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A Joint Study of the Asian Development Bank and the Asian Development Bank Institut

INFRASTRUCTURE

SEAMLESSASIA

for a


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ii

2009 Asian Development Bank and Asian Development Bank Institute

ISBN: 978-4-89974-028-5

Inrastructure or a Seamless AsiaTokyo: Asian Development Bank Institute, 2009.

1. Regional inrastructure 2. Regional cooperation 3. Economic development 4. AsiaI. Asian Development Bank and Asian Development Bank Institute.

The views expressed in this book are those o the authors and do not necessarily refect theviews or policies o the Asian Development Bank Institute (ADBI), the Asian DevelopmentBank (ADB), its Board o Directors, or the governments they represent. ADB and ADBIdo not guarantee the accuracy o the data included in this publication and accepts noresponsibility or any consequence o their use. Use o the term country does not implyany judgment by the authors, ADB, or ADBI as to the legal or other status o any territorialentity. The symbol $ represents the United States dollar unless otherwise indicated.

ADB and ADBI encourage printing and copying inormation exclusively or personal and

noncommercial use with proper acknowledgement o ADB and ADBI. Users are restrictedrom reselling, redistributing, or creating derivative works or commercial purposes withoutthe express, written consent o ADB and ADBI.

Asian Development Bank6 ADB AvenueMandaluyong, 1550 Metro ManilaPhilippinesTel: +632 632 [email protected]

Asian Development Bank InstituteKasumigaseki Building 8F3-2-5 Kasumigaseki, Chiyoda-kuTokyo 100-6008JapanTel: +813 3593 [email protected]


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Asia is huge and has vast natural and human resources. It

is the largest region in the world in population and size,being home to more than hal o the worlds people,

and occupying more than a quarter o the worlds land

area. Over the last decade, Asian economies have grownrapidly and have become increasingly connected, to each other and to

the rest o the world, through greater integration.

The competitiveness o Asias tradeand o its increasinglysophisticated production networks in particulardepends on ecient,ast, reliable, and seamless inrastructure connections. Vast parts o

Asiainland and remote areas, landlocked countries, and distant

islandsare isolated economically as well as geographically; somuch o the regions huge potential remains untapped. While some

o the existing inrastructure in the region is world class, most oit is below average. Rapid economic growth in recent years has put

enormous pressure on Asias inrastructure, particularly in transport

and energy, but also in communications. Unless it can be signicantly

improved, inrastructure will continue to be a bottleneck to growth,a threat to competitiveness, and an obstacle to poverty reduction.

Better connectivity with inland areas, or instance, would boost tradeand economic growth in coastal areas, as well as inland ones. These

issues present an opportunity or the region to take collective action tourther enhance regional cooperation, particularly in environmentally

sustainable and greener inrastructure development. The challenge is

to build better and seamless connections across Asia and thus to the resto the world.

In view o the regions diversity, wherein countries dier in size,income levels, population, natural resources, and access to both

regional and global markets, connectivity is being enhanced throughseveral subregional inrastructure programs begun in the last ew

Foreword


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regulatory, and institutional rameworks that support the development

and operation o physical inrastructure). Quite obviously, the book willserve as a denitive knowledge product or researchers, policymakers,

business leaders, and other stakeholders in the region and beyond.

This study, led by the Asian Development Bank Institute (ADBI),

is a joint fagship project conducted by the Asian Development Bank(ADB) and ADBI. Many individuals contributed to the study. I greatly

appreciate the eorts o the excellent team o authors, advisers, reviewers,

editors, and researchers, rom both outside and within ADB and ADBI.ADBI Dean Masahiro Kawai and ADB Managing Director General

Rajat M. Nag provided overall guidance. The task manager, BiswaNath Bhattacharyay, Special Advisor to the Dean, ADBI, coordinated,

managed, and nalized the study.

Connecting the diversity o Asia through seamless inrastructure

will help in sustaining an integrated, poverty-ree, prosperous, and

peaceul Asia. This will require exemplary and visionary leadership aswell as rm and unfinching commitment, which I am condent Asia

is eminently capable o providing.

Haruhiko Kuroda

President

Asian Development Bank


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vi

The study beneted rom 26 background papers prepared

and reviewed by distinguished scholars. Five workshopswere held in Bangkok, Beijing, New Delhi, and Tokyo in

2008 to exchange views on background papers and drat

chapters o the book. This ADB and ADBI joint studywas led by ADBI and conducted in collaboration with ADB under the

overall guidance o Masahiro Kawai (Dean, ADBI) and Rajat M. Nag(Managing Director General, ADB).

Biswa Nath Bhattacharyay (Special Advisor to the Dean, ADBI)served as the task manager and coordinated, managed, and nalized

the study. In addition, he played a leading and pivotal role in preparing

the nal book, as well as drating Chapter 1 (Inrastructure Needsand Regional Cooperation), Chapter 4 (Developing Eective Policies

and Institutions), and Chapter 6 (Toward a Seamless Asia). Chapter2 (Supporting Regional Trade and Investment) was drated by ADBs

Douglas Brooks, and Chapter 3 (Harnessing the Benets o Regional

Inrastructure) by ADBIs Susan Stone. Vito Tanzi drated an earlier

version o Chapter 4, and Centennial Groups Harinder Kohli dratedChapter 5 (Financing Regional Inrastructure). Philippe Legrain

drated the executive summary and served as the economics editor.

Many individuals rom ADBIs and ADBs management and stacontributed to the book. The study was conducted under the guidance

o a steering committee chaired by Messrs. Kawai and Nag and

comprising Philip Erquiaga, Klaus Gerhaeusser, Jeremy H. Hovland,Jong-Wha Lee, Juan Miranda, Sultan Rahman, Kazu Sakai, Kunio

Senga, Arjun Thapan, and Xianbin Yao. A working groupcomprising

Ashok Bhargava, Ronnie Butiong, A. Barend Frielink, Robert Guild,David Kruger, Jayant Menon, Kala Mulqueeny, Soo Nam Oh, Graham

Settle, Ajay Sagar, Diwesh Sharan, Anil Terway, and Jo Yamagatareviewed background papers and drat chapters, and provided detailed

Acknowledgements


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comments. Mario Lamberte and Rita Nangia also provided useul

comments on the book.

An external advisory board reviewed drat chapters and providedvery useul comments. The board consisted o the ollowing members:

Isher Judge Ahluwalia (Indian Council or Research on International

Economic Relations), Mahani Zainal Abidin (Institute o Strategic andInternational Studies Malaysia), Masahisa Fujita (Research Institute

o Economy Trade and Industry, Japan), Mark Johnson (Asia-Pacic

Economic Cooperation Business Advisory Council and AustralianGas Light Company), Johannes F. Linn (Wolensohn Center or

Development, The Brookings Institution), Peter Petri (InternationalBusiness School, Brandeis University), Surin Pitsuwan (Association

o Southeast Asian Nations [ASEAN] Secretariat), and Weimin Ren(Division o Bilateral and Regional Aairs, Department o InternationalCooperation, Ministry o Cooperation, Peoples Republic o China).

Masaki Omura (Japan Bank or International Cooperation) andMasakazu Sakaguchi (ADB) also provided valuable comments. Richard

Pomret (The University o Adelaide) was the external reviewer.

Stephen Banta was the manuscript editor. Ainslie Smith coordinated

the production. Vu Anh Tuan and Marie Danielle V. Guillen assisted

in research and administration. Prabir De assisted in reviewing the

prepublication version. Michael Cortes o FandMDesign Inc. designedthe book layout and cover artwork. Kazumi Hasegawa and Hideki Miuraassisted with administrative matters.


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ABF Asian Bond Funds

ABMI Asian Bond Market Initiative

ADB Asian Development Bank

ADBI Asian Development Bank Institute

AH Asian Highways

AIF Asian inrastructure und

ALTID Asian Land Transport Inrastructure

Development

ASEAN Association o Southeast Asian Nations

ASEAN+3 ASEAN plus PRC, Japan, and Korea

ASEAN+6 ASEAN+3 plus Australia, New Zealand, and

India

BIMP-EAGA Brunei Darussalam Indonesia Malaysia

Philippines East ASEAN Growth Area

BIMSTEC Bay o Bengal Initiative or Multi-Sectoral

Technical and Economic Cooperation

BNDES Brazil National Development Bank

CAF Corporacion Andina de Fomento

CAREC Central Asia Regional Economic Cooperation

CBTA Cross-Border Transport Agreement

CGE computable general equilibrium

CNY yuan (PRC currency)

DMC developing member country

EC European Commission

EdL Electricite du Laos

EGAT Electricity Generating Authority o Thailand

EIB European Investment Bank

EIRR economic internal rate o return

eTEN Trans-European Telecommunications Network

EU European Union

EWEC East-West Economic Corridor

Abbreviations and

Acronyms


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FDI oreign direct investment

FONPLATA Fondo Financiero para el Desarollo de la

Cuenca del Plata

GDP gross domestic product

GMS Greater Mekong SubregionGTAP Global Trade Analysis Project

ICT inormation and communication technology

IDB Inter-American Development Bank

IEA International Energy Agency

IGA Inter-Governmental Agreement

IIRSA Initiative or the Integration o Regional South

American Inrastructure

IMTGT Indonesia-Malaysia-Thailand Growth Triangle

ISN inormation superhighway network

JBIC Japan Bank or International Cooperation

JICA Japan International Cooperation Agency

km kilometer

km/h kilometers per hour

kWh kilowatt-hour

Lao PDR Lao Peoples Democratic Republic

LCR London and Continental Railway

LINK Linkedua Malaysia Berhad

MDB multilateral development bank

MOU memorandum o understanding

MRC Mekong River Commission

NIE newly industrialized economy

NSEC North-South Economic Corridor

NTFC national transport acilitation committee

OECD Organisation or Economic Co-operation and

Development

PAIF Pan-Asia Inrastructure Forum

PASO Pacic Aviation Saety Oce

PIF Pacic Island Forum

PLPP Plan Puebla Panama

PPA Power Purchase Agreement

PPP public-private partnership

PRC Peoples Republic o China

RPTCC Regional Power Trade Coordination Committee

SASEC South Asia Subregional Economic Cooperation


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SECSCA Subregional Economic Cooperation in South

and Central Asia

SWF sovereign wealth und

TAR Trans-Asian Railway

TEA Transport Executive AgencyTEN Trans-European Network

TEN-E Trans-European Energy Network

TEN-T Trans-European Transport Network

TEU twenty-oot equivalent unit

THPC Theun Hinboun Power Company

UEM United Engineers Malaysia Berhad

UK United Kingdom

UNCTAD United Nations Conerence on Trade and

Development

UNESCAP United Nations Economic and Social

Commission or Asia and the Pacic

US United States

WEF World Economic Forum


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ContentsForeword iii Acknowledgements

Abbreviations and Acronyms viiiExecutive Summary 1

Infrastructure Needs and Regional Cooperation 11. 3

Scope, Coverage, and Denitions 11.1. 9 Why Regional Inrastructure? 21.2. 1Framework or Regional Inrastructure Cooperation 21.3. 4Overview o Asias Regional Inrastructure Initiatives 21.4. 7Plan o the Study 31.5. 6

Supporting Regional Trade and Investment 32. 9

Overview o Asias Inrastructure 42.1. 4Trends in Asian Trade 52.2. 2Inrastructure or Trade and Investment 52.3. 9Enhancing Regional Energy Trade 72.4. 2Toward Greater Trade 72.5. 5

Harnessing the Benefits of Regional Infrastructure 73. 9

Economics o Inrastructure Network 83.1. 3Empirical Evidence 93.2. 1Regional Case Studies 93.3. 6Potential Negative Impacts 103.4. 8Overall Gains rom Pan-Asian Connectivity 113.5. 1Conclusions 113.6. 6

Developing Effective Policies and Institutions 114. 7

Components o Eective Policies and Institutions 124.1. 0

European and Latin American Experience 124.2. 4Asias Regional Inrastructure Programs: Policies and Institutional4.3. Arrangements Addressing the Major Challenges 144.4. 9Conclusions 164.5. 0

Financing Regional Infrastructure 165. 3

Financing Needs 165.1. 6Challenges in Financing Regional Inrastructure 175.2. 2International Experience 175.3. 9Development o Asian Financial Markets 185.4. 4Financing Options 185.5. 8Conclusions 195.6. 5

Toward a Seamless Asia 196. 7 A Framework or Regional Inrastructure Cooperation 206.1. 3Main Findings and Recommendations 206.2. 7The Way Forward 216.3. 3

Appendix Reerences and Bibliography 261


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BoxesBox 1.1. What Is Regional Inrastructure? 20Box 3.1. Estimating the Benets o Energy Cooperation in the GMS 94Box 3.2. Greening the GMS Transport Corridors 110Box 3.3. Methodology or Estimating Overall Gains rom Pan-Asian

Connectivity 112Box 4.1. The Greater Mekong Subregion Cross-Border Transport

Agreement Box 4.2. Pacic Aviation Saety Oce 147Box 5.1. Theun Hinboun Hydropower Project, the Lao PDR 174Box 5.2. Malaysia-Singapore Second Link: Railway 176Box 5.3. PerpignanFigueiras Rail Concession 177

Box 5.4. Channel Tunnel Rail Link 178Box 5.5. Islamic Financial Instruments 192

FiguresFigure 1.1. Asian Highway Network 28Figure 1.2. Trans-Asian Railway Network 29Figure 2.1. Road Network Indicators by Region, 1996 and 2005 46Figure 2.2. Railway Indicators by Region, 1996 and 2005 47Figure 2.3. ICT Indicators by Region, 1996 and 2005 48Figure 2.4. Electricity Consumption Per Capita, kWh, 1996 and 2005 49Figure 2.5. Intraregional Trade Flows in Asia, 2007 (as a percentage o

Asias total trade) Figure 2.6. International Logistics Perormance Index 69Figure 3.1. Gateways and Multimodal Corridors in Southeast Asia 90Figure 3.2. Household Real Income Eects in Kazakhstan 100Figure 3.3. Trends in Real Income Gains During 20102020 115Figure 4.1. Role o EU Institutions in TENs Decision Making and

Management 128Figure 4.2. Architecture o Subregional Inrastructure Cooperation

in Asia 150Figure 4.3. Policy and Institutional Framework or a Seamless Asia 152Figure 6.1. A Framework or Pan-Asian Inrastructure Cooperation 206


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TablesTable 1.1. Subregional Cooperation Programs in Asia 31Table 2.1. Comparison o Asian Inrastructure Quality with the World,

2008 51Table 2.2. Trade Growth in Asias 10 Leading Exporters, 19872007 52Table 2.3. Trade in Asian Subregions and Other World Regions,

19902007 54Table 2.4. Border Trade Costs, 2009 65Table 2.5. Proven Energy Reserves in Million Tons o Oil Equivalent and

Percent o World Total, 2006 73Table 2.6. Pattern o Asias Energy Exports and Imports, by Country and

Commodity (in percent) 74

Table 3.1. Impacts on the PRC and Thailand rom ElectricityInrastructure Investment 95Table 3.2. Real GDP Growth Premium (percentage o baseline GDP) 97Table 3.3. Sources o Real Household Income Growth (percentage

change rom baseline) 98Table 3.4. Aggregate Impacts o Pipeline Extension, 2020 (in 2002

$ million) 99Table 3.5. Aggregate Outcomes in South Asia 101Table 3.6. Household Welare Impact o Transport Cost Reductions

($ million) 102Table 3.7. Aggregate Impacts o Reduced Costs o Road Transport in

the GMS 105Table 3.8. Change in Poverty Headcount (by stratum and country) 107

Table 3.9. Accumulated Reduction in Trade Costs Resulting romInrastructure Investment, 20102020 (percentage o tradevalue) 113

Table 3.10. Present Discounted Value o Net Income Gains romPan-Asian Connectivity (in 2008 $ billion) 114

Table 4.1. Key Characteristics o Regional and Subregional Institutionsand Programs Involved in Inrastructure 136

Table 5.1. Asias Total Inrastructure Investment Needs by Sector,20102020 (in 2008 $ million) 167

Table 5.2. Indicative Investment Needs or Regional Identied andPipeline Inrastructure Projects,20102020 169

Table 5.3. Twenty-One High Priority Flagship Regional Projects 171Table 5.4. Characteristics o Major Regional and National Financial

Institutions 181Table 5.5. Structure o Financial Systems in Selected Asian Economies

(percent o GDP) 185Table 5.6. Asias Gross Domestic Savings and Foreign Exchange

Reserves, 2007 ($ billion) 189


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AppendixTable A1.1. GDP Growth, 20042010 (percentage per year) 216Table A1.2. Population and Population Density, 20072020 218Table A2.1. Land Transport Indicators in Selected Asian Countries 220Table A2.2. Air Transport Indicators in Selected Asian Countries 221

Table A2.3. Global Competitiveness and Inrastructure Quality Index o Asian Economies

Table A2.4. Primary Energy Consumption in Asia and Other Regions(million TOE) 223

Box A3.1. Measuring the Benets o Inrastructure Projects 224Table A3.1. Household Categories in the Model 226

Box A4.1. Trans-European Energy Network Development 227

Box A4.2. Mekong River Commission (MRC) 228Figure A4.1. GMS Institutional Arrangements 229Figure A4.2. Institutional Framework o the GMS CBTA 229Figure A4.3. CARECs Institutional Framework 230Table A5.1. Current Investment Needs or the Asian Highway Network 231

Table A5.2. Unmet Investment Needs or Asian Highway IdentiedProjects 232

Table A5.3. Indicative Investment Needs or Trans-Asian RailwayNetwork Projects 237

Table A5.4. Energy Projects Linking East and Southeast-Central-South Asia

Table A5.5. Indicative Investment Needs or GMS Transport and EnergyProjects 239

Table A5.6. Other Energy Projects in Southeast Asia 241Table A5.7. CAREC Transport, Trade Facilitation, and Energy Projects 242Table A5.8. Transport Logistics and Energy Projects in South Asia 246Table A5.9. Description o High-Priority GMS Energy and Transport

Projects 247Table A5.10. Description o High-Priority CAREC Transport and Energy

Projects 249Table A5.11. Description o High-Priority Transport and Energy Projects in

South Asia 252Table A5.12. Additional Transport and Energy Projects (Identied and in

the Pipeline) Without Available Investment Estimates 255Table A5.13. Trans-Asia Railway Projects Without Available Investment

Estimates 255Table A5.14. East and Southeast-Central-South Asia Transport Projects

Without Available Investment Estimates Table A5.15. ASEAN Projects Without Available Investment Estimates 257Table A5.16. List o GMS Projects Without Available Investment Estimates

and Target Schedules 258Table A5.17. East Asias Regional Energy (Power Grid Interconnection)

Project Without Available Investment Estimates 259Table A5.18. CAREC Energy Projects Without Available Investment

Estimates 259Table A5.19. Regional Transport Projects in South Asia Without Available

Investment Estimates 259


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Executive Summar


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Executive SuExecutive Su

Executive Summary

Asias diversity is its strength, providing opportunities or

trade, investment, and economic growth. The regionseconomies have fourished as they have become more

closely intertwined with each other and the rest o the

world. International supply chains span the region totake advantage o each countrys comparative advantage. As a result,

Asia plays an increasingly central role in the global economy: it is theworlds production actory, biggest saver, and an emerging giant in

outsourced services.

Without good connectivity, however, diversity breeds disparity

rather than prosperity. Asias trade competitivenessand its increasingly

sophisticated production networks in particulardepends on ecient,ast, reliable, and seamless inrastructure connections. The pattern o

Asias development highlights this phenomenon. Its thriving rmscluster in an arc o enterprise along its coastlines, close to international

ports and airports. But many parts o Asiainland and remote areas,

landlocked countries, and distant islandsare isolated economically

as well as geographically. Much o Asias potential remains untapped.

While parts o the regions inrastructure are world class, it isgenerally below the global average, as this study details. Rapid growth in

recent years has also put severe pressure on the existing inrastructure,particularly in transport and energy, as well as in communications.

The inadequacies o Asias inrastructure networks are a bottleneck

to growth, a threat to competitiveness, and an obstacle to povertyreduction.

The study examines major challenges and issues associatedwith developing regional inrastructure through the ostering o

regional cooperation in Asia, and provides a ramework or pan-Asianinrastructure cooperation. To the best o the Asian Development

Bank and Asian Development Bank Institutes knowledge, this is


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4

Infrastructure for a Seamless Asia

the rst time that such a study on regional inrastructure has been

undertaken. The studys long-term vision is the creation o a seamlessAsiaan integrated region connected by world-class, environmentally

riendly inrastructurein terms o both hard (physical) and sot(acilitating) inrastructure. The sot part supports the development

and operation o the hard component. The challenge now is to build

ecient and seamless connections across Asiaand thus to the rest othe world.

This study nds that the benets o upgrading and extending Asiasinrastructure networks are substantial, and that all countries in the

region would benet. A logistics network is only as good as its weakestlink; each country in a regional supply chain gains rom inrastructure

improvements made in others. Also, the wider a network, the more eacho its users benets. Thus, better connections to inland areas wouldboost trade and economic growth in inland areas as well as coastal ones.

Connecting national electricity grids and gas pipelines and harnessingcommon energy resources, such as rivers with hydroelectric potential,

would boost regional energy trade, subsequently reducing costs,

increasing the diversity o supply, enhancing energy security, and otenbeneting the environment. Regional inrastructure development

creates a win-win outcome or all participating countries.

Improving connectivity in the region would bring Asia largewelare gains through increased market access, reduced trade costs, andmore ecient energy production and use. I the required investment

toward pan-Asian connectivity is made in the regions transport,

communications, and energy inrastructure during 20102020,developing Asias real income during that period and beyond could

reach $13 trillion. Countries that trade more, as well as those whose

inrastructure needs are particularly urgent, would experience muchlarger gains. Asias leaders cannot aord to ignore such large gains.

Between 2010 and 2020, Asia needs to invest approximately$8 trillion in overall national inrastructure. In addition, Asia needs to

spend approximately $290 billion on specic regional inrastructureprojects in transport and energy that are in the pipeline. O these

regional projects, 21 high priority projects that could be implemented


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Executive Su

by 2015 at a cost o $15 billion have been identied. The successul

implementation o these high-priority projects and their wider regionalbenets would create a strong drive toward urther strengthening

regional inrastructure networks. This amounts to an overallinrastructure investment need o about $750 billion per year during

this 11-year period.

As this study goes to press, the global nancial turmoil and

resulting economic downturn are still unolding. I the current crisis is

prolonged, demand rom advanced economies will remain stagnant,thus depressing Asias production. However, the lesson o the nancial

crisis o 19971998 is clear: cuts in inrastructure investment thatjeopardize uture recovery should be avoided. Thereore, the need

to upgrade and extend inrastructure networks over the time rameo 20102020 assumes greater importance. To mitigate the medium-term consequences o the ongoing crisis, Asia will need to put greater

emphasis on increasing regional demand. As private nancing willbe much harder to secure, governments should adopt scal stimulus

packages that accelerate and increase inrastructure investment.

At this stage, enhanced regional inrastructure cooperation couldcomplement these country-level eorts. International institutions such

as Asian Development Bank and the World Bank need to provide

increased nancial and technical assistance or regional inrastructure

programs.

In the long run, the ull benets o Asias size and diversity can

be realized only by creating a single Asian market where goods,

services, capital, inormation, and people move reely. Moving towardthat long-term vision o a seamless Asia requires world-class, pan-

Asian inrastructure networks that: (i) provide open connections to

regional and global markets; (ii) are driven by political leadership aswell as economic logic; (iii) are built up rom national, bilateral, and

subregional programs; and (iv) are guided and supported by broad-

based and eective regional rameworks that ensure their properdevelopment and nancing.


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Supporting Regional Trade andInvestment

Where inrastructure connections are good, Asias trade hasexpanded rapidly. Trade within East Asiaand with the Peoples

Republic o China in particularhas risen ast; however, where

inrastructure connections are poor, such as within South Asia andbetween Asian subregions, trade remains low. As barriers to trade

in Asia have allennot least o which are import taris and other

trade-policy restrictionsinrastructure deciencies have become anincreasingly relevant issue. Correcting these weaknesses in regional

inrastructure would do more to lower the cost and increase the volumeo trade in Asia than would eliminating any remaining tari and non-

tari barriers.

Asias goods are transported mainly by sea. But as traded content

shits rom bulky goods toward lighter, oten higher-value products,

goods are increasingly sent by air. Relatively ew goods go long distancesby road or rail, as demonstrated by the act that trade among Asian

countries that share a land border is much lower than similar areaselsewhere in the world. Improving rail and road connections to ports

is particularly important or inland areas and landlocked countries, as

they tend to encounter high trade costs.

Exports are diversiying across new markets, and intraregional

trade in parts and components or regional supply chains accounts ora growing share o total trade. These trends underscore the need or

ecient and fexible logistics networks that provide uncomplicatedconnections between dierent transport modes and make it possible

to trade with more places, in less time, at lower costs. The logistics

networks need to be complemented by investments in inormationand communications technology, human capacity development,

cooperation on trade acilitation, and improvements in sot

inrastructure.


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Executive Su

Harnessing the Benefits of RegionalInfrastructure Networks

Sucient evidence has been generated to conrm thatinrastructure plays a key role in promoting and sustaining rapid

economic growth. Studies suggest that dierences in inrastructure

help explain East Asias superior growth in relation to other emergingregions. Evidence rom around the world shows that the returns rom

investing in telecommunications, transport, and energy inrastructure

greatly exceed those rom other orms o capital investment. Studiesin several developing Asian countries illustrate how inrastructure,

particularly roads and electricity, helps to reduce poverty.

One o the major challenges in developing regional inrastructureis to address the asymmetric distribution o regional inrastructureproject costs and benets. It is also important to eectively manage

negative socioeconomic impacts across countries so as to ensure win-

win outcomes or participating countries. Studies o the benets oregional inrastructure are scarce, but careul economic modeling

prepared or this book shows that the benets are large, tend to bewidely distributed, and oten help the poor the most. Case studies o

Central Asia, the Greater Mekong Subregion, and South Asia show

that the gains rom subregional inrastructure projects greatly exceed

the costs. The negative impacts o regional inrastructure projectsinclude road accidents, human tracking, displacement o people,and environmental damage. These issues need to be addressed. Eorts

to make transport and energy investments more environmentally

aware and, in particular, to mitigate their impact on climate change,are critical.

Developing Effective Policies andInstitutions

Asia has made some progress in developing subregionalinrastructure programs over the past decade and a hal, with

overlapping subregional groups cooperating to varying degrees on

inrastructure issues in Asia. Such programs are most advanced in the


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Greater Mekong Subregion and are less developed in other subregions.

However, connections between subregionsnotably between Southand East Asiaare particularly weak.

Further progress requires creating an eective new ramework or

regional cooperation, as well as strengthening the coordination among

and capacity o existing ones. Asia can learn rom the experiences oother regions, notably Europe and Latin America. The European

Unions experience shows that creating a ramework or regional

inrastructure cooperation oten requires an honest broker to orgea convergence o interests, and high-prole coordinators to monitor

implementation. Latin Americas experience shows that a orum ordialogue and cooperation can help build awareness o the benets o

regional integration and inrastructure, lter out unproductive projects,coordinate among national and subnational agencies, and increasestakeholders participation. While the lessons rom other regions are

useul, ultimately, Asia must crat policies and institutions that areappropriate or its own needs and circumstances.

Until now, Asia has largely ollowed a bottom-up, market-drivenapproach to inrastructure development. However, it is now necessary

to complement this approach with a more top-down, market-expanding,

and demand-inducing approach geared toward creating a seamless Asia.

Furthermore, the prospect o a prolonged downturn in Asias majorexport markets underscores the need or a long-term rebalancing o its

economy toward meeting local needs. This will require many policychanges, particularly the prioritization o improvements in pan-Asian

connectivity.

In view o Asias varied needs and circumstancesand varying

political commitment to closer integrationsubregional inrastructureprograms have been proceeding at dierent speeds and on dierent

tracks. Asia should create pan-Asian inrastructure networks by

strengthening and integrating existing subregional programs.

Consequently, a pan-Asian inrastructure orum (PAIF) shouldbe established to help coordinate and integrate existing subregional

inrastructure initiatives. It would bring together all the key stakeholders


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Executive Su

in the region, which would help build consensus about, prioritize,

and coordinate regional inrastructure plans. The PAIF could alsodevelop harmonized standards or regulatory and legal issuesbased

on international best practicesas well as a common ramework orhandling and mitigating negative social and environmental impacts.

Within the PAIF, sectoral suborums could also be establishedor

transport and energy, or instanceas well as suborums or sotinrastructure matters, such as regulatory and legal issues.

Financing Regional Infrastructure

A seamless Asia will not come to ruition without proper nancing.

Yet, nancing inrastructure projects is oten challengingor regionalprojects in particularas they involve major risks and uncertaintiesthat the private sector is unwilling to bear. Most regional inrastructure

projects are thereore developed and nanced by governments. Even

those that involve public-private partnerships generally still requiresome orm o government guarantee.

Lessons rom other regions show that developing and nancingregional projects is a slow and complicated process, even in the

European Union. Political leadership rom the highest level is necessary

but not sucient, as the Latin American experience demonstrates.Regional projects are oten a low priority or domestic policymakers

responsible or allocating budgets and usually require assistance rommultilateral institutions. Furthermore, at times such projects involve

constructing inrastructure segments in areas o a country with little

economic activity and ew advocacy groups. Concessionary nancingrom external sources may be necessary to make such projects more

attractive to investors.

The regions vast domestic savings would be the main source o

nancing or Asias massive inrastructure investment requirements.Due to the turmoil in global nancial markets, the public sector will

necessarily continue to play a dominant role, with spending rom

government budgets supplemented by unds channeled throughdomestic and regional nancial markets. Asian governments must


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bolster their collective eorts to mobilize a large pool o regional savings

or viable regional inrastructure investments. I such bankableregional projects are created, then private nancing involving public-

private partnerships could be obtained. Strengthening national andregional bond marketsnotably though initiatives such as the Asian

Bond Markets Initiative and Asian Bond Fundsis one o the rst

steps in creating a viable source o inrastructure nancing to tap thevast Asian savings.

An Asian inrastructure und (AIF) should be established to helpmobilize Asian and international unds, and to meet the challenges o

preparing and nancing bankable regional inrastructure projects.The AIFs capital could come rom a variety o sources, including

governments, sovereign wealth unds, multilateral developmentbanks, and bilateral agencies. It should have its own legal identityso as to enable it to help nance projects through its own resources,

as well as by issuing bonds or through conancing arrangementswith other entities, including private investors. The AIF would help

nance projects identied and prioritized by the PAIF by providing a

acility to expedite nancial preparations, as well as provide grant andconcessional nancing in order to encourage countries to prioritize

regional projects in their national development programs. It would

also be able to provide guarantees against major political, economic,

and nancial risks.

Toward a Seamless Asia

The key messages o this study are as ollows:

The required investment in regional inrastructure or pan-

Asian connectivity would produce large real income gains o

around $13 trillion or developing Asia during 20102020 andbeyond.

A pan-Asian inrastructure orum should be established to helpcoordinate and integrate existing subregional inrastructureinitiatives toward a seamless Asia.

From 2010 to 2020, Asia will need to invest approximately

$8 trillion in overall national inrastructure and, in addition,


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Executive Su

about $290 billion in specic regional inrastructure projects

an average overall inrastructure investment o $750 billionper year.

An Asian inrastructure und is needed to mobilize Asian and

international unds and to help prioritize, prepare, and nance

bankable regional inrastructure projects.

Building roads, railways, bridges, power stations, and pipelines

across the region should be a priority or the regions policymakers.

In these uncertain times, Asia must not pause or turn back, but ratherorge ahead with the challenging and immensely rewarding task o

integrating this large and diverse region or the benet o all its citizens.Such integration will help boost economic growth and disperse its

benets more widely. It will enhance the regions competitiveness andextend its global reach. It will help reduce poverty and promote greaterenvironmental sustainability. But it is only possible with a common

vision, strong commitment rom political leadership, and partnershipat the highest level. Now is the time to start moving toward a seamless

Asia.


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12



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InfrastructurNeeds and Regiona

Cooperatio

Chapte


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14



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Infrastructure Needs and Regional Coop

A

sias diversity provides enormous opportunities or

trade, investment, and economic growth. East Asiasremarkable success in recent decades demonstrates

this. Asian economies have fourished as they have

become more closely intertwined with each other and

the rest o the world. International supply chains span the region totake advantage o each countrys comparative advantage. As a result,Asia plays an increasingly central role in the global economy: it is the

worlds actory, its biggest saver, and an emerging giant in outsourced

services.

Without good connections, however, diversity breeds disparity

rather than prosperity. The competitiveness o Asias tradeand oits increasingly sophisticated production networks in particular

depends on cost-eective, rapid, and reliable inrastructure networks.

The pattern o Asias development highlights this phenomenon. Itsthriving rms cluster in an arc o enterprise along its coastlines, close

to ecient international ports and airports. Other outposts dottedaround the region trade by air or through ber optic cables, bypassing

shoddy roads and railways. But many parts o Asiainland and remoteareas, landlocked countries, distant islandsare isolated economically

as well as geographically. Much o Asias enormous potential remains

untapped.

Physical connectivity is crucial to support complementarities in the

production processes across the entire region. Regional connectivityenhances the ree fow o goods and services across borders, allowing

countries to benet rom better relocation o resources. Inrastructureinvestment has been at the heart o Asias development strategy o

1. Infrastructure

Needs and RegionalCooperation


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16


promoting integration with the regional and global economy (Kuroda

et al. 2008).

While parts o the regions inrastructure are world-class, it is belowthe global average generally, as this study details. Rapid economic growth

in recent years has put severe pressure on the existing inrastructure,

particularly in transport and energy, as well as in communications. Thiscurrent state o the regions inrastructure is a bottleneck to growth, a

threat to competitiveness, and an obstacle to poverty reduction. The

challenge now is to build better connections across Asiaand thus tothe rest o the world.

Ater years o bountiul growth, the global nancial crisis and

ensuing economic downturn have hit Asia particularly hard. Fordecades, the region recorded the worlds astest economic growth.In 2006 and 2007, average growth in gross domestic product (GDP)

across the 45 countries (i.e., the 46 listed in Appendix Table A1.1,

excluding Japan) o Asia and the Pacic exceeded 8.9%. The regionstwo biggest emerging economies did even better, with India recording

growth o more than 9% in each year, and the Peoples Republic oChina (PRC) topping 13.0% in 2007. But growth slowed sharply in

2008, and the Asian Development Bank (ADB)(2009) orecasts urther

weakness in 2009 and a recovery in 2010. While the undamentals

o Asias economies and nancial systems appear sound, weakeningexports and sharply reduced private capital infows pose a signicantchallenge (ADB 2008c, 2008). Further nancial turmoil would also

be likely to dampen the condence o consumers and investors.

The long term consequences o the current crisis are not clear.

However, as long as Asias long-term growth potential remains

unaected, it does not lessen the need or upgrading and extendinginrastructure networks. On the contrary, the crisis provides three

additional reasons or increased investment in regional inrastructure:

First, inrastructure is a critical supply-side base or increasingcompetitiveness and productivity o an economy and or reducing

poverty. Second, bringing orward and stepping up inrastructureinvestment can orm an important part o a scal stimulus package,

especially i the crisis proves prolonged. Governments with a sound


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scal position and stable currency can take scal measures to stimulate

their economies i necessary. For example, inrastructure spending isan important component o the PRCs CNY4.0 trillion ($586 billion)

stimulus package announced in November 2008; several other Asianeconomies have adopted similar packages to a lesser extent. Third,

the crisis underscores the importance o reducing the imbalances in

the world economy and ensuring that global growth is more balancedin the uture. Improvements in regional inrastructure can promote

greater regional integration and help expand demand within theregion, which should account or a larger share o Asias growth.

In responding to the current global nancial crisis, Asia should heedthe lessons o the crisis o 19971998. At that time, public and private

inrastructure investments were substantially reduced in many Asianeconomies, where in many cases they were already too low. Privateinvestment more than halved in East and Southeast Asia ater 1996,

while public investment also declined sharply as budget constraintsbit and international nancial institutions such as the World Bank cut

their inrastructure lending (Economic Research Service and United

States Department o Agriculture 1999). Inrastructure programswere among the rst to be cut in developing Asian economies such

as Indonesia, the Philippines, and, to a lesser extent, the Republic o

Korea and Malaysia. Indonesia and the Philippines are still suering

rom a large inrastructure decit due to the collapse o investmentater the 1997 nancial crisisand their poor inrastructure has keptgrowth rates below their potential (ADB 2006g).

In contrast, this time some Asian economies, such as the PRC andthe Republic o Korea, are responding to the current crisis by increasing

public inrastructure spending to sustain demand, help create jobs,

and raise long-term growth. The State Council o China has approvedCNY2.0 trillion ($292 billion) in railway investment under the new

stimulus package o CNY4.0 trillion. The PRCs stimulus package

also involves investments in rural inrastructure, roads, and airports. Ahigh return on new inrastructure investment is expected, especially in

underdeveloped areas such as the western part o the country (ChinaBusiness Review 2009; China Daily 2008).


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18


In the Republic o Korea, inrastructure spending ell only slightly

during the 19971998 crisis and, as the economy bounced back,the government increased inrastructure investment to create jobs

and stimulate the economy (Aldo 2001). In 2008, the governmentannounced a 14 trillion won ($11 billion) scal stimulus package, o

which 4.6 trillion won ($3.6 billion) will be spent on inrastructure

projects (Ministry o Strategy and Finance, Rep. Korea 2009).

While the global nancial and economic turmoil will no doubt

dampen private investment and may make public nancing moredicult, Asian governments, multilateral development banks (MDBs)

and bilateral aid agencies should provide additional inrastructureinvestment to tide economies through dicult times and promote

uture growth.

The crisis may also tempt countries to turn away rom regional

and global integration. But Asias economies did not retreat into

protectionism ater the 19971998 crisis, and it would be a mistaketo do so now. Regional integration has so ar delivered substantial

benets (ADB 2008c, ADB-United Nations Conerence on Tradeand Development [UNCTAD] 2008, The Research and Inormation

System or Developing Countries 2008), and changing course now

would put those achievements at risk. Indeed, the crisis underscores

the need to enhance regional cooperation, not least in developing andintegrating Asias nancial markets to mobilize unds or investmentwithin the region.

Such is the severity o the current global crisis that it would beoolish to believe that Asia does not need to rebalance growth and move

away rom its high dependence on exports to advanced economies. But

it is reasonable to assume that Asias economy is undamentally soundand that it will emerge rom the crisis sooner rather than later. Because

the time rame o this study stretches until 2020, it takes a medium-

term view o Asias needs or regional inrastructureand so shouldAsian policymakers. Regional inrastructure is a long-term investment

in Asias uture prosperity.


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Scope, Coverage, and Definitions1.1.

This study looks at regional inrastructure development in Asia

up to 2020. It examines the key issues and challenges associatedwith developing regional inrastructure through ostering regional

cooperation in Asia. To the best o ADB and Asian Development

Bank Institutes knowledge, this is the rst time that such a study onregional inrastructure has been undertaken. It assesses the extent and

merits o existing programs, policies, and institutions, and provides

recommendations or how to develop them and improve theireectiveness as well as a pan-Asian ramework or regional inrastructure

cooperation.

The study looks at both broad pan-Asian initiatives and sector-specic subregional eorts, mainly in transport (such as roads, railways,ports, waterways, and airports) and energy (such as power stations,

hydroelectric dams, electricity grids, and gas and oil pipelines), and to

a lesser extent in telecommunications (such as telephone and internetsystems). It also emphasizes the need or green inrastructure, such

as climate-riendly railways and waterways, and low-carbon, clean,and renewable energy projects. It covers both hard inrastructure

(i.e., the long-term physical structures, equipment, and acilities

[including maintenance], and the economic services they provide)

and sot (acilitating) inrastructure (i.e., the policy, regulatory, andinstitutional rameworks that support the development and operationo hard inrastructure).

While this study ocuses on regional inrastructure, it must also givedue consideration to national inrastructure, not least as one cannot

always neatly distinguish between them. Regional inrastructure is

explained and dened more ully in Box 1.1. The study does not cover,except in passing, nonconnective inrastructure, such as water and

sanitation. Nor does it look at social inrastructure, such as housing,

schools, and hospitals, which are vitally important but outside thisstudys scope.

The study covers Japan and Brunei Darussalam plus ADBs 44

developing member countries (DMCs) in the Asia and Pacic region.


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20


Box 1.1. What Is Regional Infrastructure?

In one sense, nearly all inrastructure is nationalor indeed localin that it

is situated in a single country. Among the exceptions are bridges and tunnels

that connect two countries, along with power lines, pipelines, and beroptic cables that may span several countries. But many national inrastructure

projects have a wider regional dimension: they may be planned and coordinatedwith several countries, connect to existing regional networks, or have spillover

eects on neighboring countries. For example, a road within the Lao Peoples

Democratic Republic (Lao PDR) that connects to the border with Thailand willhave an impact on Thailand even i it is built without consultation with the Thai

government or consideration or its impact on Thailand. It may, or instance,

stimulate trade with the area just across the border in Thailand. Clearly, though,both the Lao PDR and Thailand have an interest in coordinating their road

building, so that their national road networks connect with each other.

Regional inrastructure ranges rom simple projects that involve two countries,

such as building a road link or bridge across a boundary river, to complex ones that

involve several countries such as gas pipelines in which many countries cooperateand coordinate to create networks or common benet. Sot inrastructure also

has a regional dimension, since cross-border trade and movement oten require,

or at least benet rom, ollowing common rules, standards, and procedures. Forinstance, rail connections are smoother i countries use the same rail gauge, and

customs procedures are simpler and aster i countries harmonize their rules and

standards.

For the purposes o this study, regional inrastructure projects are dened as:

projects that involve physical construction works and/or coordinated

policies and procedures spanning two or more neighboring countries;

andnational inrastructure projects that have a signicant cross-border

impact:

their planning and implementation involve cooperation orcoordination with one or more countries;

they aim to stimulate signicant amounts o regional trade and

income; andthey are designed to connect to the network o a neighboring or third

country.


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These are listed in Table A1.1 o the Appendix and will be reerred to

as Asia or the sake o brevity. They span ve subregions: Central Asia,East Asia, South Asia, Southeast Asia, and the Pacic. GDP data or

these countries are presented in Table A1.1 and population data inTable A1.2 in the Appendix.

The remainder o this chapter presents the case or regionalinrastructure and a ramework or pan-Asian inrastructure cooperation,

including the long-term vision o a seamless Asia. It then provides an

overview o Asias regional inrastructure initiatives, setting the sceneor subsequent chapters.

Why Regional Infrastructure?1.2.Inrastructure plays a key role in promoting and sustaining rapid

economic growth. The 1994 World Development Report Inrastructure

or Development concluded that inrastructure investment was animportant reason why East Asias growth was much aster than sub-

Saharan Aricas (World Bank 1994). More recent studies suggest

that dierences in inrastructure account or around one third o thedierence in output per worker between Latin America and East Asia

(Calderon and Serven 2004). Studies in several developing Asian

countries illustrate how inrastructure, particularly roads and electricity,helps reduce poverty.1

Although Asias inrastructure has greatly improved in recentdecades, investment has not kept pace with the demands placed on

it by the regions rapid economic growth (ADB 2007b). With Asias

population set to rise by 15% by 2020, rom 3.6 billion to 4.2 billion(see Table A1.2 in the Appendix or details), population growth is

causing additional strain on Asias inrastructure.

Inadequate physical inrastructure is not only an impedimentto growth, it is also one o the root causes o poverty. Asia is hometo over 900 million people who survive on $1.25 or less a day and

1 For details, see Chapter 3 o this book.


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22


around 1.8 billion people who manage on less than $2 a day (Bauer

et al. 2008). Some 1.5 billion Asians lack access to decent sanitation,640 million have no access to clean water, and 930 million are without

electricityover 700 million o them in South Asia alone (ADB2007b). Only 3 in 10 Asians have access to a telephone, and a little

under hal o the regions roads are unpaved. A more detailed overview

o Asias existing inrastructure is provided in Chapter 2. Addressingthe deciencies o Asias national inrastructure is a priority, not least

because it is the oundation o eorts to build wider subregional andregional transport, energy, and telecommunications networks.

Regional inrastructure is particularly important to Asias economicdevelopment. It can deliver the ollowing benets, which are also

examined in greater detail in Chapter 3:improve regional connectivity by making it aster, cheaper,and easier or people and goods to move across borders within

the region;

reduce the cost o regional (and global) trade , enhance the

competitiveness o regional production networks, and promote

greater investment;promote greater regional (and global) integration , and thus

aster economic growth;

help reduce poverty by improving poor peoples access to

economic opportunities, lowering the cost o the goods andservices that they consume, and providing better access toessential inrastructure services such as electricity;

help narrow the development gap among Asian economies

by providing small, poor, landlocked, and remote countries andareas with better access to wider regional (and global) markets

and production networks, thereby stimulating investment,trade, and economic growth in those areas;

promote more efcient use o regional resources, by

developing regional projects that permit regional environment-

riendly energy trade such as in gas and hydropower;ensure inclusive and environmentally sustainable economic

growth by connecting isolated and landlocked areas toeconomic centers by utilizing greener technologies and

providing opportunities or low-income populations; and


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help create a single Asian market, one that can engender

large eciency gains, increase regional demand, and investAsias savings more productively.

As Asias outward-oriented economies have pursued closer

integration with global markets, they have also become more

closely intertwined among themselves. Many Asian economies areincreasingly connected through trade, investment, nance, labor,

and tourism, and other economic relationships. Intraregional trade in

parts and components has grown particularly quickly. This refects thedevelopment o regional production networks and supply chains that

span Asias diverse economies, making the most o their comparativeadvantage. These have been a main driver o the regions economic

rise (Kawai 2005). Enhancing their competitiveness and extendingthem beyond the coastal regions o East Asia where they are currentlyconcentrated is thus vital to Asias uture success. Distant islands; rural

and remote areas; and small, poor, and landlocked countries are otenlet behind in economic development because they are not connected

to economic centers and wider regional and global markets. In part, this

requires reer trade across Asia. But it also requires increased investmentin regional inrastructure and enhanced regional cooperation, building

up rom progress at the national and subregional levels towards the

ultimate aim o creating a truly seamless Asia.

Moreover, the current global nancial and economic crisis may

have major repercussions or Asian economies. I the current crisis isprolonged, demand rom advanced economies or Asian exports will

decelerate, depressing Asias production. To mitigate the medium-termconsequences o the ongoing crisis, Asia needs to put greater emphasis

on increasing regional demand. Thus, regional inrastructure geared

more toward supporting Asian production networks and regional supplychains or intraregional trade to accommodate the expected increasing

regional demand becomes more important. Amid weak global demand,

Asian economies need to rely more on regional demand to sustaingrowth. Several Asian countries have been making eorts to stimulate

domestic demand, and to alleviate the urther impact o the growingcrisis, by setting aside resources or inrastructure investment under

their stimulus packages. At this stage, enhanced regional cooperation


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24


has the potential to be an important platorm that could complement

these country-level eorts. By working together, countries in Asia canunlock their vast economic potential, achieve sustained and inclusive

rapid growth, and reduce poverty. The need or regional collectiveaction in developing Asia-wide physical connectivity is becoming

increasingly important, particularly in this time o nancial and

economic crisis.

Framework for Regional1.3.Infrastructure Cooperation

Asias economic integration has so ar been market-led and

marginally led by ormal institutions (ADB 2008b). But it now requirescloser cooperation in many areas, notably to improve physical regionalinrastructure and to enhance the ramework o rules and institutions

that support the eective development and operation o regional

inrastructure. Whereas inadequate inrastructure and institutionscould constrain uture growth, better ones could promote urther

growth and create new opportunities to spread its benets and reduce

poverty. This would support the competitiveness o Asias exportsbeneting consumers around the world as well as businesses that

rely on Asian goods such as Korean steel, or services such as Indian

inormation technology. It could also oster increased consumptionand investment within Asia, helping to oset declines in demand in

other regions and thus rebalance the global economy. Investment inregional inrastructure could thus benet both Asia and the rest o the

world.

By acting together through regional programs and cross-border

projects, governments can help provide many goods and servicesboth public and privatebetter and more cheaply than they would

be able to otherwise, as well as some goods and services that would

otherwise not be provided at all. Regional integration also helps toimprove the quality o institutions (Francois and Manchin 2007), so

regional cooperation can help achieve national goals more eciently.

In providing regional public goods, individual countries can achieve ar


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more together than they can alone. Collective action in inrastructure-

related areas is required or the ollowing reasons:Regional connectivity is a public good . By reducing the cost

o trading at a distance, regional connectivity expands marketsand trade, producing large economic benets that are spread

widely across Asia. Connecting distant islands, landlocked

countries, and inland and remote areas that remain isolatedrom economic centers, and regional and global markets is

a particularly important element o regional connectivity.But public goods tend to be undersupplied by markets and

individual governments or various reasons described in

Chapter 3. Regional cooperation is thereore needed.The benefts o regional inrastructure spill over across

borders due to large network and agglomeration eects.Countries thereore need to coordinate their inrastructureplans and inrastructure-related policies, or instance, by

streamlining and harmonizing customs procedures, in orderto harness those benets.

Participating countries need to address the asymmetric

distribution o projects costs and benefts across countriesso as to ensure win-win outcomes among them.

Countries need to act together to tackle the negative

socioeconomic spillovers o regional inrastructure

projectssuch as environmental damage, displaced people,trac accidents, and human and drug trackingthat cutacross national borders.

Regional inrastructure cooperation can also add value

to national policymaking by sharing knowledge and best

practices and by highlighting priorities that may run counter

to domestic special interests.

Asias investment in regional inrastructure should support

its shit to a greener, low-carbon economy. Given Asias vast

need or energy and its impact on the climate challenge,

uture energy supply plans, especially or power generation,need to shit towards a greater emphasis on energy eciencyand renewable energy sources. Eciency gains rom regional

connectivity and energy trading will be essential. Transport

will also need to get greener, with greater priority given to low-


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26


carbon railways and waterways, and to the use o more uel-

ecient vehicles and cleaner uels.

Long-Term Vision

This studys long-term vision is the creation o a seamless Asia:an integrated region connected by world-class environment-riendly

inrastructure networks that link national markets with distinct

strengths, promote strong and sustainable economic growth, provideor peoples basic needs, and thus help reduce poverty. Achieving a

seamless Asia will require the development o both hard and sotinrastructure. It includes:

building world-class interconnected environment-riendly

regional transport networks o road, rail, sea, and air links thatpromote trade and investment within the region and with

global markets, widen access to markets and public services,

and thereby promote inclusive and sustainable economicgrowth and reduce poverty;

developing greener cross-border energy projects that allow

countries to benet rom natural endowments, providing

ecient and secure supplies o electricity, coal, gas, oil, and

alternative energies;

expanding, deepening, and increasing the eciency o regional

production networks and supply chains by streamliningpolicies, systems, and procedures, such as customs procedures

and other bureaucratic impediments that hamper regional

and global connectivity; anddeveloping stable and ecient regional nancial markets that

channel savings rom around Asia and the rest o the world into

productive investments, notably inrastructure, throughoutthe region.

A seamless Asia would help move the regions economies towardsan Asian single market with a huge wealth and diversity o resources and

corresponding possibilities or trade and economic growth. Creation


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o Europes single market may have taken a very long time, however,

Asias production, nance, and trade are better developed andconnected now and can be used eectively to achieve integration in a

relatively shorter time. Integration is a long-term goal that the regionspolicymakers should pursue, or the sake o all Asians.

The section below presents various pan-Asian and subregionalinrastructure initiatives in Asia. The institutional and policy aspects o

these initiatives are urther examined in Chapter 4.

Overview of Asias Regional1.4.Infrastructure Initiatives

Regional cooperation can take various orms, including

intergovernmental dialogue, inormation exchange, the commonprovision o regional public goods, and regional institution building

(ADB 2008b). In the case o inrastructure, regional cooperation canplay a number o roles. It can help identiy, ormulate, nance, and

implement priority regional inrastructure projects and maintain

existing ones. It can harness shared resources such as energy and water.It can harmonize cross-border rules, systems, and procedures and help

countries learn rom good practices concerning institutions, policies,

and governance. This section reviews existing pan-Asian initiatives. Itthen outlines various subregional programs.

Pan-Asian Initiatives

Foremost among the existing pan-Asian inrastructure initiativesis the Asian Land Transport Inrastructure Development (ALTID),

established in 1992 by the United Nations Economic and SocialCommission or Asia and the Pacic (UNESCAP). ALTID is

comprised o three pillars: the Asian Highway (AH), the Trans-AsianRailway (TAR), and the acilitation o land transport projects throughintermodal transport terminals (dry and inland ports).


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28


The AH (Figure 1.1) aims to be a network o 141,271 kilometers

(km) o standardized highwaysincluding 155 cross-border roadsthat crisscrosses 32 Asian countries2 and seeks to improve economic

links among them (UNESCAP 2008a).

2 The 32 countries participating in the AH are Aghanistan, Armenia, Azerbaijan,Bangladesh, Bhutan, Cambodia, PRC, Georgia, India, Indonesia, Iran, Kazakhstan,Democratic Peoples Republic o Korea, Republic o Korea, Kyrgyz Republic, Lao PDR,Japan, Malaysia, Mongolia, Myanmar, Nepal, Pakistan, Philippines, Russian Federation,Singapore, Sri Lanka, Tajikistan, Thailand, Turkey, Turkmenistan, Uzbekistan, andViet Nam.

Figure 1.1. Asian Highway Network

Source: UNESCAP (2009a).

AH81

Mandalay

Meiktila

Payagyi

Kyaing Tong

Yangon

Myanmar

ChiangRai

TakUdonthani

KhonKaen

BangPa-in

Chumphon

LaemChabang

Lao P.D.R.

Sihanoukville

Hai Phong

Vinh

DaNang

DongHa

Kunming

Jinghong

Viet Nam

Vung Tau

Thaton

Bangkok

Pakse

HinKong

KabinBuri

NakhonRatchasima

NakhonSawan

Qudomxai

Phitsanulok

Hanoi

AH14

AH14

AH14

AH1

A H1

AH1

AH1

AH1

AH1

Thailand

HuaiKon

AH13

AH1

AH14

AH

1

AH1

AH1

AH1

AH1

AH11

AH11

AH11

AH1

AH16

AH15

AH15

AH11

AH16

AH

12

AH12

AH

12

AH13 Vientiane

AH16

AH12

AH

19

AH1

AH2

AH2

AH3

AH3

AH3

AH2

AH19

Nanning

AH1

Phnom Penh

MaeSaiTachilek

Muse

Ruili

Hekou

LaoCai

HuuNghi Youyiguan

Poipet

Veunkham

Trapeangkreal

MocBai

Bavet

BanLao

Daluo

Mongla

Savannakhet

NateuyBoten

Mohan

HouayxayChangKhong

NongKhai

Cau TreoKeoneua

NakhonPhanom

Mukdahan

LaoBao

Densavanh

Aranyaprathet

Cambodia

MaeSot

Myawadi

MuangNgeon

Sino

Thakhek

BienHoa

HoChi Minh

Stung Treng

Hoi An

Kratie

Uttaradit

HoaBinh

ASIAN HIGHWAY ROUTE MAP


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The TAR network (Figure 1.2) aims to span 141,000 km o railways

across 28 countries,3 linking to the pan-European rail network at variouslocations, oering connections to major ports in Asia and Europe, and

thus providing landlocked countries with improved access to seaportseither directly or in conjunction with highways (UNESCAP 2009b).

3 The 28 countries participating in TAR are Azerbaijan, Bangladesh, Belarus, Cambodia,Democratic Peoples Republic o Korea, Georgia, India, Indonesia, Kazakhstan, KyrgyzRepublic, Lao PDR, Malaysia, Mongolia, Myanmar, Nepal, Pakistan, PRC, Poland,Republic o Korea, Russian Federation, Tajikistan, Thailand, Turkey, Turkmenistan,Singapore, Sri Lanka, Uzbekistan, and Viet Nam.

Figure 1.. Trans-Asian Railway Network

Source: UNESCAP (2009b).

TRANS-ASIAN RAILWAY NETWORK


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30


The third pillar, acilitating land transport, involves integrating

road, rail, sea, and air links through improved logistics and intermodalinteraces. Its priorities are interconnecting the AH and TAR networks

with seaports and establishing 700 dry ports4

in landlocked countriesby 2015.5

In the energy sector, since 2006, the United Nations has startedthe regional initiative on a trans-Asian energy system or enhancing

regional energy security or sustainable development in the 21 s t

century. The trans-Asian energy system could be dened as an Asia-wide integrated energy system linking and synergizing subregional

energy systems. (UNESCAP 2008d: 9). This system would aim to

achieve greater cooperation, coordination, and integrationallowing

countries to share inormation and expertise, leading to a system otransboundary energy trade and exchange. An integrated regionwideenergy system would allow countries to balance supply and demand

within the region in an ecient manneropening up the potential or

energy trade between countries that do not share borders or belong tothe same subregion. This would benet both supplying and consuming

countries as well as countries o transit. However, it remains just aproposal (UNESCAP 2008d).

Subregional Initiatives

In view o Asias diversity, wherein countries dier in size, income

levels, population, natural resources, and access to both regionaland global markets, connectivity has been enhanced through several

subregional inrastructure initiatives in the last ew decades. A listo these initiatives is provided in Table 1.1, and an overview o each

program is given below.

4

UNESCAP (2008a) denes a dry port as an inland location with unctions similar tothose o a seaport or the consolidation and distribution o goods. It distinguishes three typeso modal interchange acilities that process border trade and provide ull customs services:dry ports, inland container depots, and reight villages. Dry ports can process all orms ocargo, while inland container depots can process only containers.5 UNESCAP (2008b) estimates that 740 new container berths will be needed by 2015 inthe United Nations Economic and Social Commission or Asia and the Pacic region, at acost o $51 billion.


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Association o Southeast Asian Nations (ASEAN) is a ormal

grouping composed o 10 member countries with a broad mandateincluding inrastructure development. It recognizes that integrated

energy, transport, and communication networks are vital or regionaltrade and investment, and hence or a thriving regional economy.

But members geography and disparities in development pose bigchallenges. Deep seas and high mountains separate many o them,and unding expensive regional links is thus particularly dicult.

While member countries und inrastructure projects nationally,

ASEAN seeks to promote greater cooperation and coordination among

Table 1.1. Subregional Cooperation Programs in Asia

Note:a Iran is an observer.

NameYear

EstablishedMembers

Association o Southeast Asian Nations(ASEAN)

1967Brunei Darussalam, Cambodia, Indonesia, Lao PeoplesDemocratic Republic (Lao PDR), Malaysia, Myanmar, PhilippinesSingapore, Thailand, and Viet Nam

Bay o Bengal Initiative or Multi-SectoralTechnical and Economic Cooperation(BIMSTEC)

1997Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka, and

Thailand

Brunei Darussalam-Indonesia-Malaysia-PhilippinesEast ASEAN Growth Area(BIMP-EAGA)

1994Brunei Darussalam plus provinces in Indonesia, Malaysia, andPhilippines

Central Asia Regional EconomicCooperation (CAREC)

1997

Aghanistan, Azerbaijan, Kazakhstan, Kyrgyz Republic, MongoliTajikistan, Uzbekistan, plus the Xinjiang Uygur AutonomousRegion and the province o Inner Mongolia o the PeoplesRepublic o China (PRC)

Greater Mekong Subregion (GMS) 1992 Cambodia, Lao PDR, Myanmar, Thailand, Viet Nam, plus Guangxand Yunnan provinces o the PRC

Indonesia-Malaysia-Thailand GrowthTriangle (IMT-GT)

1993 Provinces in Indonesia, Malaysia, and Thailand

Pacifc Islands Forum (PIF) 1971

Australia, Cook Islands, Fiji Islands, Kiribati, Marshall Islands,Federated States o Micronesia, Nauru, New Zealand, Niue, PalaPapua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, andVanuatu

South Asian Association or RegionalCooperation (SAARC)

1985Aghanistan, Bangladesh, Bhutan, India, Maldives, Nepal,Pakistan, and Sri Lanka

South Asia Subregional EconomicCooperation (SASEC)

2001 Bangladesh, Bhutan, India, and Nepal

Subregional Economic Cooperation inSouth and Central Asia (SECSCA)a

2003 Aghanistan, Pakistan, Tajikistan, Turkmenistan (associate), andUzbekistan


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them. Its our fagship regional inrastructure programs are the ASEAN

Power Grid, the Trans-ASEAN Gas Pipeline, the ASEAN HighwayNetwork, and the Singapore-Kunming Rail Link. It also has programs

to promote energy eciency and renewable energy.

The Brunei Darussalam-Indonesia-Malaysia-Phillipines East

ASEAN Growth Area (BIMP-EAGA), made up o provinces o threecountries plus Brunei Darussalam, also seeks to expand opportunities

or trade and investment through inrastructure development. With

ADB as its development adviser, regional inrastructure projects haveocused on air and maritime services, as well as sotware aspects.

Airport and seaport acilities have been upgraded to accommodate anexpected increase in passenger and cargo trac rom more regular air

and sea links.

Bay o Bengal Initiative or Multi-Sectoral Technical and

Economic Cooperation (BIMSTEC), comprised o countries in

South Asia and Southeast Asia, has economic integration through aree trade agreement as its main objective. A ramework agreement or

this was signed in 2004 but has yet to be implemented. BIMSTEC has13 priority sectors, and in 2008, together with ADB as its development

partner, it completed a study to help promote and improve transport

inrastructure and logistics among its member countries. In 2004, the

BIMSTEC Trilateral Highway project linking India, Myanmar, andThailand, with a total length o 1,360 km, was taken up by membercountries to improve transport links and promote trade and tourism in

the subregion.

Central Asia Regional Economic Cooperation (CAREC) is

an inormal orum involving eight Central Asian countries and six

multilateral institutions, that generally aims or regional integrationand trade, with inrastructure (transport and energy) as one o its

major unctions. CARECs mandate is to promote development

through cooperation ollowing a long-term strategic ramework and acomprehensive action plan, which provides strategic direction and is

updated annually. It aims to enhance energy security through regionalenergy projects. CARECs strategic transport ramework or 20082018

has three goals: to establish competitive transport corridors across the


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connectivity. To date, IMT-GT has undertaken several regional

inrastructure projects and identied ve economic connectivitycorridors.7 Together with ADB, its development partner since 2006,

it provides capacity-building support, helps mobilize technical andnancial resources, and helps promote an enabling environment or

private sector development (IMT-GT 2009).

Pacifc Island Forum (PIF) consists o 16 Pacic island countries

and aims to strengthen regional integration through the Pacic Plan

or Strengthening Regional Cooperation and Integration, which wasendorsed in 2005. This aims to expand trade in goods and services,

notably by implementing regional tourism marketing and investmentplans, implementing regional transport services plans, as well as

planning and implementing national sustainable developmentstrategies. The PIF program also attempts to enhance governancemechanisms and strategies as well as associated legislation or maritime

and aviation security and surveillance (PIF Secretariat 2007).

South Asian Association or Regional Cooperation (SAARC)

is composed o countries in South Asia, and its main objective iseconomic integration through the South Asia Free Trade Area. A

SAARC Regional Multimodal Transport Study, conducted with ADB

nancial and technical assistance, identied 10 road corridors, 5 rail

corridors, 10 inland or maritime gateways, and 7 aviation gateways.

South Asia Subregional Economic Cooperation (SASEC) ismade up o our countries in South Asia. The initiative was launched

in 2001, with ADB providing technical assistance. In 2007, the SASECinormation highway project was approved, with technical assistance

nanced rom the Regional Cooperation and Integration Fund. Six

transport and energy projects are ongoing or in the pipeline, at anestimated cost o $56 million. There is huge potential or energy trade

and cooperation in the subregion as there is hydropower potential in

Nepal and Bhutan, coal in the Indian states o West Bengal and Bihar,and oil and gas in Bangladesh and in the Indian states o Assam and

7 The ve corridors include: (i) Extended Songkhla-Penang-Medan; (ii) Straits oMelaka; (iii) Banda Aceh-Medan-Pekanbaru-Palembang; (iv) Melaka-Dumai; and(v) Ranong-Phuket-Aceh.


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Tripura. SASECs vision is to develop, utilize, and optimize power

links, but there has been limited progress so ar.

Subregional Economic Cooperation in South and Central Asia(SECSCA) is composed o countries in South and Central Asia. It

aims to promote transport connectivity and acilitate the movement

o goods and people across South and Central Asia. Key to achievingthese goals is developing ecient transport corridors that connect

landlocked Central Asian republics to ports in the Arabian Sea and the

Persian Gul via Aghanistan. With ADBs technical assistance, a planor two transport corridors, north-south and east-west, was ormulated

in 2006 (Asia Regional Integration Center 2009). But due to thecontinuing confict in Aghanistan, very little progress has been made.

At present, regional inrastructure cooperation in Asia is relativelyunderdeveloped. In general, limited progress has been made with

various pan-Asian initiatives. Although achievement has been made

with respect to intergovernmental agreements o participatingcountries, much remains to be done with the physical construction o

the AH and the TAR, while the Trans-Asian Energy System remainsmerely a proposal. Subregional cooperation has increased since the

early 1990s with the support o ADB, but here, too, progress has been

slow, with the notable exception o the GMS. However, subregional

initiatives have advanced urther than pan-Asian ones.

Within ASEAN, the very ew completed projects are bilateralor example, between Malaysia and Singaporerather than regional.

Almost all successully completed, or under serious consideration,regional projects are in energy, transport, and telecommunications. In

the GMS, the ocus has been on building new domestic inrastructure

(such as road corridors and power transmission grids) and connectingthem across national borders (or instance by building bridges and

completing missing segments), so as to develop new corridors within

and among countries. Central Asia is seeking to develop regionaltransport and energy networks, building on the success o the Almaty-

Bishkek road and existing privately unded oil and gas pipelines. InSouth Asia, the regional projects are mostly bilateral, mainly involving


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India seeking to import power rom neighboring countries (such as

Bhutan) capable o exporting hydropower.

The immediate priority o the region is to develop and integrateexisting subregional programs towards a seamless Asia. These can act

as building blocks towards creating an integrated region connected by

world-class, environmentally-riendly inrastructure networks.

Plan of the Study1.5.

This study is organized into our major themes or ocus areas,

namely: (i) trade, logistics, and investment; (ii) regional inrastructure

network; (iii) policies and institutions; and (iv) nancing inrastructure.Chapter 2 identies major challenges acing the region on trade,logistics, and investment, ocusing on international and intraregional

issues and examining not only investment-related issues but also policy

and institutional aspects. It also provides an analysis o the relationshipbetween existing inrastructure and costs o major traded goods and

services, as well as an analysis o challenges and opportunities that can

be overcome by improved logistics.

Chapter 3 discusses the economics o an inrastructure network and

examines the benets o regional inrastructure networks and presentsnew empirical evidence to support the cases in Central, South, and

Southeast Asia in terms o economic welare and poverty. In addition,it estimates the benets o Asia-wide inrastructure investment in terms

o real income gain.

Chapter 4 examines policy and institutional issues as they dene

the overall environment or eective inrastructure development,notably how to ensure that they promote sustainable development and

green inrastructure. In particular, it reviews existing legal, regulatory,

and institutional rameworks and policies in Asia and other regions,and suggests what institutions and policies need to be in place to ensure

sustainability and eectiveness o regional inrastructure projects. In

addition, it provides a policy and institutional ramework or a seamlessAsia.


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Chapter 5 estimates the regions inrastructure nancing needs and

provides recommendations on how to ll in the huge gap in nancinginrastructure investment in Asia. It examines the experiences o Asia

and other regions or enhancing public-private partnerships (PPP) ininrastructure investment and building regional nancial inrastructure

or intermediating surplus unds in the Asian region or inrastructure

projects that can enhance regional connectivity.

In the concluding chapter, the study proposes major policy

recommendations, lessons learned or eective inrastructuredevelopment through possible regional cooperation initiatives, and a

ramework or pan-Asian inrastructure cooperation towards a seamlessand integrated Asia.


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SupportinRegional Trade an

Investmen

Chapte


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Supporting Regional Trade and Inve

A

sias reemergence as an economic powerhouse in recent

decadesand its recovery rom the 19971998 nancialcrisisowes much to the expansion o its international

trade. This has been ostered by the development o

supporting inrastructure, both hard (physical) and sot

(institutional), and o ecient logistics servicesthe well-manageddistribution and storage o goods, services, and related i

adb book infrastructure.seamless

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