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Regional Cooperation and Integration South Asia Subregional Economic Cooperation Mugling–Pokhara Highway Improvement Phase 1 Project (RRP NEP 52097) REGIONAL COOPERATION AND INTEGRATION A. Background 1. The Asian Development Bank (ADB) promotes South Asian connectivity through its regional cooperation and integration support for the region, characterized by a multisectoral approach consisting of (i) national projects with subregional dimensions, (ii) subregional efforts through the South Asia Subregional Economic Cooperation (SASEC) program, (iii) regional efforts through the South Asian Association for Regional Cooperation (SAARC), and (iv) interregional approach through the Bay of Bengal Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) program.1 2. South Asian Association for Regional Cooperation. The SAARC platform is dedicated to improving the welfare of the people of South Asia through economic growth, social progress, and cultural development. The SAARC Development Fund has three windows to finance regional opportunities: social, economic, and infrastructure. Kathmandu, Nepal, hosts the SAARC Secretariat, and Thimphu, Bhutan, the SAARC Development Fund Secretariat. ADB has assisted in the formulation of the SAARC Regional Multimodal Transport Study which identified priority transport projects for enhanced regional connectivity in South Asia. 3. South Asia Subregional Economic Cooperation. The SASEC program brings together Bangladesh, Bhutan, India, Maldives, Myanmar, Nepal, and Sri Lanka in a project-based partnership to promote regional prosperity by improving cross-border connectivity, facilitating faster and less costly trade among member countries, and strengthening regional economic cooperation. ADB is the secretariat and lead financier and development partner of SASEC. Under the SASEC transport program, regional connectivity improvements are aimed to increase subregional trade and improve the competitiveness of local industries, particularly for Bhutan and Nepal which are landlocked, as the deficiency of the cross-border infrastructure network results in high transport costs and impedes regional integration and trade with indirect neighbors.2 Excluding India, trade with all other member countries of SASEC and SAARC account for only 0.9% of Nepal’s total trade.3 4. Bay of Bengal Multi-Sectoral Technical and Economic Cooperation. The BIMSTEC program was established in 1997 to promote the integration of South Asia and Southeast Asia. ADB has been BIMSTEC’s development partner since 2005, and has supported the preparation of the BIMSTEC Transport Infrastructure and Logistics Study (BTILS) and its update. The BTILS is the program’s blueprint for transport cooperation, which analyzed the regional group’s transport and logistics bottlenecks and the policy or project recommendations to address these. The BIMSTEC Transport Connectivity Master Plan is being finalized to promote seamless connectivity and to enhance transport and trade linkages between and across its member countries. 1 Bangladesh, Bhutan, India, and Nepal formed the South Asian Growth Quadrangle in 1996. They founded SASEC in 2000 and requested ADB to help advance their economic cooperation initiative, with ADB acting as its Secretariat and lead financier and development partner. After ADB’s 47th Annual Meeting in Astana, Kazakhstan in May 2014, SASEC expanded its membership to include Maldives and Sri Lanka as full members. Myanmar became its seventh member in April 2017 during the SASEC Finance Ministers’ meeting held in New Delhi. SAARC includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. BIMSTEC comprises Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka, and Thailand. 2 As part of SASEC, ADB is assisting Bangladesh, Bhutan, India, and Nepal to upgrade their respective sections of SAARC Corridors 4 and 8. These projects have been subsumed under the SASEC Corridors as defined in the 2018– 2019 update of the SASEC Operational Plan. 3 Government of Nepal, Department of Customs. 2018. Annual Foreign Trade Statistics FY2017/18. Kathmandu. 2 5. South Asia Subregional Economic Cooperation 2025. The SASEC Operational Plan for 2016–2025 was adopted in May 2016 and finalized in September 2016.4 It provides a rolling pipeline of over 200 potential priority projects requiring over $120 billion investments in transport, trade facilitation, energy, and economic corridor development. The 2018–2019 update of the SASEC Operational Plan presented at the SASEC Nodal Officials and Working Groups Meeting (Seoul, March 2019) adopted a clear “network-based” process of prioritizing projects, which involves (i) defining what projects form part of defined transport and energy networks; (ii) conducting a comprehensive stock-take of completed and ongoing projects; and (iii) identifying the operational priority projects needed to fill the gaps in the identified networks. The SASEC Operational Plan Update consists of 111 proposed projects with financing requirement of $58.7 billion, the bulk of which is in transport (76 projects costing $39.1 billion). As of the end of May 2019, the SASEC portfolio amounts to about $12.5 billion for 54 committed projects covering the transport sector, energy, economic corridor development, trade facilitation, and information and communication technology. Transport is the largest sector with 36 projects costing $10.2 billion, followed by energy with 12 projects at $1.5 billion. ADB contributed almost $7.2 billion of the total cost, while SASEC governments and other cofinanciers contributed about $5.3 billion. B. South Asia Subregional Economic Cooperation Transport Infrastructure Strategy 6. Transport infrastructure. Transport infrastructure is the main priority of SASEC under the SASEC Operational Plan 2016–2025. The plan focuses on realizing seamless movement along intermodal transport systems in key trade routes, and is aligned with connectivity initiatives in SAARC and BIMSTEC. For road transport, the Operational Priority (OP) 1 is to upgrade and expand the road network along major trade routes, including upgrading key routes to Asian Highway Class 1 standards, linking roads to primary SASEC routes and key borders, and developing access roads to borders and ports to address last mile connectivity. For rail, the OP- 2 is to improve connectivity between Bangladesh and India, landlocked countries and seaports, and ports and their hinterlands. For maritime transport, the OP-3 is to improve port handling efficiency and port capacity by developing deep water ports and reducing port dwell times by augmenting port operating efficiency. For inland waterways, the OP-4 is to promote coastal shipping and inland water transport to handle international trade. For airports, the OP-5 is to expand capacity to handle both passenger and air freight traffic as a result of growth in tourism and global value chains. 7. Road corridor. The updated SASEC Operational Plan identified six important SASEC road corridors (SRC) that holistically address the subregion’s modal development needs, and are designed to promote multi-faceted development in the areas along the routes. Better linkages between in-country economic corridors will generate synergies from improved infrastructure and connectivity, industrial value chain linkages, and urban development. These SRCs are (i) Nepal– Kolkata Trade Corridor, (ii) Bay of Bengal Highway, (iii) India–Association of Southeast Asian Nations (ASEAN) East–West Corridor, (iv) Nepal–Bhutan–Bangladesh North–South Corridor, (v) North Bangladesh–India Connector, and (vi) Sri Lanka Port Highway. 8. As part of SAARC Corridor 4, the project is related to a broader network of SAARC corridors aiming to strengthen regional cooperation. These corridors include the following: (i) SAARC Corridor 4: Kathmandu (Nepal)–Kakarbhitta (Nepal)–Panitanki (India)– Phulbari (India)–Banglabandha (Bangladesh)–Mongla/Chittagong (Bangladesh); 4 SASEC Secretariat. 2016. Operational Plan 2016–2025. Manila. 3 (ii) SAARC Corridor 7: Kathmandu (Nepal)–Nepalganj (Nepal)–New Delhi (India)– Lahore (Pakistan)–Karachi (Pakistan); (iii) SAARC Corridor 8: Thimphu (Bhutan)–Phuentsholing (Bhutan)–Jaigaon (India)– Changrabandha (India)–Burimari (Bangladesh)–Mongla and Chittagong (Bangladesh); and (iv) SAARC Corridor 10: Kathmandu (Nepal)–Bhairahawa (Nepal)–Sunauli (India)– Lucknow (India). 9. Project spill-over effects. The project road is an extension of SRC 4, consisting of Kathmandu–Kakarvitta/ Panitanki–Rangpur–Bogra–Dhaka–Chattogram, with spurs Rangpur– Burimari/Chengrabandha–Phuentsholing, Bogra–Mongla, and Dhaka–Payra Port. (i) The project will improve the access of Pokhara area to Birgunj/Raxaul area via the East–West Highway. The Birgunj–Raxaul area can serve as an important gateway for Pokhara’s products into India via SRC 1: Kathmandu–Birgunj/Raxaul– Kolkata/Haldia. Since SRC 1 is Nepal’s key trade route linking it with India, the project will enable Pokhara and its hinterlands to contribute a larger volume of Nepal’s trade with India, and enable Pokhara’s production units to have better access to international markets via the Kolkata/Haldia port. (ii) The project provides the western extension of SRC 4. Through Bharatpur, the project links Pokhara and its hinterlands to the East–West Highway and international markets served by SRC 4 via ports in Chattogram, Mongla, and Payra. The project will thus open up the Pokhara area to trade with Bangladesh, especially in the northwest region, and to international markets via ports in Bangladesh. Since SRC 4
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