Connecting Asia

Connecting Asia

Financing regional railways, roads, ports and other developments is a big challenge, but connectivity also needs ‘soft’ infrastructure to ensure that projects meet their full potential.

As Asia continues to expand its role as an engine of global growth, cutting reliance on exports has become a matter of urgency, especially given the weakness of many global economies. The focus is thus shifting inward to an economic model that places greater emphasis on domestic and intraregional activity,

Such a profound shift requires huge investments in regional connectivity — roads, rail networks, logistics centres, seaports and airports as well as communication infrastructure. The question is, how well equipped are individual countries and the region to plan and fund so many multi-layered connectivity projects? The path they choose must be one that will allow Asia to develop its own economic potential to better withstand external risks.

“Over the past decades, Asian countries have been trading much more to the European and United States markets, for which most of the trading activities relied on maritime transport,” said Dongwoo Ha, director of the Transport Division at the United Nations Economic and Social Commission for Asia and the Pacific (UN Escap).

“Their economies therefore very much concentrate on coastal areas, neglecting many developments that could happen inland. The development of dry port areas would help cluster logistics services, manufacturing and processing around them.”

The development of more dry ports also would bring new opportunities to spread development deep inland within the region, he told Asia Focus recently.

According to the Asian Highway Database, around 12,000 kilometres or 8% of the total network is still below the minimum standard and requires improvement. The long-planned Trans-Asian Railway, meanwhile, has 10,500 kilometres of “missing links”, most of them in Southeast Asia, or 9% of a total length of 117,000 km. Completing the missing links will cost an estimated $25 billion, according to Escap.

“The biggest challenge at the moment for transport connectivity in the region is financing of infrastructure. There are huge investment requirements but the developing countries do not have the money to do so,” said Mr Ha.

The Asian Development Bank strongly agrees, stating that the lack of financial mechanisms to attract infrastructure investment is a major obstacle to progress. Well-structured investment plans are needed to ensure that sufficient funds will flow into developing physical connectivity.

“Many countries in the region have been accumulating reserves but they don’t have a way to actually invest or reinvest those accumulated reserves into the region,” said Alfredo Perdiguero, principal economist of the ADB.

“Therefore many of them have decided to use some of their money in the other ways, such as buying US dollar reserves.”

Governments cannot afford these big-ticket projects by themselves and need to involve the private sector, but creating a workable model has proved difficult. A big part of the problem is the poor transparency, waste and corruption that characterise many of the governments in the region.

For the private sector, risk management, including political risk, is a major concern, along with return on investment. However, infrastructure development requires long-term investment and many businesses are more focused on short-term gains.

“One way to have long-term financing is to issue private-sector (corporate) bonds,” said Mr Perdiguero. “We need to have a guarantee mechanism to minimise the risks and to ensure that the cost of their investment will be paid off. The corporate bond market should be developed to become wider with better liquidity.”

The ADB economist believes the public-private partnership (PPP) model has a lot of good potential to address this problem. However, structuring the agreements and balancing the interest of the public with that of the private sector is very important.

The two sectors that seem to benefit most from PPP investment are energy and transport, but the record has been mixed in other sectors, according to Mr Perdiguero.

“[A successful PPP] will require a good legal framework and good development facilities. We encourage governments in the region to create a ‘PPP unit’. These people have to be well-trained and make the investment opportunities seem attractive for the private sector,” he explained.

Sometimes overlooked in discussions about physical connectivity is the importance of “soft infrastructure” to enable hard infrastructure to work more effectively. Asia has many overlapping sub-regional institutions involved in national and regional energy, transport and telecommunications infrastructure planning.

The roles of these institutions are to support connectivity through appropriate policies, reforms, systems and procedures, with effective regional coordination and cooperation. However, they often are seen as ineffectual, informal and lacking a clear and binding system of rules and policies.

“These problems happen because [regional connectivity] involves many different agencies — customs clearance, immigration, security and health services — leading to massive complications,” explained Mr Ha.

“We need to have very good coordination among all these agencies. In this case, technology and the use of electronic devices can play a bigger role.”

Electronic documents, single-window clearance, one-stop services and the use of GPS (global positioning system) to monitor cargo and vehicle movements are some of the ways to create a better flow of goods and labour.

Another underlying problem is that different sub-regions across Asia have been using different approaches. Each has its own initiatives and agreements for developing connectivity, which can lead to incompatibilities and roadblocks.

“UN Escap is trying to create a harmonised framework for the region by providing international conventions and treaties relating to the facilitation of trade and transport,” said Mr Ha. “Once similar regulations are being used in different sub-regions, Asia can be better connected.”

The institutional infrastructure for connectivity in the region is still far behind that of trade and investment, agreed Pradap Pibulsonggram, the Thailand representative on the Asean Connectivity Coordinating Committee (ACCC).

“This is the main problem for regional connectivity. Agreements on transport facilitation, aviation, shipping and many other things are yet to be ratified,” Mr Pradap told Asia Focus.

Numerous cross-sector and cross-institution bodies need to be set up, with priorities set to deliver some quick wins, in his view. Effective coordination mechanisms will be the key to building momentum in the region.

Selecting the right modes of transport to serve particular needs is crucial. Rail is a major opportunity for Asia because it is still a weak point in the region. Yet it is also one of the most environmentally friendly and energy-efficient mode of transports.

According to an Accenture report, rail transport demand in Asia is predicted to double over the next 20 years. However, rail services must be part of a wider intermodal transport network to ensure that all transport modes are very well-connected.

“A lot of money must be invested in railways, not only in the infrastructure but also in the institutions that are in charge of railways. If Asia is going to be serious about the environment, railways are the key answer,” Mr Perdiguero noted.

Though a lot of progress has been made in terms of increasing connectivity and productivity in Asia, wide gaps still exist between developed and underdeveloped areas. More than 800 million people in Asia are still living in absolute poverty.

For countries on the Asian landmass, the closest ports or developed economic zones may be thousands of kilometres away. This makes upgrading of freight systems and development of inland transport of paramount importance.

In order to make Asia more economically sustainable and resilient in the face of external shocks, increased regional connectivity will have to play a larger role in rebalancing regional economies toward more regional demand and trade-driven growth.

Expanding development away from coastal areas to the inland area is another way to make regional development more sustainable and inclusive.

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