Connecting South Asia and Southeast Asia Connecting South Asia and Southeast Asia
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A JOINT STUDY OF THE ASIAN DEVELOPMENT BANK AND THE ASIAN DEVELOPMENT BANK INSTITUTE Connecting South Asia and Southeast Asia Connecting South Asia and Southeast Asia i © 2015 Asian Development Bank Institute All rights reserved. Published in 2015. Printed in Japan. Printed using vegetable oil-based inks on recycled paper; manufactured through a totally chlorine-free process. ISBN 978-4-89974-047-6 (Print) ISBN 978-4-89974-048-3 (PDF) The views expressed in this book are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB), the Asian Development Bank Institute (ADBI), or their Board of Governors or the governments they represent. ADB and ADBI do not guarantee the accuracy of the data included in this publication and accept no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” or other geographical names in this publication, ADB and ADBI do not intend to make any judgments as to the legal or other status of any territory or area. Users are restricted from reselling, redistributing, or creating derivative works without the express, written consent of ADBI. Note: In this report, “$” refers to US dollars. Asian Development Bank Institute Kasumigaseki Building 8F 3-2-5, Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan www.adbi.org Contents List of Figures, Tables, and Boxes vi Foreword x Acknowledgments xii Abbreviations xiv Executive Summary xvii Chapter 1: Introduction and Overview 1 1.1 Context and Aim of the Study 1 1.2 Rationale for Greater Economic Integration and Cooperation 4 1.3 Analytical Approach 7 1.4 Cross-Border Transport Infrastructure 10 1.5 Energy Infrastructure and Trading 15 1.6 Financing Infrastructure 20 1.7 Trade Facilitation 22 1.8 National and Regional Policy Reforms 25 1.9 Institutional Risks to Connectivity 26 1.10 Impacts of Improved Connectivity 29 1.11 Conclusions 31 Chapter 2: Current State of Cross-Regional Economic Ties 35 2.1 Introduction 35 2.2 Trade Links 35 2.3 Supply Chains and Small and Medium-Sized Enterprises 39 2.4 Foreign Direct Investment 43 2.5 Financial Flows 44 2.6 Summary 46 Chapter 3: Cross-Border Transport Infrastructure 53 3.1 Introduction 53 3.2 Scope of Study and Concepts 54 3.3 Highways 58 3.4 Railroads 72 iii ivContents 3.5 Seaports 84 3.6 Summary of Priority Projects 98 3.7 Benefits 101 3.8 Obstacles and Constraints 104 3.9 Summary and Recommendations 106 Chapter 4: Energy Infrastructure and Trading 113 4.1 Introduction 113 4.2 Rationale for Energy Trading and Scope of Study 113 4.3 Current Situation of Energy Demand, Supply, and Trading 116 4.4 Identification of Energy Trading Projects and Costs 128 4.5 Model Projections 129 4.6 Summary and Recommendations 134 Chapter 5: Infrastructure Finance and Financial Sector Development 139 5.1 Introduction 139 5.2 Rationale for Greater Financial Integration 140 5.3 Financial Sector and Market Assessment 143 5.4 Investment Finance Funding Methods: Assessment of Options 150 5.5 Regulatory and Institutional Constraints 161 5.6 Infrastructure Financing Framework: Policy Proposals to Ease Constraints 167 5.7 Financing Solutions for Regional Projects 173 5.8 Conclusions 176 Chapter 6: Trade Facilitation 181 6.1 Introduction 181 6.2 Scope of Trade Facilitation 182 6.3 Overview of Trade Facilitation 184 6.4 Issues and Bottlenecks 187 6.5 Regional Initiatives to Address Issues 208 6.6 Conclusions 217 6.7 Recommendations 222 Chapter 7: National and Regional Policy Reforms 227 7.1 Introduction 227 7.2 Trade Barriers 227 7.3 Free Trade Agreements 232 7.4 Exchange Rate Regimes 235 7.5 Conclusions 238 Contentsv Chapter 8: Risks to Connectivity and Institutional Arrangement 241 8.1 Introduction 241 8.2 Reasons for Regional Coordination 242 8.3 Regional Institutions for Connectivity 243 8.4 Factors Affecting Success of Cooperation Initiatives 251 8.5 The Way Forward 257 Chapter 9: Assessing Impacts of Regional Integration 265 9.1 Introduction 265 9.2 Tools for Assessing Economic Effects of Regional Integration 266 9.3 Estimating the Effects of Regional Integration via a CGE Model 271 9.4 Qualitative Issues 284 9.5 Conclusions 288 List of Background Papers for the Connecting South Asia and Southeast Asia Study 293 Figures, Tables, and Boxes Figures 1.1 Key Elements for Promoting Cross-Regional Connectivity 7 2.1 Total Trade between South Asia and Southeast Asia, 1990–2013 37 2.2 Share of South Asian and Southeast Asian Cross-Regional Trade to Their Total Trade, 1990–2013 37 2.3 Share of South Asian and Southeast Asian Production Network Exports in World Total, 1990–2013 40 2.4 South Asian and Southeast Asian Cross-Regional Greenfield Foreign Direct Investment, 2003–2008 and 2009–2014 43 2.5 Share of South Asian and Southeast Asian Cross-Regional Greenfield Foreign Direct Investment to World Total, 2003–2008 and 2009–2014 44 2.6 Southeast Asian Intra- and Cross-Regional Portfolio Investment Total Assets, 1997–2012 45 2.7 South Asian Intra- and Cross-Regional Portfolio Investment Total Assets, 1997–2012 45 3.1 GMS Economic Corridors 57 3.2 SAARC Transport Corridors 60 3.3 Priority Highway Corridors and Projects 72 3.4 Priority Railroad Corridors and Projects 84 3.5 Share of Asian Seaborne Trade by Cargo Type, 2012 86 3.6 Relationship between Container Ship Size and Operating Costs 87 3.7 Bay of Bengal Ports 90 4.1 LNG Import Portfolio of Major Economies in Asia, 2012 118 5.1 Credit Guarantee and Investment Facility 161 5.2 Infrastructure Project Stages 173 5.3 Financing Structure for Port Projects 174 5.4 Financing Structure for Road or Railroad Projects 175 5.5 Financing Structure for Utility Projects 176 vi Figures, Tables, and Boxes vii 6.1 Buy–Ship–Pay Model 183 6.2 World Bank Doing Business: Trading across Borders Rankings, 2012, 2013, and 2014 185 6.3 World Bank Logistics Performance Index, 2012 186 6.4 Diagram of a Single Window System 194 6.5 ASEAN Single Window Architectural Design 211 6.6 Thailand National Single Window 212 7.1 Average Most Favored Nation Tariff Rates on All Commodities 228 7.2 Effectively Applied Tariffs, 2000 and 2013 229 7.3 Non-Tariff Measures Implemented, 2009–2013 230 7.4 Top 10 Countries’ Non-Tariff Measures Implemented, 2009–2013 231 7.5 South Asian and Southeast Asian Concluded Free Trade Agreements, 2014 232 7.6 Real Effective Exchange Rates of South Asian and Southeast Asian Economies 237 Tables 1.1 Summary of Connectivity-Related Transport and Energy Infrastructure Projects 15 1.2 Country-Level Priority Proposals for Improving Connectivity between South Asia and Southeast Asia 16 2.1 Value of Merchandise Trade between South Asia and Southeast Asia, 1990, 2000, and 2013 38 2.2 Importance of SMEs in Selected South Asian and Southeast Asian Economies 42 B2.1 Myanmar Comparison Indicators 49 3.1 South Asian Possible Road Corridors 63 3.2 Southeast Asian Possible Road Corridors 65 3.3 Bottlenecks on Asian Highways 1 and 2 Connecting South Asia and Southeast Asia 68 3.4 Priority Road Investment Projects 72 3.5 South Asian Possible Rail Corridors 75 3.6 Southeast Asian Possible Rail Corridors 77 3.7 Missing Links of the Trans-Asian Railway Connecting South Asia and Southeast Asia 79 3.8 Kolkata–Ho Chi Minh City Priority Rail Projects 83 3.9 Kolkata–Hai Phong (via Yunnan Province) Priority Rail Projects 83 viiiFigures, Tables, and Boxes 3.10 Dawei–Ho Chi Minh City Priority Rail Projects 84 3.11 Identified Port Development Projects 97 3.12 Priority Projects 99 3.13 Summary of Connectivity-Related Road, Rail, and Port Infrastructure Projects 100 3.14 Road Transport Benefits from Time Saving in India 102 4.1 Export and Import Status of Natural Gas in South Asia and Southeast Asia, 2005–2012 116 4.2 Natural Gas Trade in Asia via Cross-Border Pipelines, 2012 117 4.3 LNG Trade in South Asia, Southeast Asia, and Rest of the World, 2012 117 4.4 Actual and Planned Importing Capacity of LNG by Economies in South Asia and Southeast Asia 119 4.5 Gas Production by Economy in Southeast Asia 120 4.6 Greater Mekong Subregion Power Trade and Net Imports, 2010 121 4.7 Major South Asian Energy Trading Bilateral Agreements 124 4.8 Comparison of Energy Sector Investments in BAU and EET Scenarios in South Asia and Southeast Asia 130 4.9 Energy Sector Investment Priority Mapping with Examples for Southeast Asia 131 4.10 Energy Sector Investment Priority Mapping with Examples for South Asia 133 4.11 Priority Energy Projects 133 5.1 South Asian and Southeast Asian Domestic Infrastructure Financing Needs, 2010–2020 141 5.2 South Asian and Southeast Asian Cross-Border Infrastructure Investment Needs, 2010–2020 142 5.3 South Asian and Southeast Asian Sources of Financing 145 5.4 Fiscal Balances in South Asia and Southeast Asia 147 5.5 Infrastructure Investment Projects with Private Sector Participation, 2012 149 5.6 Infrastructure Financing Options 151 5.7 Sectorwise Private Sector Participation [and Foreign Direct Investment] Restrictions in Highest Investment Markets in Asia 164 5.8 Doing Business Rankings 167 Figures, Tables, and Boxes ix 6.1 Numbers of Documents and Time Taken for Export and Import Transactions, 2014 189 6.2 Corruption Perceptions Index, 2013 203 7.1 Classification of Exchange Rate Regimes in South Asia and Southeast Asia 236 8.1 Relevant Subregional Cooperation Programs in South Asia and Southeast Asia 243 9.1 Effects of South Asian–Southeast Asian Trade Initiatives on Income, Exports, and Exports/GDP in South Asia, 2030 275 9.2 Changes in Factor Prices in South Asia, 2030 277 9.3 Real Income, Export Gains, and Change in Exports/GDP in Southeast Asia, 2030 279 9.4 Changes in Factor Prices in Southeast Asia, 2030 282 Boxes 2.1 Myanmar’s Role as a Bridge 46 5.1 Nepal–India Electricity Transmission and Trade Project 156 5.2 Asian Infrastructure Funds 158 Foreword The success story of economic growth in Southeast Asia over the past few decades is well known.