Cross-Border Infrastructure and Economic Development

Infrastructure investment has been the bedrock of national economic development plans in many economies. National infrastructure projects are essential in connecting various production clusters and markets within a country, thereby helping integrate the national economy. Transport infrastructure has long been considered critical, because of its ability to enlarge markets.⁹

Good infrastructure is now considered a major contributor to economic development in many developing economies. In most developing economies, inadequate and unstable power supply, inefficient transport systems, poor-quality roads, weak and aged railroad systems, badly equipped and congested ports and airports, unreliable communications systems, and grossly inadequate urban infrastructure raise transaction costs, curtail productivity, and often render investments unviable. Efforts to enhance investment in national infrastructure can help accelerate the pace of economic development in many of these economies (Box 2 [ PDF 89.4KB | 1 pages ]).

The infrastructure agenda of the East Asian economies—starting with Japan and spreading to the Asian NIEs and middle-income ASEAN members—has been guided by a strategic vision of the top leadership, using coordination and feedback devices within the planning process to implement or realize that vision. Though each of these economies has followed a country-specific approach, one common attribute has been that inherent priorities have been set by the top leadership of each economy. Rapid infrastructure development has been possible because investments were made ahead of infrastructure demand, at times gambling on large infrastructure projects that may have had questionable viability. Providing infrastructure has been closely linked spurring industrialization and economic growth. Countries such as the PRC, Viet Nam, and even India are pursuing this model of infrastructure development today.

The unique aspect of the East Asian model is that these economies developed infrastructure as part of their overall strategy of promoting integration with the regional and global economy. Infrastructure was seen as an important enabling factor in the process of globalization until the recent upsurge in the growth of global production networks. Advances in information and communications technology and the growth of production networks across East Asia have changed this basic role of infrastructure—from an enabling factor to an important decision variable that affects the overall costs of production. Multinational firms have various alternatives for investments. Infrastructure—the quality and quantity of a country’s "hardware" and "software" aspects—can change an investor’s overall cost of trade and production. Cross-border infrastructure can have an immense impact on an economy’s competitiveness by reducing the economic distance from external markets, building economies of scale due to wider markets, increasing FDI inflows, and expanding trade and economic activity in general.

The recent interest by the multilateral and regional development institutions in supporting infrastructure development stems from the impact infrastructure investment has, not only on the overall quality of life and poverty reduction, but also on infrastructure governance— infrastructure design and management along with appropriate regulatory frameworks. Though empirical studies are not conclusive about the impact of infrastructure on economic growth and poverty reduction, there is growing recognition of the positive contribution infrastructure makes to these objectives. National and cross-border infrastructure is an important policy instrument for economic development.

Lessons from Major Cross-Border Infrastructure Investments in Asia

A nation’s boundaries often impede cross-border trade, investment, and economic integration. Even in the most open economies, domestic trade is much larger than international trade.

Several regional initiatives are at various stages of implementation in Asia to promote regional cooperation and greater connectivity. In a sense, the 1997–1998 financial crisis was a turning point for regional cooperation among East Asian economies. Before the crisis, the institutional base and policy initiatives were limited to removal of trade and investment barriers under the auspieces of the General Agreement on Tariffs and Trade (GATT)/WTO and APEC, while actual integration was driven largely by the private sector. The growing support for regionalism reflected several factors, including the need to reduce financial vulnerabilities at the regional level; the need for greater cooperation with the PRC, given the country’s emerging dominance in the world and in regional markets; and the merit of harmonizing policies, regulations, standards, and procedures to enhance the region’s competitiveness.¹⁰ Market-led integration since the crisis was supplemented by policy-driven cooperation in money and finance, trade and investment, and the provision of regional public goods. In this context, robust transport and communications links are important building blocks, connecting regional markets by supporting production, trade, and investment (Box 3 [ PDF 89.5KB | 1 pages ]).

The ADB has supported a number of regional and subregional economic cooperation programs involving both hardware and software aspects of infrastructure, including trade and transit facilitation, policy and regulatory harmonization, and capacity building. This section examines four case studies of cross-border infrastructure: the GMS Northern Economic Corridor and Trade and Transit Harmonization,¹¹ the Nam Theun 2 Hydropower Project, the Regional Cooperation for Pacific Aviation and Information Communications Technology, and the Indonesia-Singapore Gas Transmission program.

The GMS Northern Economic Corridor and Trade and Transit Harmonization

The GMS program has focused on regional cooperation for strengthening cross-border connectivity. Key activities include development of economic corridors: roads to improve access, institutional and policy support for trade facilitation, and transit policy harmonization to reduce logistics costs across the subregion. Five economic corridors (two north-south, one east-west, and two southern) were identified, and several road investments have begun. Feasibility studies are addressing prospective railway improvements. Trade and transit harmonization is a key element, bringing to the GMS program both the hardware and software components of infrastructure development.

The Northern Economic Corridor project (ADB, 2002)—which will link Thailand and the PRC via a 228-kilometer road link through the northern and more remote regions of landlocked Lao PDR—was designed to open up economic opportunities across diverse populations. The trade and transit corridor was estimated to cost $90 million for the physical investments in building road links and the components that will benefit local communities along the way. A social action plan with provisions for community roads, small water and sanitation schemes, education, HIV/AIDS awareness programs, and local capacity-building programs for environmental management was an integral part of the project design. These components were planned in a participatory process involving many ethnic minority groups.

The project was funded using financial and other resources from the two primary beneficiaries (the PRC and Thailand), in partnership with the ADB. The role of the ADB was multifaceted. It (a) helped mobilize financial resources; (b) assisted in project design to ensure greater regional connectivity and the inclusion of isolated regions of northern Lao PDR in the process of regional integration; (c) assisted Lao PDR as the transit country in negotiations on pricing policies, so that maintaining the newly created assets would not place undue fiscal burden on the country’s finances; (d) actively worked to ensure that the distribution of costs and benefits across the three countries was fair (given that the most immediate benefits were expected to accrue to the PRC and Thailand, the PRC and Thailand shared two-thirds of project investments and provided Lao PDR with concessional financing); and (e) ensured that the project adopted a social and environmental management plan to include contracting arrangements that aligned incentives of construction firms to mitigate these risks. Similar projects that seek to coordinate regional infrastructure are underway in the subregion.

The three economic corridors in the GMS—north-south, east-west, and southern—are expected to form a highly efficient transportation system. No matter how good roads are, they are of little use if traffic is held up at the borders, however. Although international conventions exist to address regulatory and procedural barriers to the cross-border movement of people and goods, most GMS members are unable to fully accede to these conventions. Recognizing this, the ADB has been working with countries involved to implement an agreement on the cross-border movement of services and goods. These types of support allow people and goods to travel around the GMS with minimum impediment, cost, or delay, ensuring that a basic framework is in place to support the economic competitiveness of GMS as an integrated area for production, consumption, and distribution.

The GMS Cross-Border Transport Agreement (CBTA)—which entered into force with the ratification by the six GMS member countries in December 2003—is a multilateral instrument designed to facilitate the cross-border transport of people and goods across the subregion. It incorporates the principles of bilateral or multilateral action and flexibility in recognizing differences in procedures in each GMS country. The agreement includes references to existing international conventions that have demonstrated usefulness across a broad range of countries. It also takes into account, and is consistent with, similar ASEAN initiatives.

The CBTA includes a preamble, with 10 parts and 20 annexes and protocols, that applies to selected and mutually agreed upon routes and points of entry and exit among the signatory countries along the east-west, north-south, and southern economic corridors. The preamble covers (a) single-stop inspection; (b) cross-border movement (visas) for people engaged in transport operations; (c) transit traffic regimes, including exemptions from physical customs inspection; (d) bond deposit, escort, and agriculture and veterinary inspection; (e) requirements that road vehicles will have to meet to qualify as cross-border traffic; (f) exchange of commercial traffic rights; and (g) infrastructure, including road and bridge design standards, road signs, and signals.

The Nam Theun 2 Hydropower Project

Nam Theun 2 (NT2) is a 1,070-megawatt hydropower project being implemented in Lao PDR that will export most of its power to Thailand (ADB, 2004). The $1.2 billion project is a private sector undertaking with multilateral and bilateral financial and other support. This enormous project—not only the largest private power project in Lao PDR but also the largest private sector hydroelectric cross-border project in the world—has been under preparation since the mid-1980s. The project has very strong supporters as well as several groups that oppose it.

The Lao PDR government is the major beneficiary of NT2. It will receive about $1.9 billion over the 25-year operation period, from dividend income, royalties, and taxes. The main costs are borne by local communities and the environment around the project area. These costs arise from construction of the dam, the flooding of the Nakai Plateau, and downstream effects associated with the interbasin transfer of water from NT2 to the Xe Bang Fai River. More than 70,000 local inhabitants (some of them from ethnic minorities) will be affected in varying degrees.

One of the major issues has been ensuring a fair system of distributing costs and benefits, with appropriate compensation to protect those most affected by the project. A total of $90 million has been designated as capital and operating expenditures for environmental and social mitigation and compensation. These obligations are part of the concession agreement signed by government and private sector concessionaires. Mechanisms have been developed to address weak accountability arrangements in the public finance management system, in particular, to facilitate more effective and transparent targeting of NT2 revenues toward poverty reduction, including improved education, health, and sustainable livelihood.

An adequate system to monitor and build capacity support for the government—provided through multilateral and bilateral institutions—is in place to implement a project that is not only a success in terms of producing and trading power but is also helping Lao PDR further its development agenda of poverty reduction, social development, and economic growth. A key challenge is to ensure that the proposed distribution of costs and benefits among different stakeholders groups is fair and remains on track.

Pacific Cooperation for Aviation and Information Communications Technology Regional cooperation means something very different for the island economies of the Pacific, which are small, have fragmented markets, and are isolated physically. Cross-border connectivity is a major challenge, as the scope for hard infrastructure to strengthen physical connectivity is limited by geographical dispersion and remoteness. A strong rationale exists for regional cooperation on the software aspects to improve connectivity—through efficient regional aviation, shipping, and information and communications.

Aviation in the Pacific involves 43 air transport operators, 266 aircraft, and nearly 4,000 licensed personnel. The capacity for safety and security regulation and oversight is difficult to sustain with small individual markets. Noncompliance with international safety standards and other regulations makes air travel in the Pacific less safe and secure than elsewhere, and it reduces connectivity (ADB, 2005b). Air travel is vital for Pacific economies given the geographical nature of the region and the importance of tourism.

To establish a strict, rule-based international regulatory environment, a regional agency—the Pacific Aviation Safety Office (PASO)—was formally established. PASO is expected to help reduce overall oversight costs and meet international standards by avoiding duplication, creating economies of scale, harmonizing regulatory systems, and making available scarce technical expertise available as and when needed. An investment program will support PASO’s continuing development to improve aviation safety and security. The program has four components: (a) harmonizing the regulatory environment, (b) ensuring compliance with international standards; (c) establishing a regional inspection and surveillance system, and (d) upgrading PASO headquarters. The project involves extensive capacity building, formulation of regulatory and legal frameworks, and adoption of necessary documentation systems. The project is expected to be self-sustaining in five years, once revenues match expected costs. It is designed to serve as a model for intergovernmental regional cooperation in the field of regulation services, needed to develop adequate regional transportation infrastructure.

For many developed countries, information and communication technology (ICT) provides additional information services over already well-established communications infrastructure. In the Pacific, cross-border ICT—using very small aperture terminal satellite communications (VSAT)—has the potential to radically address two fundamental challenges, distance and small market size. ICT cooperation can aggregate production, so that fishing and agriculture cooperatives, for example, can access larger markets and even very small enterprises, such as microtourism or agrotourism resorts, can attract the attention of global audiences. Digital connectivity can thus become a lifeline that allows isolated island economies to participate in expanding global and regional markets.

Technological solutions—such as multiple-access VSAT technology—allow data from the Internet to be beamed down to a multitude of places within the footprint of a given satellite. Users located anywhere in the Pacific—on land or sea—can communicate by e-mail, facilitate exchanges between local administration and the central government, and market tourism, for example. Establishment of this or a similar wide-area system would help the Pacific capitalize on its vast human and natural resources more effectively.

Strong communications capacity provides a cluster of countries with opportunities to grow into an integrated region and to thrive on economies of scale—something the Pacific still needs to do. In trade, ICT is important for procurement, exports, or aggregating national production; in governance, the system could improve local administration, human resource deployment, budgeting, and much more. A wide-area communication network also benefits hospital procurement, disaster management, health alerts, and school research, among other activities. In short, digital connectivity—through effective and inexpensive ICT cooperation across island nations—can open up a new window to the world.

Indonesia-Singapore Gas Transmission

Although a large number of Asian countries have gas resources, the region has yet to develop an integrated cross-border gas network. The Indonesia-Singapore gas pipeline began as a domestic pipeline with ADB funding from various multilateral and bilateral sources. The original project was to construct onshore and offshore pipelines to increase domestic use of gas as a substitute for petroleum and to improve energy efficiency. The project included a set of policies to create an enabling environment for private-sector participation in the gas sector and establish a regulatory framework and supporting institutions for transmission and distribution systems. An important policy covenant under the ADB loan was that the state gas company (PT Perusahaan Gas Negara Pesero Terbuka) would partially divest a portion of its equity in the project to a suitable strategic partner to spread economic risks and to introduce world-class operations, maintenance, and financing to Indonesia’s gas sector.

The 1997–98 financial crisis brought considerable uncertainty to the domestic gas market and delayed securing a strategic investor. In response, the government, in partnership with the ADB, formed Transmisi Gas Indonesia in 2002. Through open competitive bid, it divested 40 percent of its equity to Transasia, a consortium comprising Malaysia’s Petronas, Gulf Indonesia, Singapore Petroleum, and Canada’s Talisman Energy. Transasia paid $187.6 million for the 40 percent equity that included about $58 million toward the cost of extending the Grissik-Battam pipeline to Gissik-Battam-Singapore. The cross-border project is an initial step, not merely in restructuring Indonesia’s gas sector but in opening the door to the broader goal of establishing a proposed trans–ASEAN gas pipeline (Thomson Financial, 2002).

Lessons Learned

Most of the lessons from these case studies are specific to the context and circumstances of the individual projects. However, a few generic lessons can be drawn:

• Governments involved in cross-border infrastructure projects need to play a larger role, even if the projects are primarily private sector driven. Their role can be multifaceted and, in most cases, context specific—from sharing risks to creating credible policy regimes to providing direct or indirect financial support. For example, if high fixed costs, the long life of assets, and space specificity expose cross-border infrastructure to risks as a result of high sunk costs (or unrecoverable past expenditures), governments need to ensure private-sector confidence by establishing credible policy regimes.
• In the absence of a single pervasive sovereign jurisdiction, aligning the differing interests of two or more nations requires either formal or informal institutional arrangements aimed at lowering transaction costs, reducing any risk of conflict, or both—through, for example, the European Commission or the GMS.¹²
• The presence of multiple constituencies involved in cross-border infrastructure requires capacities and mechanisms to identify the magnitude and distribution of the benefits and costs of cooperation. When costs and benefits between different groups vary dramatically, a fair system of distribution needs to be introduced and the issue of incentive compatibility must be addressed—and internalized at the planning and design stage. In the case of cross-border transport projects, sufficient incentives should be provided to any transit country to ensure project success.
• Appropriate mitigation plans and adequate financial and technical resources are required to deal with transborder externalities, such as the spread of HIV/AIDS, pollution, the erosion of social values and cultural identities, and the trafficking of vulnerable groups. Bridging shared history, cultural values, norms, and creating cohesiveness based on ethnic identity can help cross-border infrastructure projects build trust across ethnic divides—an essential element for successful regional cooperation.¹³
• Planning and preparation costs are almost always high. Some projects require up- front external financial and other support to be successful.

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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.