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Public-Private Partnerships for Cross-Border Infrastructure Development ESCAP is the regional development arm of the United Nations and serves as the main economic and social development centre for the United Nations in Asia and the Pacific. Its mandate is to foster cooperation between its 53 members and 9 associate members. ESCAP provides the strategic link between global and country-level programmes and issues. It supports Governments of countries in the region in consolidating regional positions and advocates regional approach to meeting the region’s unique socioeconomic chanllenges in a globalizing world. The ESCAP office is located in Bangkok, Thailand. Please visit the ESCAP website at www.unescap.org for further information. The darker area of the map represents the members and associate members of ESCAP. ACKNOWLEDGEMENT This paper has been prepared by Mathieu Verougstraete, Economic Affairs Officer, Macroeconomic Policy and Financing for Development Division, ESCAP. This paper is presented as a background document for the 4th High-Level Dialogue on Financing for Development in Asia and the Pacific (April 2017). The paper describes research in progress by the author(s) and are published to elicit comments and debate. The views expressed in this paper are those of the author(s) and should not necessarily be considered as reflecting the views or carrying the endorsement of the United Nations. This publication has been issued without formal editing. Cover Photo Credit: foxaon1987/Shutterstock.com This paper has been issued as draft without formal editing. ABSTRACT Cross-border infrastructure networks are critical for improving regional connectivity, their financing has however been challenging. This paper examines whether Public-Private Partnerships (PPP) may contribute to their development and reviews past experience with this type of financing arrangements in the energy, transport and telecommunication sectors. By involving several countries, cross-border projects face specific challenges as these projects are by nature more complex, face augmented political risks and necessitate higher level of coordination. To support countries in financing cross-border projects, the paper studies these challenges in detail. It also highlights the policy actions required to achieve enhanced regional connectivity. It stresses, for instance, the importance of supporting intergovernmental platforms where international networks can be planned, regulatory hurdles tackled and financing arrangements structured. Developing guidelines for these type of projects would also help countries in their efforts to enhance regional connectivity. The paper concludes by recognizing the potential of PPP for cross-border projects, though it acknowledges that supportive policy actions from participating governments will be required for their success as well as a strong high-level political backing. INTRODUCTION In the wake of weak global aggregate demand, and (33%), telecommunication (10%) and water (3%) thus declining global trade flows, strengthening infrastructure.2 While the level of private investment regional integration has become a priority of many varies considerably across countries, it accounts for countries in Asia and the Pacific seeking new drivers more than 1 per cent of GDP on average per year in of economic growth. In that context, improving 10 countries. connectivity plays an important role as it can further enhance the potential of interlinked production Whereas PPPs cannot fill all infrastructure gaps, networks and facilitate international trade while experiences at the national level show that this allowing investments and ideas to travel across mechanism may contribute to a significant share countries. Recognizing these benefits, Governments of infrastructure investments in some sectors. have integrated the development of transborder For example, available data suggest that the infrastructure into the 2030 Agenda for Sustainable private sector has financed roughly 50 per cent of Development.1 investments in power generation assets in South- East Asia over the period 2000-2013.3 Likewise, in To achieve greater connectivity, developing physical transport, the private sector contribution reached an connectivity between countries is a prerequisite. impressive 34 per cent of total investment in roads This can be done, for example, through pipelines, and highways in India in the 11th Plan (2007- transmission lines, roads, railways and fiber cables 2012).4 crossing borders (i.e. cross-border infrastructure projects). Despite this extensive track record, the World Bank’s PPI Database only reports 20 projects classified as Unfortunately, for several reasons such as cross-border, with six of them in the ESCAP region. constrained public budgets, legal and regulatory This seems to indicate that multi-country PPP obstacles and insufficient regional cooperation, projects are relatively uncommon (though the PPI these linkages have not been developed to the level database does not capture all the existing projects). required. To gain a better understanding of the potential Countries in Asia and the Pacific therefore have to of PPP for cross-border projects, it is necessary find options to overcome these issues and bridge to identify specific examples and study those the infrastructure bottlenecks, particularly in the examples in detail. As such, lessons can be learned energy, transport and telecommunication networks. for designing future policies to promote the PPP mechanism for regional infrastructure development. Among the possible options, mobilizing private In addition, in-depth analyses are needed to shed finance, through Public-Private Partnerships (PPPs), light on the prospects and specificities of private is being considered by policy makers as a promising investments in each sub-sector, which are reviewed avenue. Nonetheless, little is known about how in turn below. the PPP mechanism could be effectively used for transboundary projects despite a reasonably well- I. Energy established track record at the national level in several economies. The energy sector is a good candidate for cross- border PPP projects. On one hand, private To address this information gap, the paper is companies have invested heavily in energy-related structured around three main questions: infrastructure development and have acquired a . What has been the experience so far with PPP large experience with this sort of projects. On the based cross-border projects? other hand, there is a clear economic case for regional energy markets as they can reduce the gap . What challenges emerge from examining in supply and demand by transferring power from these projects? energy-rich countries to energy-deficient countries. What conclusions can be drawn for future Indeed, more than half of the countries in Asia and policy actions? the Pacific are not energy self-sufficient and depend on imports to meet domestic demand.5 In addition, transnational networks can reduce reserve capacity EXPERIENCE needs for peak demand periods by linking countries Asian countries have a large track record regarding with different seasonal consumption patterns. the use of PPP for developing national infrastructure. However, regional markets only work provided In the region developing countries, private that cross-border connections are developed. The companies have invested around $650 billion following sections assess whether these connections over the last 15 years for energy (54 %), transport may be built through private resources. a) Power Generation and Transmission savings to justify the import of electricity for another In the energy country. For instance, Far East Russia’s hydropower sector, hydro-power Investments in the power sector have been closely together with wind and solar from the Gobi desert linked to the development of Independent Power projects have a could be exported to neighbouring countries. Producers (IPP) whereby governments delegate the Regional power trade implies though sufficient strong track record responsibility of generating electricity to private transmission capacity and grid interconnections with cross-border companies. In this model, public authorities typically among the countries involved. Therefore developing investments sign a long-term Power Purchase Agreement (PPA) these linkages should be a priority for further regional with private investors, thereby guaranteeing the integration. An example of this kind of regional project’s future cash flows. Cross-border projects initiative is the “Asian Energy Super Ring” proposal occur then when a power plant is located in a connecting Russia, Mongolia, Japan, China and different country than the one where the electricity the Republic of Korea, which has been put forward is sold. This has happened in the hydro-power sector by a consortium of private sector companies from on several occasions as illustrated by the three the participating countries. Another example is the cases presented in Box 1. Although these hydro $1.17 billion CASA-1000 project, which is publicly projects are transboundary, the private consortium funded through loans and grants from development had mainly to comply with the regulatory system partners. The project aims at facilitating the export of the country where the asset is located. This has of available surplus electricity in the summer months most likely facilitated their realization. from Kyrgyzstan and Tajikistan to Afghanistan and Pakistan by strengthening transmission capacity Other renewable