Policy Research Institute - PRI Bangladesh

The Policy Research Institute of Bangladesh (PRI) is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of the Bangladesh economy, its key policy challenges, domestically, and in a rapidly integrating global marketplace.

Regional connectivity and Bangladesh

Published: Monday, Aug 31, 2015


Posted : 31 Aug, 2015 00:00:00


Regional connectivity and Bangladesh

Zarif Iftekhar Rasul

South Asia, described as one of the least economically integrated regions of the world, is also one of the most disconnected regions where political boundaries essentially serve as physical barriers to trade, and movement of vehicles and people. Despite having a forum for regional cooperation, cross-country regulation and logistical barriers greatly detract trade and investment in a region that constitutes around 9.0 per cent of the global economy.

For the past 25 years, notwithstanding the liberalisation efforts in trade under South Asia Free Trade Agreement (SAFTA), intra-regional trade has not inched higher than 5.0 per cent of total trade of the region with the rest of the world. In addition, intra-regional investment is miniscule at under 1.0 per cent. Most empirical evidence highlights the fact that trade logistic costs are more of a trade barrier than tariffs.

Regional connectivity and Bangladesh

South Asia is characterised by two completely land-locked countries (Nepal and Bhutan) and largely land-locked regions, such as North East India (NEI). Lack of transit through India prevents the landlocked countries of Bhutan and Nepal from accessing Bangladeshi seaports. Similarly, India faces serious constraints in establishing a proper road network and smooth flow of cargo and passenger traffic with its northeastern states as Bangladesh stands in the middle, with the virtual absence of modern internationally recognised protocols for movement of passenger and cargo across borders. Currently, the narrow Siliguri Corridor (also known as Chicken’s Neck) serves as the connection between mainland India and NEI.

All that could become a thing of the past thanks to the signing of the recent Bangladesh, Bhutan, Nepal and India Motor Vehicle Agreement (BBINMVA). This agreement paves the way for closer economic integration of a region that has hitherto remained disintegrated with fragmented road and rail infrastructure defined by political boundaries rather than economic necessities. With this agreement, it is expected that there will be free movement of goods and passengers among these four countries that will not only facilitate trade but also foster better economic and political relations.

Although freedom of transit has been chartered by several international conventions, there are obvious challenges and concerns for the host country. Since goods in transit cannot be subjected to customs duties, there is always a possibility of these goods being diverted to the market in the host country without being duly taxed. This requires security measures to be put in place which often hinders the flow of transit traffic. Managing cross-border corridors, especially with limited capacity of officials and lack of automation processes poses an immense challenge. Then there is the question of infrastructure. Heavy transit traffic can potentially damage roads, bridges, and other physical infrastructures. There are also externalities of transit traffic in the form of increased probability of accidents, congestion and environmental damage.

Preliminary estimates, however, suggest that the benefits from the BBINMVA are likely to be substantial for Bangladesh. In addition to enhanced connectivity, Bangladesh will benefit from a much better utilisation of its port facilities, reduced trade costs with India, Nepal, and Bhutan, resulting in higher volume of trade, and an opportunity to upgrade its transport network financed by user charges. Despite these benefits, the issue of user charges usually takes precedence over other pertinent issues during talks of transit in the socio-political sphere. Most of the discussion and debate is based on confused thinking about rent-seeking behaviour owing to location and geography and disregard for international conventions. As Bangladesh, along with the other countries, prepare multilateral protocols and formalises the MVA, it is important to gain a clearer understanding of user charges in relation to transit and explore the different possibilities.  

Fees based purely on providing transit are prohibited by international conventions. However, there are genuine administrative and auxiliary costs for the host country that stem from providing transit facilities. As such, user charges to recover these costs are sanctioned. The imposition of user charges for transit is not unprecedented. Several countries in Western Europe have introduced transit charges that yield a sizeable revenue which are subsequently used for improving infrastructure. Some countries have imposed charges based on emissions and size of transit vehicles as measured by the number of axles. Many Asian countries such as Vietnam and Thailand also levy toll charges on transit traffic, which is directly connected to distance travelled. The widespread levy of transit charges provides numerous examples for Bangladesh to draw from.

Before user charges can be calculated, an estimation of the volume of transit traffic is in order. Various studies have explored this issue, coming up with different figures. Experts conclude that even with a downward bias, volume of transit traffic to and from NEI via Bangladesh would initially be about 17.39 million tonnes, with a 2.0 per cent annual growth rate. The opening up of Mongla and Chittagong seaports along with newer road and rail routes will further increase transit flow.

Such a large volume of traffic has enormous revenue implications for Bangladesh. In order to capitalise on transit, road user charges should be imposed to recover costs of administration and use of services. These charges will cover various external costs associated with transit that were mentioned earlier. Although Bangladesh has instruments for road transport taxes and charges, they do not contribute to the efficiency of road use because the cost recovery is not linked to road usage. This is because heavy vehicles like trucks and buses, which cause the most damage, are not charged accordingly. This underlines the need to implement proper road user charges consistent with efficient management and proper maintenance of road infrastructure. An efficient charging system should also differentiate between heavy vehicles based on loaded mass and axle configuration.

Several studies have attempted to estimate road user charges for Bangladesh transit. A report by strategic advisors Castalia to the World Bank in 2010 calculates transit cost for a truck over the 495 kilometres (km) of the Asian Highway 1 route that starts from the Benapole border in Paschim Bangla and ends at the Tamabil border in Sylhet (Table-1).

The transit fee includes charges for capital, operation and maintenance costs. Capital charge covers the cost of acquiring the right of way and civil works. The operating and maintenance costs include routine maintenance, periodic maintenance, rehabilitation, and traffic control and enforcement. Incorporating all these costs, the total transit fee comes to around $56 per trip. The study also estimates costs avoided by Indian trucks as they avail transit opportunities. Taking into account the transit fee and related tolls, savings could amount to a significant $102 per trip. Although administrative expenses and border processing will reduce some of those savings, transit traffic would still be left with a substantial amount of savings.

In the light of these benefits accrued by countries availing transit facilities, there have been calls to implement user charges that reflect a share of the benefits. However, such charges are akin to pure transit fees prohibited by international convention. International conventions also define rights and obligations in matters of sharing common resources, such as water, air, land and sea routes to prevent rent-seeking behaviour based on favourable geography. Even though the issue of transit charges generate heated political debates, Bangladesh should abide by international best practices and implement user charges that reflect genuine costs of providing transit facilities.

BBINMVA thus opens up numerous opportunities for Bangladesh in the form of increased connectivity, higher utilisation of seaports, and potential revenue gains. As the world moves towards greater economic integration, the initiation of the MVA is a step forward for the economies involved. The onus is now on the concerned authorities to devise protocols and transit charges to maximise gains from this agreement. With the formalisation of the MVA, it is expected that trade transaction costs will be significantly reduced in this sub-region, thus working as a catalyst for stimulating intra-regional trade and investment.

(The writer is an economist at PRI.  zarifrasul@gmail.com)