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Economics of CNG Vehicle Program in Dhaka City



Mega cities in South Asia are an epitome of traffic snarls and resulting vehicular pollution. Dhaka, a centre of polity and economy in Bangladesh, is no exception. In fact, it depicts a picture of feeble urban civic life and poverty amidst plenty. This paper discusses the urban transport scenario and resulting vehicular pollution in the context of socio-economic conditions inhibited by the population of the city. Further, paper describes the adverse impacts of pollution in the city and discusses economics of introducing CNG vehicles in Dhaka.


Dhaka is the capital and primal city of Bangladesh. It is dominant in terms of population concentration, economy, trade and commerce, education, and administration. Initially, it was during Mughal’s period Dhaka flourished through vast trade and commerce in great variety of commodities. Prosperity of the city and cheapness of the produce in seventeenth century is remarkable in the history of this region. In 1905, Dhaka was made the capital of a new province comprising East Bengal and Assam. A great deal of construction took place to house the new administration; however, this was cut short by annulling the partition of Bengal in 1911. In 1947, the city emerged as the provincial capital of then East Pakistan and finally, in 1971 became the capital city of Bangladesh.

Dhaka’s metropolitan area is 1,500 sq. km; while the area under Dhaka City Corporation (DCC) is 360 sq. km. Population of Dhaka Metropolitan Area is about 10.9 million (1991 Census) with annual growth rate of 3%. Population density is 222 persons per hectare within the DCC area and 71 persons per hectare for the metropolitan area. Male to Female ratio is 1.27 and literacy rate of population of age 7 years and above was 57 percent in Dhaka city compared to 42.3 percent in other urban areas. The literacy significantly differs for the males and females. According to the 1991 census, the literacy was 62.9 percent for males and 49.1 percent for females. Per capita income in the city is US$ 500 and 50 percent of the population aged 10 years and above is in gainful employment. There are about 3000 slums and squatters in the city and 30 percent of population lives in slums. According to the Poverty Monitoring Survey (1999), 16.4 percent of the urban and 19.6 percent of the rural population suffered from various ailments during the monitoring month. 

Dhaka City is growing with accelerating rate but unfortunately transport infrastructure development of the city could not keep pace with the travel and transport demand of this growing population and area. The resultant effect of this adverse situation is that about 60% of the citizen’s of Dhaka meet their travel needs in walk modes.

Dhaka city is experiencing continuous deterioration of service facilities of the city. Dhaka City’s land ownership pattern is very unequally distributed. About 80% of the residential land is occupied by the 30% of the population where as poorer 70% have access to only 20% of land. Slum and squatter settlements mostly consist of densely constructed huts, usually arranged in rows and often containing multiple families. It is to be noted that only 5% of Dhaka’s urban poor live in Pucca (permanent) housing.

About 77 percent of the households are provided with tap water and about 20 percent use tube well water in Dhaka city. The remaining three percent households are dependent on well, pond, canal and rivers for drinking water. According to the available statistics, among the urban non-poor households, 41 percent use tap water and 54 percent use tube well water in Bangladesh. In the rural areas, less than one percent households use tap water.

About 24 percent households in the urban area use katcha latrine or open space for sanitation. The corresponding figures for rural area and the country are 70 percent and 64 percent respectively. In the urban area including Dhaka city, 8 percent households use flash latrine, 46 percent use sanitary (pucca) latrine and 22 percent use slab latrine. Sanitation facilities are worse among the poor compared to the non-poor. Katcha latrine or open space is used by 41 percent of the poor households and 13 percent of the non-poor households in the urban area of Bangladesh (Poverty Monitoring Report, 1999, BBS)

Fuel use pattern in the urban area is dominated by gas, electricity as well as biomass. In the urban area 33 % households use gas, 4% use electricity and 55% use biogas. Gas is used by 45% of the non-poor households compared to 16 percent of the poor households. In the rural area gas is used by less than one percent (0.42) and 93% households use biomass. In the urban area, 73 percent households have electricity while the remaining 27 percent households use kerosene and other energy sources. 84 percent of the non-poor households and 57 percent of the poor households in Dhaka uses electricity. 23 percent of the households nationwide and 15 percent of the households in the rural areas uses electricity. There are significant differences in the accessibility of the poor and the non-poor households to electricity.


The air pollution in few big cities of Bangladesh is a very serious concern. As per a World Bank Study, as many as 15000 deaths (5000 in Dhaka), a million cases of sickness requiring medical treatment and 850 million cases of minor illness can be avoided annually if air pollution levels in the country’s four principal cities are reduced to match standards in force in developed countries[1]. The same report further estimates the economic cost of these avoidable deaths and sickness to be US$ 200 to 800 million every year. 

Dhaka has heterogeneous traffic flows. Three wheelers, out of which ninety percent are two stroke engines baby taxis and two wheelers, are dominant in the vehicle fleet in terms of both number and mileage. The number of two stroke engine three wheelers has tripled from 1990-96[2]. Air pollution levels in Dhaka are considerably higher than the Bangladesh standards or the World Health Organization (WHO) guidelines for residential areas. Most experts here blame three-wheelers with two-stroke engines and the heavy-duty diesel vehicles for the high pollution levels. They see leaded gasoline as the principal source of lead in the atmosphere. As many countries have phased out leaded gasoline, Bangladesh is also working on the problem. Due to pressure from green lobby to reduce air pollution in Dhaka, the government decided that three-wheelers would be made to run on non-polluting compressed natural gas (CNG). Initially, all such decisions remained on paper. The reason might be that there was support for converting three-wheelers to CNG instead of banning them so as to prevent the sudden unemployment of at least 250,000 people[3]

Here it is worth mentioning that motor vehicles per thousand people in Dhaka city is still low in comparison to other capital cities of developing countries but the likely higher economic growth in the future with even faster increase in population will definitely result in fast growth in vehicles fleet in Dhaka. Besides the composition and size of vehicle fleet, poor maintenance, excessive commercial use, fuel adulteration, use of lubricants of sub standard quality and poor management of traffic will further result in severe congestion and vehicular pollution in Dhaka.

Keeping in view the above problems, Dhaka Urban Transport project was launched by the Government of Bangladesh and the Dhaka City Corporation. The International Development Association (IDA), the World Bank’s concessionary arm approved the credit of US $ 177 million for the project. The Government also wanted to develop an Air Quality Management System to reduce Dhaka’s severe air pollution. The World Bank provided Bangladesh a $ 4.7 million Learning and Innovative Loan in 2000 for a Bangladesh Air Quality Management Project (AQMP) under which Dhaka would pilot new ways of controlling urban air pollution.

Next step in the direction of reducing air pollution in Dhaka is to popularize the use of CNG vehicles, as in many other cities of the world. 


Worldwide, improving air quality in urban settings has been a long-standing planning objective and road transport using diesel vehicles has been identified as major contributor to such air pollution. To help address this problem, increasingly stringent vehicle emission standards came in to force worldwide. It also stimulated research into alternative fuels and technologies that promise cleaner and lower emissions. Various fuels that are alternatives to diesel and petrol have been proposed for use in vehicles. Alternative fuel vehicles use such fuels as compressed natural gas (CNG), liquefied natural gas (LNG), methanol, ethanol, bio-diesel fuel and propane. Among these fuels, Natural Gas, either in the form of CNG or LNG, is more in the news. Reasons behind the popularity of these fuels are economic as well as environmental. Many countries like Argentina, Canada, Italy, New Zealand and United States of America have substantial NGV programs. Brazil, Chile, China, Colombia, Egypt, India, Indonesia, Mexico, Pakistan and Thailand are in various phases of developing such programs.

As early as in 1985-86, Bangladesh Petroleum Corporation started a project to use CNG in vehicles instead of Gasoline. The World Bank donated Tk 225.1 million to initiate the project. The primary objective of this project was to reduce vehicular emissions as combustion of CNG produces less pollutant than the gasoline.

After a decade in 1996, there were only 86 vehicles converted under the project[4], while in that year the volume of traffic in Dhaka only was composed of 84411 cars, 9135 buses, 15600 trucks, 66360 three wheelers and 121156 two wheelers. In year 2002, there were only five CNG filling stations in Dhaka, out of which 4 has been established by Rupantarit Prakritika Gas Company Limited (RPGCL) and one was in joint venture between a Chinese company and RPGCL[5]. The gas supply to these filling stations was quite erratic, particularly during morning hours when gas pressure decrease due to domestic use. The need was felt to create an efficient transmission and distribution network to improve and secure a reliable supply of gas. Further, as conversion of vehicles to CNG has now become imperative to save the city from the menace of air pollution that has turned the capital into almost a 'gas chamber', need was felt to set up number of CNG filling stations to cater the growing demand when large numbers of vehicles get converted to CNG. 

Realizing the urgency the Bangladesh Government has taken up the CNG conversion process issue within its 100-day action plan for implementation. To expedite the process, the government has already given permission to 13 private companies to set up CNG conversion units[6]

The economic benefits arising from the CNG vehicle program in Dhaka are expected to accrue to consumers of various categories such as vehicle owners, users of transport, workers and the economy in general. Additionally, benefits on account of improved environment and thus health status of the population in Dhaka and macro economic contribution of the CNG program for further development of the energy and particularly, gas sector are equally important.

Economic Benefits to Vehicle Owners & Users

The amount of consumer surplus (economic benefits) arising from CNG Program will directly benefit the vehicle owners. Operating cost of CNG vehicles is lower than that of vehicles run on alternate fuel i.e. petrol or diesel. Thus vehicle owners will benefits from reduced operation costs in terms of resource cost savings. For instance, if hundred percent of the bus fleet of the Dhaka is converted to CNG, the present value of likely stream of economic benefits in terms of resource cost savings in the coming twenty years period, at twelve percent rate of discount, will be about 16000 million Taka. Similarly, the conversion of whole vehicle fleet of Dhaka to CNG will fetch the present value of likely stream of economic benefits in terms of resource cost savings over a twenty year period, at twelve percent rate of discount, to the tune of 32000 million taka[7].

However, the experience shows that vehicle owners will not transfer a portion of consumer surplus to end-users. Therefore, intervention by Government / administration is required to ensure that end users of transport also get a share in consumer surplus arising from transport component in the proposed project. 

Benefits to Operators of Filling Stations

Another potential beneficiary of the CNG program will be the CNG filling station operators because the demand for CNG as fuel is going to increase and they will earn from the increased sale of CNG. Initially, the profit might not have been significant because of low gas pressure leading to sub optimal sale proceeds at the end of the day. However, their income will significantly increase due to the program that will ensure the regular supply of gas with optimum pressure

Network Benefits

Total consumption of gas by vehicle fleet of Dhaka will be less than the supply of gas provided by an optimum size of the transmission and distribution network. Therefore, consumers of other categories such as households, commercial or industrial consumers will consume the additional supply of gas, over and above the consumption by transport in the city. Discussions (by author a year back) with RPGCL, the distributor of gas in Dhaka, revealed that presently, the supply of gas is less than demand, particularly during peak hours. It results in lower than optimum supply pressure in the existing gas distribution network and thus existing consumers did not get the proper supply of gas. As suggested by officials of RPGCL, the investment in up gradation and augmentation of gas transmission and distribution network will help in improving the supply of gas to existing consumers by maintaining optimum supply pressure in the network. 

The possible consumers of the additional supply of gas by the upgraded network may be grouped under to heads depending upon the physical location of the newly added transmission and distribution network and its area of coverage. First group will be households and commercial consumers in the Dhaka city and other possible consumers may be industries in the outer periphery of Dhaka. In case of first group of consumers, i.e. household and commercial, economic benefits on account of improved network for supply of gas will be in terms of resource cost savings because the cost of natural gas is lower than that of other alternate fuels. In other words, consumers will be able to get same amount of energy, which they used to get from alternate fuels, by spending less. Such benefits will occur to existing as well as new consumers.

In case of use of gas in industry, the economic benefits will be in terms of net incremental output (net value added) to the economy. The quantum of such benefits depends upon the type of industries likely to consume the additional supply of gas. Discussions with officials of RPGCL indicated that a few gas based power plants have been proposed in Dhaka region, which may be the likely consumers of the additional gas supply. This possibility becomes even more likely in the light of the fact that the gas based power plants in Bangladesh are not getting the requisite supply of gas for power generation. However, possibility of supplying gas to industries in outer Dhaka region simultaneously with the supply to CNG filling stations may not be feasible because of the incompatible spatial patterns of industrial development and spread of city. Therefore, the network benefits are more likely to occur to household and commercial consumers.

Health Benefits due to Reduced Pollution

Author estimated health benefits[8] from use of CNG as transport fuel in Dhaka on the basis of reported cases of death and sickness due to air pollution in major cities of Bangladesh. Proportionate share of Dhaka in reported cases of death and sickness was taken on the basis of proportionate share of Dhaka in the total population of major cities of the country and thus, economic benefits associated with reduced health problems due to use of CNG was estimated for the city. The benefits in terms of savings in cost of health impact due to air pollution was estimated under three heads, viz. loss of human capital – deaths due to air pollution, loss of work person days on account of sickness due to air pollution and expenditure on treatment.

The estimated cost of health problem due to air pollution in Dhaka comes to about Tk 25000 million per year. In other words, Tk 25000 million as health benefits can occur to the economy, if an air pollution level in Dhaka is reduced to match standards in force in developed countries.

Macro Economic Benefits -Foreign Exchange Savings

It is generally argued that market for gas in Bangladesh is limited This argument seems misplaced when demand scenario for gas in Bangladesh is analyzed in the context of possibilities of replacement of other imported fuels such as petrol and diesel by gas. Judging from the size of the oil bills in the BOP, the fact of the matter appears to be that Bangladesh had been an energy deficient country.

Projections[9] by Power System Master Plan (PSMP) put the likely growth in energy demand in Bangladesh at 10% per annum. Assuming the same rate of growth in demand for petrol and diesel, calculations reveal that demand for these energy products is going to be more than four times after 15 years.



















* Projections are based on power demand forecasts made by the Power System Master Plan (PSMP), which predict that power demand is going to grow at 10% per annum in the country.

Keeping in view the current import bill of the country for these fuels[10], limited available reserves of petroleum and exploration activities[11] there, the domestic production is not going to meet this increasing demand. To meet the increasing demand for petrol and diesel there are two options available with the government- either increase the imports or replace the use of these fuels by domestically produced natural gas.

The first option has no economic logic. For example, in 1995-96, 1007 thousand MT of diesel was imported which was valued at 183 Million US$. Assuming that the ratio between imported fuels and domestic production will remain the same, as at present, and demand growth will be as predicted by PSMP, the likely quantum of import of diesel alone will be about 6700 thousand MT in 2015.













Thus, considering the existing level of imports of these products and precarious position of foreign exchange reserves[12], Bangladesh cannot afford to depend on imports of energy fuels to meet the increasing demand.

The other viable option is to replace the petrol and diesel by natural gas as a fuel in industry and transport.

For example, let us consider the case of replacing use of imported diesel by domestically produced natural gas in the industry and transport sector, and resulting foreign exchange savings. Since the replacement of diesel with gas is a gradual process and takes few years to fully materialize, the savings in foreign exchange will be smaller in the initial years. But after 4-5 years such savings will pick up. Thus the import substitution may save the country foreign exchange to the tune of about US$ 90 Million in 2005, which may increase to about US$ 330 Million in 2010. 

Other Prospects

Presently, the industry contributes only about 18% of GDP in Bangladesh. But the analysis of historical changes in structure and composition of GDP in industrialized and newly industrialized countries indicate that the relative share of industry, transport and services sector in the GDP increases with the increase in per capita GDP and industrialization. 

With such structural changes in the economy of Bangladesh, the per capita consumption of energy will also increase and, in this context, the role of gas sector as a strategic sector to pick up the economic growth is very crucial. As the demand for energy increases in the economy the gas sector will develop further and cater to the demand either by increasing supply in its present pattern of usage and or through import substitution. The CNG vehicle program in Dhaka will play the role of catalyst to speed up the process of development in the gas sector. Here, it is timely to comment that the need is to link energy sector growth strategy with trade, business, industry and agriculture growth strategy in the mid to long term. Besides, further development of gas sector will help Bangladesh to export gas to earn foreign exchange. Although the decision to export gas is a political one, but possibilities of export are intrinsically related with the development of domestic market for gas. Activities related with development of domestic gas market such as CNG program in Dhaka give impetus to gas exploration and infrastructure development activities, and thus set the stage for export of gas. Ultimately, it will help in picking up the industrialization and economic growth through forward and backward linkages and thus further expansion of the domestic and international market for gas.

End Notes:

[1] The Times of India, February 9, 2001.

[2] Source: Bangladesh Bureau of Statistics, 1997.

[3] Source: Times Internet Limited.

[4http://www.rrcap.unep.org/issues/air/maledec/baseline/ Baseline/Bang/BANGCH5.htm

[5] As informed by officials of RPGCL during discussion.

(December 28, 2001)

[7] Calculation are based on local vehicle operating norms and inputs such as useful life in years, Km run per day, per Km CNG and diesel/ petrol consumed, operating days per year, economic price of CNG and petrol/diesel and maintenance cost of CNG and petrol/diesel vehicles.

[8] Economic valuation of health benefits is tedious job requiring expertise in diverse fields such as environment sciences, health sciences and economic etc. The primary study requires proper designing of the problem keeping in view the geographic scope, sector scope, selection of pollutants and their likely health effects, selection of air pollution model and design of economic valuation methodology. In various countries specific economic metrics for evaluation and techniques to be used have been developed for economic valuation of health impacts. Some times, evaluation is done through direct survey, while in other cases prior domestic studies and international estimates are adapted to local economic conditions.

[9] There are diverse views on likely energy demand scenario in Bangladesh. Projected growth rates vary from 4% to 10% per annum. But keeping in view the 6.7% annual growth in power sector during the period 1993-94 and 1998-99 and the growth in the fertilizer, industrial, commercial and domestic sectors at 2.3%, 12.15%, 10.1% and 11.9% respectively, the demand for energy is expected to rise significantly. (‘Optimizing Use of Bangladesh’s Gas Resources’, Report No. 14, Centre for Policy Dialogue, Dhaka)

[10] The payment on account of import of Crude Petroleum and POL was 273.00 Million US$ and 44.00 Million US$ respectively for the period July 2000 to June 2001 (Source: Bangladesh Bank)

[11] The first round bidding for exploration was announced in September 1993. A total of 23 blocks were on offer. The response to this offer was quite satisfactory. The second round of bidding in 15 blocks started in June 1997. Out of 15 blocks on offer 12 blocks were had takers.

[12] The international reserves of Bangladesh have been declining in recent years. In 1994-95, these reserves were 3069.6 Million US$, which came down to 1602.10 Million US$ in 1999-2000 and further fell to 1085.40 Million US$ in October 2001

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