Cross-border infrastructure links are the key to achieving regional integration in Southeast Asia. Such links promote economic development and boost intra-regional trade. Governments in the region, therefore, accord high priority to creating such links.
However, the financial requirements for cross-border infrastructure projects are huge. Besides, the risks involved in the implementation of such projects make it even more difficult to tie up funds.
Despite concerted efforts, progress on the ground has been slower than originally envisaged, partly due to the risks of financing cross-border projects and, even more significantly, due to difficulties in harmonising regulatory frameworks. Heterogeneity among the Association of Southeast Asian Nations (ASEAN) economies is the key challenge to implementing regional or cross-border infrastructure projects. The countries differ in terms of their state of development and capacity. Moreover, governments and policymakers have greater incentive to undertake national projects compared to regional projects, as the benefits in the case of the former are more visible.
The Southeast Asian region as a whole has undertaken several initiatives to address the perennial issues impeding execution of cross-border projects. Meanwhile, efforts are also being made to provide financial incentives to the stakeholders involved.
Experience so far
Historically, the Southeast Asian countries have been involved in several cross-border infrastructure development programmes. Their strategic location on trade routes has made these countries suitable for the creation of infrastructure across borders. In order to meet its energy objectives, the region has in place two key initiatives – the Greater Mekong Subregion (GMS) project and the ASEAN Power Grid (APG). In the transport sector, two of the biggest ongoing initiatives for improving intra-regional connectivity are the Asian Highway Network (upgrading of 23 routes covering 24,000 km of national routes to class I standards by 2020 within the ASEAN region) and the Trans Asian Rail Network (14,000 km of rail track in ASEAN). Ramesh Subramaniam, Deputy Director General, Southeast Asia Department, Asian Development Bank (ADB) says, “The transport, energy and communication sectors accounts for more than 80 per cent of the regional infrastructure requirements”.
On the ground, the progress of cross-border infrastructure projects has been mixed. While some projects have faced inordinate delays due to intra-regional issues and financial constraints, a few projects have been successful in reaffirming the premise for creating integrated infrastructure. The Nam Theun 2 hydropower plant completed in Lao PDR has been a major success story. The plant supplies electricity to Thailand. The project provides a perfect case for adopting innovative financing mechanisms to hedge the project against several risks. The project made slow but steady progress due to its innovative financial structure. The $1.2 billion project was funded through a mix of private, multilateral, and bilateral funds. The financing process was completed within a record time of 15 months.
The 3,200 km trilateral highway connecting India, Myanmar, and Thailand is an example of an inordinately delayed project. The project, which was conceptualised in April 2002, is particularly significant due to the geographical locations of the three countries and their trading relationships with one another. Though there was some progress in its initial years, the project had been stalled since 2006 due to a lack of political commitment and funding, which could largely be attributed to Myanmar’s political isolation.
The financing mix of cross-border projects has been dominated by multilateral funds. Private investments have so far played a very limited role. The risks faced by private investors in financing cross-border infrastructure projects are immense and more complex than the risks for projects located in a single country. The bulk of the private investment has come in the energy sector, mainly restricted to natural gas pipelines and hydropower projects. The main reason for this is that energy sector projects are viewed as having better revenue generating potential than transport projects. So far, $4,250 million has been invested in completed cross-border energy projects through the public–private partnership (PPP) route. In addition, in the transport sector, a sea bridge between Malaysia and Singapore was completed at a cost of $790 million.
Lucrative project line-up
ADB has identified a list of 1,202 regional projects to improve connectivity across the Asian region. Specific to Southeast Asia, there is a visible pipeline of 119 subregional projects worth $90 billion expected to be implemented during 2010–20. The maximum opportunity lies in the energy sector followed by the railway sector.
The investment required to create and upgrade regional infrastructure for the Southeast Asian countries is huge. The Southeast Asian economies have entered into a range of agreements for the implementation of regional projects in the road, railway, port, and energy sectors. The majority of these projects have been funded through loans from multilateral agencies such as ADB, the Japan International Cooperation Agency (JICA) and others, and equity contributions from respective country governments.
According to Southeast Asia Infrastructure Research, upon completion, these projects together will result in an investment of over $76 billion (cost estimates for some of the ongoing projects are not available). Of this, about 80 per cent of the investment will flow into the railway sector, 12 per cent into the energy sector (including oil and gas projects), and the remaining into the development of roads and special economic zones (SEZs). The table gives an indicative sector-wise break-up of upcoming cross-border projects in Southeast Asia.
Execution bottlenecks
The implementation and financing of cross-border infrastructure projects has always been a vexed issue. This has been primarily due to the complexities of project execution as compared to national-level projects. Financial sustainability is a key area of concern given the huge capital expenditure involved. It is imperative to assess the economic returns of a project before initiating it. A case in point is the Lao PDR–China high speed railway project, which is not expected to generate profit for a long time. The project is likely to reach the break-even point in 38 years. With debt being a major source of funding for these projects, delayed economic returns are bound to impact the viability of the projects.
Asymmetry in specifications pertaining to standards, guidelines, and technical procedures across boundaries impedes smooth project implementation. However, the extent to which these differences impact a project may vary depending on the sector. For instance, technical specifications for a cross-border road project will only involve road and bridge design and signage standards at the construction stage, whereas technical standards are essential throughout both the construction and operation of a cross-border power project. Harmonious settlement of these specifications at the project design stage is essential.
Regulatory issues arise out of decisions related to pricing, tariffs, transit and user fees, access and use, transmission regulation, metering, load specifications, insurance standards, health and safety, security of supply, and emergency supply arrangements. Arrangements for pricing, tariffs, and access and use are critical, especially in the case of power projects, because factors such as underpricing, excessive transit and user fees, restrictions on or unfavourable transmission of transit access, unclear interconnection requirements, and excessive liability insurance requirements hamper the development of cross-border projects.
Strong national institutions play an important role in reducing the negative impact of cross-border projects. However, institutions are often not equipped with the requisite resources, staff, skills and experience to design effective regulations and policies to aid implementation of these projects. National-level institutions more often fail to integrate transnational projects with domestic plans and priorities.
At the time of project design, optimal distribution of costs and benefits between stakeholders must be ensured. In some cases, benefits of cross-border projects are unequally shared between parties. These issues need to be addressed at the time of project planning. A case in point is the project involving construction of a 228 km road in Lao PDR which is being implemented under the GMS programme’s North–South Economic Corridor. Despite the project being wholly within the boundaries of Lao PDR, the country is financing only the local cost of the project. Since the road completes the missing link between China and Thailand, both the countries are financing the project equally. The national governments involved should arrive at an arrangement to deal with the issue of asymmetric cost and benefit allocation.
Besides, several projects have been impacted by socio-environmental concerns among stakeholders in participating countries. For instance, the Lao government’s plan to build a 52.69 trillion kip high speed rail track linking its territories bordering China to its capital Vientiane has been stalled due to social and environmental concerns.
Some of the sector-specific concerns include harmonisation of energy markets and transport facilitation. The ability to access electricity and gas resources from almost any location in ASEAN will not be achieved until the region makes a concerted effort to resolve complex issues and sets up an open access system, a more cooperative structure to facilitate trading and oversee the physical stability of interconnected systems, tariff setting mechanisms, gas specifications and gas transit principles, consumer protection and safety, and legal and tax issues.
Further, integration initiatives are lacking in the areas of intermodal transport development through the establishment of dry ports and an efficient logistics market. In most countries, the development and implementation of intermodal policies and projects are distributed over many ministries or agencies.
Breaking the logjam
Individual Southeast Asian countries and the region as a whole have initiated several steps to remove bottlenecks hampering the execution of cross-border projects. The establishment of the ASEAN Infrastructure Fund to mobilise financial resources to support regional infrastructure development is a move in the right direction. In August 2014, the ASEAN Capital Markets Forum announced a framework for cross-border offering of collective investment schemes (CIS) in Malaysia, Singapore, and Thailand. The framework allows fund managers operating in a member jurisdiction to offer CIS, under a streamlined authorisation process. For instance, qualified fund managers in Malaysia can offer their products directly to investors in Singapore and Thailand.
Efforts by several countries to ease foreign investment restrictions are expected to provide traction to project implementation. The Philippines, for instance, in October 2013, changed foreign exchange rules to allow overseas companies based in the country to convert proceeds from local share offerings into US dollars. In 2010, the ASEAN+3 Bond Market Forum was established to foster the standardisation of market practices and harmonisation of regulations relating to cross-border bond transactions in the region.
To promote transport facilitation, ASEAN countries had adopted the Regional Strategic Framework for the Facilitation of International Road Transport (RSF) prepared by UNESCAP in March 2012. On similar lines, an RSF for the facilitation of international railway transport is also under preparation to form a complete future system for international land transport in the Asia-Pacific region. An intergovernmental agreement for dry ports is currently under preparation, which should help in achieving greater cooperation. Meanwhile, countries like Indonesia and Thailand have established national logistics strategies while Malaysia has taken a host of initiatives to improve freight forwarding practices.
The road ahead
Strategic geographical placement and crucial economic linkages with neighbours necessitates enhanced regional connectivity in ASEAN. As the Southeast Asian region is moving towards ASEAN Economic Integration, the role of transnational infrastructure projects is becoming more important. While the initiatives by the respective governments so far have been encouraging, the complex nature of such projects and the massive investment required impedes implementation. Given the heterogeneity among countries, what is required is greater cooperation from the respective governments in terms of synchronisation of regulatory and legal frameworks. According to Subramaniam, “Governments can help spur regional infrastructure development in a number of ways. First, they can harmonise standards, practices and institutional arrangements between countries. Second, they can establish appropriate regional institutional architecture, for instance, dealing with power trade. Third, the countries can foresee adverse effects of regional projects and take proactive measures to ensure that any displaced or disadvantaged communities’ concerns are addressed. Fourth, they can establish regional infrastructure financing arrangements. An example is the ASEAN Infrastructure Fund established by the ASEAN economies in partnership with ADB”.
Private sector participation is one area that still remains unexplored in transnational projects. According to industry experts, governments in the region should take steps towards eliciting greater participation from these players. The integration of financial markets will also play an important role in the correct pricing of these projects. “Integration of financial markets will promote greater flow of funds between countries. It can help promote more trade by making it easier and cheaper to settle and finance cross-border transactions. By broadening the range of investments available, it can help countries diversify their asset allocation and share risks across the region. This should help smooth out volatility in consumption”, says Thiam Hee Ng, Senior Economist, Office of Regional Economic Integration, ADB. Regional funding pools, such as the ASEAN Infrastructure Fund, may also be tapped to fund these projects.
It is imperative that the importance of financing cross-border projects is recognised and steps taken to reduce the risks and difficulties associated with the projects. This will help the region to place itself on a higher-growth trajectory, as a lot of market potential that lies within will be easy to tap once such projects are executed smoothly.
