Cross-border transportation projects moving at a snail’s pace-
Enhancing economic integration through cross-border linkages among Southeast Asian countries has emerged as a major focus area, especially at a time when slow growth has become the new “normal” in advanced countries, leaving Asian economies to rely more on domestic and regional demand to ensure inclusive growth. Taking cognisance of such a development, a number of cross-border transport projects have been taken up on high priority for achieving regional integration. However, despite concerted efforts, progress in transport projects has been somewhat slower than originally envisaged, primarily due to challenges like high finance costs, the political risks associated with such projects, and more significantly, the heterogeneity among ASEAN economies. 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 the execution of cross-border projects. Efforts are also being made to provide financial incentives to the stakeholders involved.
Experience so far
Historically, ASEAN countries have been involved in several cross-border infrastructure development programmes focused on transport. Two of the biggest initiatives currently under progress for improving intra-regional connectivity are the Asian Highway Network, which is a 141,000 km network of roads running across 32 countries, and the Trans Asian Rail Network that comprises 117,500 km of railway lines serving 28 member countries, of which 14,000 km of rail track is in ASEAN countries.
The on-ground progress of cross-border transport projects has mostly been slow as most projects have been facing inordinate delays due to interregional issues and financial constraints. The 3,200 km trilateral highway connecting India, Myanmar and Thailand presents an apt example of an inordinately delayed project. The project, which was conceptualised in April 2002, is particularly significant due to the geographical location of the three countries and their trading relationships with one another. Although there was some progress in its initial years, the project had been stalled since 2006 due to lack of political commitment and funding. Now, with the renewed push from the Indian government, the project is expected to be completed by 2020.
The financing mix of cross-border transport projects has largely been dominated by multilateral funds. Private investments have so far played a very limited role, primarily due to the risks involved in funding such projects in comparison to projects located in a single country.
Priority projects identified by ADB
The Asian Development Bank (ADB) has identified 26 priority projects of the total pipeline of projects, including road, railway and port transport projects, primarily on the basis of being more realistic and having a better chance of being economically justifiable. The total cost of these projects stands at $8.4 billion, of which $986 million is for roads, $5.1 billion for railroads, and $2.4 billion for ports. Given the huge gap between the investment requirements for road and rail projects, road projects should be given priority in the early phase, mainly because they cost much less. Port projects costs are high, but should also receive priority attention, particularly in light of the fact that the bulk of the trade is still by sea. In terms of country-wise investment requirements, the largest investment requirement has been identified for Bangladesh, India and Myanmar.
Execution bottlenecks in transport projects
Implementation and financing of cross-border transport projects has always been a vexed issue. This has been primarily due to the complexity involved in project execution as compared to national-level projects. Financial sustainability is a key concern area, 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 Laos-China high speed rail projects, which is not expected to generate profit for a long time. The project is likely to achieve break even point in 38 years. With debt being a major source of funding for these projects, delayed economic returns are bound to affect the viability of these projects.
Asymmetry in specifications pertaining to standards, guidelines and technical procedures across boundaries impedes smooth project implementation. However, the extent to which these differences affect a project may vary depending on the sector. Therefore, harmonising these specifications effectively at the project design stage is essential.
Further, 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 not equally shared between parties. These issues need to be addressed at the time of project planning. Further, the national governments involved should arrive at an arrangement wherein the issue of asymmetric cost and benefit allocation is dealt with.
Strong national institutions also play an important role in handling the negative fallouts of project implementation. However, institutions are often not equipped with the requisite resources, staff, skills and experience to design effective regulations and policies to aid the implementation of these projects. National-level institutions often fail to integrate transnational projects with domestic plans and priorities.
Integration initiatives are also 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 and very few countries have focused on putting in place policies to guide and support the development of an efficient logistics market so far.
Recent impetus on infrastructure linkages
The Southeast Asian countries and the region as a whole have taken several steps to de-clog execution bottlenecks in cross-border transport projects. One major step in this direction has been the establishment of the ASEAN Infrastructure Fund that aims to mobilise financial resources to support regional infrastructure development. Further, in August 2014, the ASEAN Capital Markets Forum announced the operationalisation of its 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 rules are expected to provide traction to project implementation. The Philippines, for instance, in October 2013, eased foreign exchange rules that allowed overseas companies based in the country to convert proceeds from local share offerings into US dollars. In 2010, the ASEAN+3 Bond Market Forum (ABMF) was established to foster the standardisation of market practices and harmonisation of regulations relating to cross-border bond transactions in the region.
To overcome issues relating to 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 Asian and Pacific region. An intergovernmental agreement for dry ports is currently under preparation, which should help in foster greater cooperation. Besides, countries like Indonesia and Thailand have established national logistics strategies while Malaysia has taken a host of initiatives for improving freight forwarding practices.
Further, the establishment of the ASEAN Economic Community (AEC) in 2015 has marked a major milestone in the regional economic integration agenda in ASEAN, offering opportunities in the form of a huge market of $2.6 trillion. The AEC’s vision for transport for the next nine years, laid out in the AEC Blueprint 2025, will encompass greater connectivity, efficiency, integration, safety and sustainability of ASEAN transport to strengthen ASEAN’s competitiveness and foster regional inclusive growth and development.
To strengthen access to cross-border project financing for Singapore-based enterprises, there are plans to enhance the existing Internationalisation Finance Scheme under the Committee for the Future Economy to provide insurance against default of payments by borrowing countries in selected emerging markets. This step will help unlock private financing for Singapore-based infrastructure companies.
Recently, transport ministers of ASEAN countries also adopted the Kuala Lumpur strategic transport plan for 2016-25, which designs a range of solutions for aviation, road and maritime transport. With regard to establishing the ASEAN Single Aviation Market, the ministers have enforced the ASEAN multilateral agreement on the full liberalisation of passenger air services. Efforts are also being made to expedite the development of the ASEAN Framework Agreement on Cross Border Transport of Passengers and strengthen cooperation between transport and customs officials to effectively implement the ASEAN Customs Transit System. Further, China-led Asian Infrastructure Investment Bank also aims to establish sustainable infrastructure and cross-border connectivity through mobilisation of private capital this year.
The way forward
The slow pace of economic growth in developed nations and the strategic geographical placement of ASEAN countries make a strong case for improving regional connectivity within ASEAN member states to ensure inclusive growth. In this regard, modest progress has been made with several initiatives being made by member states to promote implementation of cross-border transport projects. However, given the heterogeneity among countries, synchronisation of regulatory and legal frameworks across ASEAN member states remains the topmost priority.
Public-private partnerships (PPPs) provide an important top-up for infrastructure funding, but have had a very limited role to play in cross-border transport projects within ASEAN. Lack of transparency, and poor regulation and governance of PPP projects, along with the political and financial risks involved in funding such projects, have been the main reasons deterring private sector participation. Going forward, the integration of financial markets will play an important role in effectively pricing these projects. Besides, regional funding pools such as the ASEAN Infrastructure Fund could be tapped for funding such projects.
It is vital for ASEAN member states to take cognisance of the importance of financing cross-border projects, and take steps in the right direction. 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. Furthermore, support from multilateral development banks and international co-ordination for cross-border projects will help ensure the success of these projects.
