A Framework for Cross-Border Infrastructure

Given the rapid growth of regional economic activities, trade, and investment in Asia, cross- border infrastructure has become an important building block of regional economic integration in the age of globalization. Many cross-border infrastructure initiatives are specifically directed at facilitating cross-border trade by reducing overall transport and logistics costs. Cross-border infrastructure has also helped improve connectivity within a country or changed the market structure of domestic sectors.

Except in the European Union, which has well-defined rules on market integration to support cross-border infrastructure, these projects are usually planned and designed on a bilateral basis. In some cases, individual project negotiations have worked well. Scandinavian countries have interchanged as much as 7 percent of total subregional power generation based solely on a gentlemen’s agreement. Though in theory, project-to-project cooperation between governments for mutual benefit should work without requiring a formalized institutional or legal framework, in reality this approach often involves high transaction costs, high failure rates, or long lead times. A project-to-project approach does not follow a single, integrated framework for planning and designing projects.

This section proposes a framework for planning and designing cross-border infrastructure in three dimensions: political, economic and financial, and institutional and software. All of these dimensions usually need to be addressed to ensure successful cross-border infrastructure results.

Political Dimensions

Infrastructure often has a political angle. This is particularly true of cross-border infrastructure, because it invariably raises foreign policy issues. More often than not, a cross- border infrastructure project, policy, or program is used to promote or hinder a government’s foreign policy goals. In this sense, any cross-border infrastructure project requires strong political leadership at the national level, a strategic vision based on shared priorities for regional integration and development, and political commitment to this bilateral or multilateral coordination.

Several levels of governments are often involved in planning, designing, and coordinating cross-border infrastructure. Even within a country, the central planner often has different perceptions about the value of cross-border infrastructure than local governments and users. This can lead to problems of mismatches in prioritization and resource allocation. Local governments, for example, may have a greater stake in connectivity with neighboring countries than the central government does. The highest political leadership must set a clear strategic vision for national and cross-border infrastructure in order to resolve such mismatches at the national level.

There is a need to develop sufficient mutual trust and goodwill between governments involved in the project. As multiple constituencies are often involved in cross-border infrastructure, institutional mechanisms are needed to sort out the true objectives of cooperation and to resolve any obstacles. This can be done either through formal institutions (such as the European Union) or, as is the case in many Asian groups, through informal political consensus to create such collaborative arrangements. Whichever approach is taken, governments need to make political efforts to develop mutual trust and build consensus among them in various ways, including joint studies, dialogue, and interactions among politicians, experts, news media, and citizens.

A strong political commitment to international coordination for cross-border infrastructure can also reduce overall external risks. Governments involved need to collectively ensure that the underlying policy environment supports cross-border infrastructure, particularly when the project undertaken involves the private sector. Strong political commitment to coordinate using a multilateral framework can make it difficult for individual governments to unilaterally renege on the terms of an agreement under which the infrastructure is supplied, as the other parties naturally would also have an interest in enforcing the agreement. Transparent and predictable governance structures and institutional arrangements for infrastructure projects reduce overall risks and enhance project feasibility.

Economic and Financial Dimensions

Benefits from better connectivity through cross-border infrastructure—in the form of lower logistics costs, expanded trade, higher growth, and greater poverty reduction—tend to be indirect and long term, whereas costs tend to be incurred immediately and up front. These benefits are often asymmetric across countries, making it difficult to agree on the appropriate distribution of costs. These can raise doubts over resource allocation, especially for high- profile projects. Hence economic and financial feasibility and distributional consequences need to be carefully studied and well established. This is particularly the case because political leaders often announce cross-border infrastructure projects without undertaking the necessary economic and financial analyses beforehand.

Cross-border infrastructure projects should be planned and designed within the overall medium-term development strategy of each of the countries involved, and they should be identified within a regional sector planning framework. This framework should not only apply existing tools for sector planning (in terms of least-cost planning) but also require an institutional arrangement for effective regional policy coordination, including both strategic discussions at a high official level and technical consultations at the working level.¹⁴

Economic and financial analyses of projects identified within a regional sector planning framework are important for any infrastructure; they are particularly important for cross- border infrastructure given the capital intensities; complex structures of costs and benefits; regional public goods attributes; and long-term, indirect impacts. Cross-border infrastructure often involves various groups of stakeholders across national boundaries, and the groups that bear the greatest costs are not necessarily those that enjoy the greatest benefits from the project. With this in mind, a detailed distribution analysis is necessary to assess the project impact.

An appropriate institutional mechanism needs to be designed to ensure that stakeholder groups that are affected unfavorably by cross-border infrastructure projects are compensated fairly.¹⁵ Such an assurance is crucial to ensure a fair system of distribution and obtain support from less powerful countries, regions, or groups.

Institutional and Software Dimensions

Institutional and software components are as important in cross-border infrastructure as the physical (or hardware) components. For any hard infrastructure facility to work, well- designed institutional and software support is essential. It is particularly important for cross- border infrastructure, because of the involvement of multiple constituencies and the associated externalities. Developing a relevant institutional and software agenda for cross- border infrastructure can be complex, because no single legal or policy jurisdiction exists and the agenda often involves a large number of issues.

Successful cross-border infrastructure requires institutional arrangements, formal or informal, that will help reach an optimum outcome arising from cooperation as opposed to independently chosen suboptimal outcomes. Technocratic cooperation is the most critical element. Institutional requirements for coordination vary depending on how complex a sector is. For example, the technical complexity is lower for a cross-border road project (primarily involving agreements on design standards and road signage at the construction stage) than for an electricity project (for which an agreement on technical standards is essential for both construction and operation). The asymmetric distribution of costs and benefits between different stakeholders needs to be addressed at the planning and design stage. ¹⁶ Thus sector-specific institutions will be needed for detailed planning, design, coordination, and financial arrangements in any cross-border infrastructure.

It is important to design institutions in a way that provides incentives for long-term success. This is particularly true when costs and benefits of cross-border infrastructure projects vary drastically across groups. Cross-border projects need to align incentives and financing arrangements in ways that allow all participating countries to benefit from the projects.

The strong need for planning and coordination for cross-border infrastructure requires a systematic institutional arrangement, whether formal or informal. Though in theory, ad hoc institutional and technocratic coordination and negotiations between governments on a project-to-project basis should work well without a formalized institutional or legal framework, in reality this approach has had high failure rates and long lead times, significantly raising transaction costs and making such collaborations infeasible. Strong institutional coordination helps minimize such costs. A systematic, comprehensive, institutionalized approach is essential for success.

Harmonizing regulatory, procedural, and technical standards and environmental, social, and other safeguard requirements helps reduce risks and lower transaction costs for cross- border infrastructure. Resources are clearly needed for investing in such software aspects, particularly strengthening local capacity and building consensus.

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Comment(s)

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1. Cristela Goce Dakila
   (posted 08 October 2007 / 04:59:52 PM)
   
   Overall, the focus of the paper , which is cross-border infrastructure for Asian development is very timely, relevant and far-reaching in terms of perspective.
   
   The paper is rich with valuable insights which are useful for policy planners and implementors. It also provides academic researchers with a multidisciplinary framework useful in addressing the urgent concern for Asian regional cooperation.
   
   Among the infrastructure types mentioned,transport infrastructure investment, I think, is the most vital in establishing inter-country connectivity via trade in goods and services and investments.
   
   I wish to suggest the usage of a spatial computable general equilibrium model as an analytical tool to examine the impact of cross-border infrastructure investment on both producers(firms) and consumers (HHs) and other stakeholders in a specific Asian sub-region.