Introduction

Demand for infrastructure development in Asia far exceeds the available funding. Regional development institutions including the Asian Development Bank (ADB) extend funds to support many cross-border (also termed subregional or multi-country) projects to promote socioeconomic development in participating countries.

At the policy level, there are two major economic justifications for regional cooperation between two or more countries: (i) the need to deal with project-related additionalities and positive and negative externalities and (ii) the potential to derive economies of scale in pursuit of national goals. By pursuing these, all participating countries benefit from regional cooperation. However, removing physical and nonphysical barriers in order to realize these benefits requires investment as well as harmonization and simplification of relevant policies and procedures.

Regarding the first justification for regional cooperation, cross-border projects may bring additional concessional and non-concessional funds. Positive externalities (e.g., benefits such as time and cost savings, environmental protection, and trade facilitation) and negative externalities (e.g., costs such as environmental pollution, trafficking, and the spread of communicable diseases) arise when the consequences of one or more countries' actions spill over national borders. If the concerned countries do not make cooperative arrangements, too few positive externalities and too many negative ones will arise.

As to the second justification, regional programs and cross-border projects can produce economies of scale in provision of public or private (marketable) goods and services above and beyond what any country could achieve alone. As such, regional cooperation can facilitate the achievement of national goals.

Regional economic cooperation can also be conceptualized through club theory. Any collective endeavor (or club) must satisfy two basic conditions: (i) it must be self-sustaining and (ii) it must provide enough net benefits for each of its members. The success of a club depends on its benefits derived from reduction in unit cost from pooled productive capacities exceeding the cost of collective action. The cost is often influenced by physical distance between the countries. In the Pacific, for example, adding more remote countries entails higher diseconomies of isolation. This tension between scale benefits and distance costs of collective action determines the size of an “optimal club” (in this case, a group of countries). The composition of the “optimal club” may vary significantly according to the issue or service under consideration.

Reduction in trade costs is among the most important expected outcomes of cross-border infrastructure projects. Trade costs are often defined as the range of costs involved in moving a product from a point of production to a market. As such, they can refer to both national and cross-border transactions. For an analysis of regional cooperation, the focus must be on the cross-border aspects of such costs (or “international trade costs”), since these raise barriers to trade and restrict the return on investments in export goods (although they raise it for import substitutes). Declines in such costs make goods more cost competitive and raise the return on investment.

While the benefits associated with cross-border infrastructure projects and the rationale for regional cooperation are well recognized by policymakers and practitioners, evaluation practice suffers from analytical difficulties as well as inadequate data because of the elusive nature of such data for infrastructure projects whose benefits and costs go beyond national boundaries. This paper attempts to fill this gap.

Section 2 defines cross-border infrastructure projects and provides the framework and criteria for evaluating them. Section 3 examines the extent to which such criteria can be applied in evaluating recent cross-border infrastructure projects. It also describes emerging impact patterns observed in various relevant studies. Section 4 draws out lessons learned and Section 5 provides recommendations for design and implementation of cross-border infrastructure projects.

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