Conclusions and Policy Recommendations

This paper has examined a range of crossborder infrastructure development issues related to the Asian countries. While tariff barriers have come down in Asia, international infrastructure along with “behind the border” issues have become important for deepening regional cooperation and integration. This suggests that there is significant potential for economic gains through deeper regional cooperation in Asia.

Despite the active pursuit of private investment in infrastructure by most developing countries in Asia and a growing number of success stories, the pace of such investment remains slower than initially expected. Participation by the private sector in infrastructure development has been mixed. While there has been moderate progress in national infrastructure development by the private sector, progress is rather limited in the case of development of crossborder infrastructure in Asia. The paper indicates that Asian countries have attracted higher private sector investment for development of national infrastructure projects like seaports and airports, compared to crossborder infrastructure projects in the past. The rising trend in private investors in infrastructure projects indicates a decline of investments by developed country investors.

The paper has clearly brought out that private sector investment in crossborder energy sector projects exceeds that found globally in the transport, telecommunications, or water sectors. In the Asian context and when all modes of financing crossborder projects are considered, energy sector projects still dominate the investment scenario.

Crossborder energy (power generation or natural gas) projects are driven by demand–supply pressures within countries and the cost economics associated with acquiring equivalent energy from other sources. In this sector, the commodity output, power or natural gas, is easily tradable and can be sold to power-deficient countries under long-term agreements, thereby providing opportunities to the host country to earn foreign exchange revenue and, as well, to improve its economic condition. Risks associated with energy projects, like environment/social issues, political uncertainties, etc., are more or less limited to the pre-completion stage, and post-implementation risks are limited.

On the other hand, crossborder transport (road/highway) projects involve higher risks associated with traffic growth, willingness-to-pay, political equations, environmental and social issues, etc. Transport projects involve the physical cross-over of people and goods involving long, drawn-out formalities at border checkpoints. In a few cases, adverse political relations impact traffic, and, thereby, revenue. Crossborder transport projects are also tagged with social problems, like drug/human trafficking, HIV/AIDS risks, etc.

By considering all modes of financing, this paper has found that crossborder infrastructure financing in Asia has witnessed an upward trend in the last decade and a half. Given the huge infrastructure investment needs of the region and insufficient government resources, the role of the private sector and PPP in enhancing infrastructure facilities in Asia, particularly crossborder infrastructure, is crucial.

The review of the case studies of CBIPs clearly indicates that the major reasons for the slow progress of international infrastructure development by the private sector are many, and comprise both economic and non-economic issues. Many of the new investments (such as transportation and energy) in crossborder infrastructure seem to be viable on commercial terms but non-workable when non-economic factors are considered. Also, preconditions for private financing of infrastructure (e.g., revenue-sharing, energy tariff fixation, etc.) are more difficult to establish than is commonly realized. In addition, inadequate preparation leading to unanticipated problems and delays in implementing infrastructure projects is also seen as major drawbacks for limited response of private sector. While some projects have been operating successfully, some were stalled or abandoned, mainly due to political reasons (e.g., the Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation Highway). Indeed, public sector investment drives crossborder energy and transportation projects in Asia, whereas private sector investments have picked up the pace only recently, specifically after the 1997 Asian financial crisis.

Trends in the GMS show that crossborder road transport projects have not yet attracted private investments upstream. Considering the complexities of the issues involved, and the fact that transport is a basic prerequisite for economic development, major parts of funding along with policy/program formulation and institutional reforms have of necessity been shouldered by national governments in the past, and the trend will have to continue in the future. The role of multilateral and bilateral development agencies is very important for facilitating dialogues between neighboring countries, evolving subregional plans, providing technical advice, and financing and mobilizing resources for project implementation. The EWEC, and the entire GMS program as a whole, have demonstrated this effect (Butphomvihane 2007).

Conventionally, the private sector is willing to participate in low-risk, high-return projects. However, crossborder projects are bundled with several risks: political, social, economic, etc. As a result, the private sector is hesitant to participate even in high-return projects. In such circumstances, the role of multilateral and bilateral development agencies in extending guarantees is very important. The Theun Hinboun and NT2 hydropower projects were able to attract private investment due to sustained support (comprising funding, covering political and risk guarantees, and crucial support in implementing environmental and social rehabilitation and mitigation measures) from donor agencies like ADB, World Bank, and MIGA.

Both environmental and social issues, including resettlement and rehabilitation of project- affected persons, need to be studied in sufficient detail and mitigation measures evolved during the project design stage itself in order to avoid problems during implementation and completion. An inclusive approach whereby the project-affected persons are equally and rightfully involved with evolving and implementing the mitigation plans works well as observed in the NT2 project.

Development of economic infrastructure comprising special industrial and economic zones requires considerable investments, mainly from the private sector. However, basic infrastructure, in the form of roads, water, electricity, and telecommunications services are expected from the public sector. The SEZs along the EWEC have attracted some private industries and investments once the east-west road corridor became operational, providing much-needed connectivity to the Da Nang port on the Viet Nam side.

Development of transport linkages has to be equally complemented with efficient operational procedures comprising crossborder transport agreements and elimination of non-physical impediments for the movement of goods and people. This includes simplified customs procedures, cooperation to reduce the need for inspection and quarantine measures, improve trade logistics, etc. ADB has played an important role in GMS through technical assistance to the neighboring countries in framing crossborder transport agreements and drafting the associated annexes and protocols. ADB has also been instrumental in capacity-building activities (institutional and human resources development) for enhancing the effectiveness of the program. Private sector participation in financing and operating CBIPs in the transport sector is expected to facilitate and act as a catalyst in improving operational procedures across international borders (e.g., GMS crossborder transport agreements).

Case study analysis also shows that the following prescriptions will better facilitate CBIPs which, despite their obvious advantages, still face a number of hurdles in Asia:

• Standards and labels are widely acknowledged as an effective means to improve CBIP efficiency. Crossborder connections, be they energy or transport, require harmonization of national legal and regulatory frameworks, as well as pricing schedules. Common technical standards for design and construction, operation and maintenance, safety, etc. are also necessary.
• The need for active participation of the private sector in CBIPs in demonstrated by the example of gas distribution, which is currently controlled by a monopoly held by state-owned petroleum companies in many ASEAN countries, limiting private sector participation and investment. Countries in Asia should open up the entire downstream sector of CBIPs. Asian countries should formulate a competition policy across Asia to enhance investment efficiency for CBIPs.
• Individual governments must also move toward a market-based pricing system and away from practices, such as price intervention and tax distortions, that lead to inefficient pricing of CBIPs (e.g., natural gas and gas-related products and services).
• The emergence of the PRC and India has significant implications for regional patterns of CBIP usability. A detailed understanding of the CBIP dynamics is thus particularly valuable.

7.1 Mechanisms to Strengthen CBIPs

• Greater spending on infrastructure to meet growth needs in Asia requires stronger partnership between government and private sector. Attracting both local and international private sector investment requires clear regulatory frameworks, especially on key elements such as tariff regulation, maintaining a level playing field with incumbent public sector players, clear concession agreements (for example, termination, change in law, force majeure, and competition policy) and competing facilities.
• Despite such risk mitigation such as local currency financing, long-term fixed interest rates, etc., active support and leadership from national governments in sharing project risks, extending tax benefits and facilitating matters related to land acquisition, environment, resettlement and rehabilitation, customs, etc. are essential as they provide much-needed confidence to the private sector in implementing CBIPs
• To foster new developers—both regional and south-south—the involvement and participation of multilateral donor agencies is important not only towards funding assistance but also in sharing project risks, providing technical assistance and guidance in environmental/social matters, etc. Donor agencies can play the role of an honest broker and help facilitate dialogues on important matters related to CBIPs.
• Independent panels and review committees with participation from donor agencies and the active involvement of project-affected persons in implementing social/environmental mitigation measures have been shown to be successful, as with the NT2 project.
• In order to gain support from the local population, a part of the revenue generated from the CBIPs should be reinvested for social and economic development activities around the project area.
• Transparent subsidies for essential services would attract regional and international investors in CBIPs.
• Two far-reaching approaches towards CBIPs would be leveraging a demand-side approach by creating bankable PPP projects, and leveraging a supply-side approach by mobilizing more appropriate products and local currency financing for infrastructure.
• National governments and donor agencies will have to continue supporting development of basic infrastructure in bordering areas. The case study of EWEC reveals that once basic infrastructure is developed, the private sector is attracted and participates in investment projects in the long run.
• Considering the risk associated with CBIPs and depending on revenue accruals, project developers may have to consider revisiting or renegotiating the concession document so as to ensure sufficient and safe returns to private entrepreneurs.
• Implementation of operational components (e.g., trade facilitation) is more complicated than the infrastructure project itself, and sufficient emphasis on technical support and capacity building from government agencies involved with border trade activities should be accorded in order to achieve the planned objectives.
• Innovative financing mechanisms to make the CBIPs more attractive for the private sector (like development rights for townships for the entrepreneur) need to be evolved.

7.2 Way Forward

Since Asia has a wide and vibrant base of local investors, and since limited public resources are not able to meet all of Asia's required investments for crossborder infrastructure, Asian countries are exploring avenues for increasing investments in national and crossborder infrastructure through a combination of PPP and exclusive private investments. It is argued in the literature that PPP is one of the best-suited options for the development of national and international infrastructure.²⁸ It supplements scarce public resources, creates a more competitive environment, and helps to improve efficiencies and reduce costs. In most cases, it also meets the specific financing requirements of stakeholders and beneficiaries.

Another perspective on infrastructure financing through PPP is that there are large financial market implications in the redirection of Asian savings from non-Asian money center financial markets to regional markets that can handle massive physical infrastructure investments (Summers 2006; Agarwala and De 2007; Krueger and Bhattacharya 2008). Therefore, this must be added to the very large ancillary investments that serve the new physical infrastructure: many of these will be private, but there will also be a significant public sector component as well as crossborder elements.

For many crossborder infrastructure investments, PPP is emerging as the preferred instrument, where the private sector gets its normal financial rates of return while the public sector partner provides concessional funding based on the long-term direct and indirect benefits to the economy. There are also other options that are becoming popular in financing crossborder infrastructure projects in Asia and elsewhere, such as equity financing for private infrastructure development, private bond placements, public bond placements, official aid financing, direct investment by national and Asian firms, foreign direct investment, and sovereign wealth fund. Various guarantees or subsidies are also used to share project risks. However, given the underdevelopment of the Asian financial markets outside a few key centers, financial infrastructure development is also needed to provide the appropriate type of investments for the full range of physical infrastructure projects.

Governments in Asia along with multilateral development organizations can play a greater role for development of crossborder infrastructure in the region. This is not to deny that exclusive dependence on government for the provision of all infrastructure services introduces difficulties concerning adequate scale of investment, technical efficiency, proper enforcement of user charges, and competitive market structure. Nonetheless, complete reliance on private production, particularly without an appropriate regulatory environment in force, is also not likely to produce optimal outcomes. Now, infrastructure investment is entering a new stage, marked by new operators and sources of capital, a redefining of the public sector's role, and new instruments for regulating and overseeing public services. The role of private sector, whether through PPP, or PSP, is thus very important in order to sustain crossborder infrastructure development in Asia.

Eliminating the gap in infrastructure financing for CBIPs is not all that is required. In order to attract large and medium-scale private investors, it is essential that Asian countries should set in place an effective and useful institutional mechanism to be operative at regional level. At the same time, countries have to continue domestic reforms which will encourage the private sector to invest in national infrastructure. A strong national infrastructure can only strengthen crossborder infrastructure since a large part of Asia is geographically contiguous. Contrary to popular belief, many Asian countries still do not have PPP policy, despite that fact that they are aggressively looking for private sector investment. Problems become more severe in smaller and LDCs where a lack of adequate capacity coupled with inadequate regulatory frameworks jeopardizes crossborder infrastructure development opportunities. There should be a regional binding with specific targets to adopt an exclusive PPP policy and transparent guidelines for regional and national infrastructure. Here, Korea's PPP policy and Latin America's IIRSA initiative could provide some good lessons for Asia.

At the same time, in order to unlock Asia's crossborder infrastructure development potential, it is important to encourage effective coordination among development partners and donor agencies like ADB, JICA, ESCAP, IDB, World Bank, USAID, and other partners who are directly and indirectly engaged in regional cooperation and developmental activities.

Finally, the need for a structured regional program for CBIPs is required not only to overcome the institutional constraints but also to finance and support crossborder projects among LDCs. Moreover, for many of these crossborder projects, there may be some gap in financial viability which the public sector may be invited to ease.²⁹ The current trend among investors in crossborder projects in Asia and South America shows that public sector investments have been much higher than private sector, even though there is wide variation in investment between the two regions. Therefore, we can not ignore the role played by the government and multilateral development organizations in financing and developing crossborder projects. The need is primarily of three types: institutional support, capacity building, and long-term finance. To manage these three primary objectives, an exclusive program and a fund to promote crossborder infrastructure under the aegis of ADB would pave the way for facilitating private sector investors in Asia, as would leveraging existing initiatives in GMS and other subregions.

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