-cost option. Within the immediate objective of protecting the subproject areas (having existing embankment systems) from flood inundation damage and erosion-induced land loss, structural measures that can fully meet the requirement at least cost were adopted renovation of existing embankments with the exploration of innovative and costeffective alternatives for riverbank protection works from international and national experience. 5 An alternative concept of repeated retirements or shifting of the embankments in response to the progress of riverbank erosion was outlined and consulted during the initial stage of the project preparatory TA. While its structural cost would be lower, this alternative entails significant social disruption as a result of continued loss of land for 2,200 hectares (ha) and dislocation of 16,000 people in the next 10 years alone, rendering this option socially difficult to pursue, in particular in the concerned subprojects with populated (sub-) urban and/or productive 1 ADB. (1997). Guidelines for the Economic Analysis of Projects. Manila. 2 Because of the limited availability and reliability of secondary data collected at the district level, these data were cross-checked with the state level statistics as necessary. 3 The executing agency does not generate revenue from its flood and riverbank erosion risk management services given its public goods nature. Therefore, the financial internal rates of return are not relevant indicators of the project and were not assessed. Financial sustainability of operation and maintenance (O&M) is pursued through policy and institutional actions as defined in Sector Assessment (Summary): Flood Risk Management (Appendix 2). 4 The costs associated with institutional and knowledge base development having statewide implications are excluded from subproject economic analysis, but were included in the project assessment. 5 This includes the use of sand-filled geotextile containers as opposed to conventional quarried rocks, and adoption of flow-retarding screens to induce siltation as morphologically feasible, which can substantially reduce the costs.

2 2 rural areas. 6 All stakeholders and state decision makers agree that an option to stabilize the bank line and minimize land loss and social displacement should be pursued as far as its economic feasibility and long-term sustainability can be ascertained. C. Economic Benefits and Valuation 4. The benefits considered in the economic analysis are (i) reduced land loss caused by riverbank erosion, (ii) flood damage mitigation caused by embankment overtopping and erosioninduced embankment breach, and (iii) enhanced economic activities resulting from improved reliability of existing flood and riverbank erosion risk management (FRERM) infrastructure. It is assumed that the first two categories of benefits will be fully attained at the end of the first tranche of the investment program, while the last category will be achieved 3 years after completion of the investment program. The summary of economic costs and benefits is shown in Table 1. Item Table 1: Economic Cost and Benefit Summary (Rs million) Dibrugarh SP (25,100 ha) Kaziranga SP (10,300 ha) Palasbari SP (62,100 ha) Investment Program Implementation Costs Capital investment 1, , ,263.1 Annual O&M Annual Benefits Reduced land loss Reduced production loss Reduced property loss Increased crop production AIFRERMIP = Assam Integrated Flood and Riverbank Erosion Risk Management Investment Program, O&M = operation and maintenance, SP = subproject Source: Asian Development Bank estimates. 5. Reduced land loss caused by riverbank erosion. The rates of erosion of the riverbank at the three subproject sites have been estimated from the morphological trend analysis using satellite images. The categories of land under threat from erosion were divided into (i) agriculture land, (ii) tea gardens, (iii) water bodies, (iv) homestead, and (v) urbanized area. These were valued at the net present value of production for the first three categories of lands, whereas the land values and costs of relocation were estimated for the last two categories of lands from the resettlement surveys and converted to economic prices using the standard conversion factor. The estimated annual reduced loss is 103 ha for Dibrugarh, 34 ha for Kaziranga, and 90 ha for Palasbari. 6. Reduced flood damage caused by embankment breach. The three subproject areas have been protected by the existing embankment systems but suffer from occasional flood inundation damages resulting from riverbank erosion (that undercuts the embankments) and/or high flood water level (that overtops the deteriorated embankments). The damage levels have been evaluated based on (i) net income impacts of flooding for agriculture (crops, tea estates, and fisheries) and other outputs; and (ii) the cost of replacement or repair of the affected property, including private housing and public infrastructure and utilities. Regarding the productive activities, probable flood damage that may arise during embankment breaches was estimated at six different flood frequency levels (from 1-in-2 year up to 1-in-100 year) on the 6 There is also a risk that the time-consuming process of seeking people s consensus and acquiring land for retired dykes may not be completed before river erosion breaches the embankment, undermining the economic viability.

3 3 basis of socioeconomic (including agriculture production) survey and topographical data (for estimation of the inundated area in each frequency flood). 7 On this basis, annual average flood damage was derived for each subproject by allocating the probabilities of breaches caused by river erosion (1-in-10-year for Dibrugarh and 1-in-5-year for the other subprojects) and by high floods (no probability up to 1-in-5-year flood, 50% for 1-in-10-year flood, and 100% for 1-in-20- year flood and above) following the recent trend analysis and the present conditions. For comparison, the post-project condition assumed that the present flood damages caused by riverbank erosion would be completely prevented, whereas flood damages would still occur at 50% probability during the excessive floods with 1-in-100-year or less frequency Annual average damage data were collected from the district administration for private properties and the Public Works Department for public roads and utilities, and were crosschecked with the state level statistical data on historical flood damages. The annual average cost of reconstructing the breached embankments (with necessary retirements) by the Water Resources Department was estimated on the basis of the trend of past breaches, and incorporating reconstruction and associated land acquisition and resettlement costs. 8. Enhanced economic activities. Reduced threat of flood and related damage in the subproject areas is expected to reduce the uncertainty associated with virtually all economic activities, which will increase investment levels and in turn local production, incomes, and employment. To quantify the impacts, the yield levels of paddy, the key monsoon crop, were assumed to increase by 20%, in light of the existing yield levels observed in areas with higher flood protection security in Assam, and on the basis of the crop models developed for each subproject area following the socioeconomic survey. The economic benefit values (in terms of reduced land loss, reduced production and property damages, and increased crop production) were assumed to increase by 1.5% per annum after completion of the investment program, in response to the enhanced economic growth of the subproject areas. 9. Other non-quantified benefits. The investment program will generate other benefits including (i) avoidance of human injury and loss of livestock; (ii) reduced cost of coping with floods (in terms of communication time, cost of health care and temporary resettlement, etc.); (iii) reduced loss in non-farm production and workdays; and (iv) increased land price and nonfarm economic activities, among others. 9 Improved FRERM program delivery will also be established with participatory and accountable mechanisms. At the state level, the investment program will deliver generic outputs including (i) a state FRERM plan; (ii) knowledge products (such as a short-term river erosion prediction system for the Brahmaputra River); (iii) FRERM guidelines (for systematic and cost-effective FRERM planning, design, implementation, and maintenance, and for participatory nonstructural measures); and (iv) strengthened capacities of the sector institutions. These state level outputs of the investment program will have wider and far-reaching impacts compared with the subproject level outputs. 7 It is assumed that 70% of the gross value of the standing annual crops and 30% of the gross value of the standing perennial crops in the flood season will be affected at the time of embankment breach in 1-in-50-year floods. It was also assumed that 4% of commercial incomes for the Dibrugarh subproject (for Rs214 million) will be lost as a result of disruption caused by flooding, on the basis of the available tax revenue data collected. 8 Embankments are designed with the design flood level of 1-in-100 year flood plus free board of 1.5 meters. Because of the vastness of flood plains, there is little difference in water levels among major floods (a few centimeters between 1-in-100 year and 1-in-200 year floods). 9 Embankment breach will also cause large areas (about 1,000 2,000 ha) of sand deposition, making crop cultivation virtually impossible over the medium term. All the subproject areas also have a risk of avulsion or main channel migration into the drainage channels and tributaries running parallel to the Brahmaputra River, cutting off the area between the new and existing channels as a river island, including large low lying areas of the Kaziranga National Park.

4 4 D. Economic and Sensitivity Assessments 10. Results of the economic analysis show that the economic internal rate of return (EIRR) of the investment program is 17.0%, and the individual subproject EIRRs range from 18.0% for Kaziranga subproject to 19.7% for Palasbari subproject. Sensitivity assessments were undertaken in terms of cost overrun in investments and O&M, substantial follow-on investment requirements (to cope with further morphological and unanticipated changes), implementation delay, reduced incremental crop production, and reduced price of paddy, a major crop in the subproject areas. Overall, the investment program is sensitive to cost overrun of capital investment and implementation delay. The switching value of cost overrun ranges from 44% for Kaziranga to 58% for Palasbari. The subprojects can also maintain their economic viability to cope with unanticipated events that may require over 150% of the present capital investment after 5 years of investment program completion. A 2-year delay in implementation and benefit generation will reduce EIRRs to 15.4% for Kaziranga subproject and 16.7% for Palasbari subproject, which is mitigated by intensive support being provided for advance procurement and consultant recruitment actions and capacity development. Overall, the investment is deemed robust, although sustaining the proper functions of the FRERM infrastructure is most critical and should be achieved with sufficient maintenance works. A summary of the economic and sensitivity assessments is in Table 2. Parameters Table 2: Summary of Economic and Sensitivity Assessments (%) Dibrugarh Kaziranga Palasbari Investment Program EIRR S.V. EIRR S.V. EIRR S.V. EIRR S.V. Base Case Sensitivity Assessment Investment cost increase by 10% Follow-on investment (50% of cost) after 5 years O&M cost increase by 50% Implementation delay by 2 years Incremental Paddy Production Reduced by 50% Paddy price reduction by 20% = not available, EIRR = economic internal rate of return, O&M = operation and maintenance, S.V. = switching value. Source: Asian Development Bank estimates. E. Impacts on Poverty 11. The total number of population in the subproject areas are 266,000 in Dibrugarh, 49,000 in Kaziranga, and 580,000 in Palasbari. The poverty ratio in these areas is relatively high 41% in Dibrugarh, 32% in Kaziranga, and 58% in Palasbari partly as a result of the large landless population, including those who have been displaced by past river erosion and settled as informal squatters on and along the flood embankments. The assessment focused on the impacts on rural households among whom poverty is concentrated, using the crop models prepared. The rural population is predominantly landless, marginal, and small farmers with up to 2.0 ha of landholding in size, accounting for 92% of the rural households in Dibrugarh (average size 1.6 ha), 85% of the rural households in Kaziranga (average size 1.8 ha), and 91% of the rural households in Palasbari (average size 0.9 ha). 12. Distribution analysis of farm incomes indicates that out of the incremental incomes made possible by reduced flood damages on agriculture and increased yields, 68% in

5 5 Dibrugarh, 59% in Kaziranga, and 62% in Palasbari subprojects will accrue to landless, marginal, and small farmers. On average, the subproject investment will increase annual incomes by Rs1,410 Rs2,450 for landless agriculture laborers (through increased employment), Rs3,900 Rs5,100 for marginal farmers (up to 1.0ha of landholding in size), Rs8,600 Rs10,100 for small farmers, and Rs19,900 Rs23,000 for medium and large farmers (through reduced flood damages and incremental crop production under a more flood-secure environment). Due to reduced flood damages, the subproject investments will substantially stabilize the annual income levels of the beneficiary population Poor people will benefit from increased opportunities for family and hired on-farm labor. Annual hired on-farm opportunities are estimated to increase by 119,000 days in Dibrugarh, 104,000 days in Kaziranga, and 669,000 days in Palasbari. Most of these opportunities are expected to be provided to landless and marginal farm households with less land. The increased labor amounts to days per landless households, thereby providing opportunities to gain additional income from the subproject investments. Possible private investments in high value agriculture, food processing and other industries, and service sectors that have not been included in the analysis but are likely to be induced by increased flood security, will provide further benefits to the population (in particular laborers). 10 The present income levels ranges from Rs3,300 Rs9,230 for landless agriculture laborer, Rs11, for marginal farmers, Rs40,700 Rs50,910 for small farmers, and Rs103,300 Rs127,430 for medium and large farmers.