Filling Asia’s Infrastructure Investment Gap: The Role of Mega Infrastructure Initiatives

Abstract

This article uses the lens of key financial actors to analyse the daunting challenge of Asia’s long-term infrastructure development. It examines three issues: (a) the historic role of infrastructure in Asian economic development; (b) the contribution of mega infrastructure initiatives (MIIs) (e.g., China’s Belt and Road Initiative and Japan’s Partnership for Quality Infrastructure) to filling the region’s large infrastructure investment gap; and (c) the effectiveness of the Asian Development Bank (ADB). While underlining infrastructure investment as a key driver of Asia’s economic miracle and emerging regionalism, the article highlights the region’s large infrastructure investment gap. It shows that MIIs have only partially filled Asia’s large infrastructure investment gap and there is a risk of an Asian ‘noodle bowl’ of multiple overlapping initiatives, which may raise transactions costs for small regional economies. It suggests that ADB’s honest broker and financing roles have helped to bring parties together in regional projects, but ADB operations can be improved. It ends with policy implications.

JEL Codes: O16, O19, G20, G23, H54

Keywords

Asian infrastructure development Belt and Road Initiative partnership for quality infrastructure free and open Indo-Pacific strategy India-Middle East Europe Economic Corridor Asian Development Bank

Introduction

Infrastructure development facilitated Asia’s transformation from a poor agricultural backwater into a prosperous global factory. With Asian economies increasingly integrated with the global economy and with each other, infrastructure investment inevitably occupies a role in economic recovery from the COVID-19 pandemic and mitigating the effects of future pandemics. This article uses the lens of key financial actors to examine the daunting challenge of Asia’s long-term infrastructure development.¹ It focuses on a new type of actor in the region’s infrastructure landscape, namely, mega infrastructure initiatives (MIIs) by major global economies, and the smaller scale but longer ground-level operational experience of a regional development bank. The boom in MIIs since the 2010s, which include China’s Belt and Road Initiative (BRI), Japan’s Enhanced Partnership for Quality Infrastructure (PQI), the US-led Free and Open Indo-Pacific Strategy and the multi-country India-Middle East Europe Economic Corridor (IMEC) is related to Asia’s rise and great power rivalries over sharing the fruits of the region’s prosperity (Hisahiro, 2024; Wilson, 2020; Zhao, 2023). But the contribution of MIIs to filling the region’s enormous infrastructure investment gap and negative systemic issues of such initiatives are open questions. The Asian Development Bank (ADB) began with national infrastructure development activities in the mid-1960s and expanded into regional infrastructure lending in the mid-1990s. However, the extent to which ADB’s regional cooperation activities including regional infrastructure lending are effective is an important question.

This article examines these questions in Asia’s infrastructure investment and economic development. The rest of the article is as follows. The second section reviews the links between infrastructure investment, economic development and regionalism in Asia. The third section maps the spread of various MIIs and estimates their contribution to filling Asia’s infrastructure investment gap. The fourth section discusses the effectiveness of ADB’s regional cooperation efforts. The fifth section concludes this article.

The Role of Infrastructure in Asia’s Economic Development

Key lessons from Asia’s economic miracle story include the impressive savings and investment rates, deliberately promoted by governments alongside pursing outward-oriented development strategies and investments in human capital (Stiglitz, 2001). A major aspect of the savings and investment nexus was the role of national infrastructure investments (transportation, power, water and telecommunications systems) in facilitating trade and growth. Famous examples of trade-related infrastructure projects are visible in newly industrialising economies in East Asia. In the 1970s and 1980s, South Korea invested US$ 10 billion to build the Busan Port, which today handles about three-quarters of the country’s container traffic and is the world’s 6th busiest container port. Singapore invested around US$ 6 billion to construct Changi Airport, which opened in 1981. Changi Airport become one of Southeast Asia’s busiest transport hubs, annually moving over 60 million people and over 2 million tonnes of air freight. Since 2008, China has invested heavily in building a sophisticated high-speed rail network within an operation length of 35,000 km equivalent to over two-thirds of the world’s total high-speed rail networks. These investments have helped East Asian economies to experience rapid structural transformation and growth over several decades. Per capita incomes have risen rapidly and enabled Korea and Singapore to become high-income economies. Meanwhile, China has become a prosperous global factory at the centre of dense networks of global supply chains and trader in parts and components internationally.

Regional Infrastructure Investment

More recently, Asia has invested in regional infrastructure to link neighbouring countries and more distant countries for trade-led development (Arnold, 2009). Most of the trade within Asia follows an ocean route with seaports providing connectivity to Southern coastal areas where much of the population and production is located. There is also increasing effort being made to create Northern land routes to access areas beyond the coast such as landlocked countries or inland areas of China and India.

The notion of investing in regional infrastructure has roots in the economic literature on geography and trade pioneered by Krugman (1991) and others. It highlights the notion that geographical considerations influence the volume of trade between countries. Gravity models confirm that distance matters for trade, with each doubling of distance between countries halving the volume of trade (Venables, 2019). Studies also indicate significant trade frictions such as transport costs and cumbersome border management systems. Such costs between neighbours can be reduced by building roads, railways, power transmission lines and other hardware for regional connectivity. The Kunming–Singapore railway, often labelled as a section of the Trans-Asian Railway Network, which links China, Singapore and other Southeast Asian countries, is an important example. This builds upon a fragmented railway network that originated in British and French colonial times. Another is the Central Asia Road Links Programme of the World Bank, which aims to improve road connectivity between Tajikistan, Kyrgyz Republic and Uzbekistan. Software projects in the form of streamlined customs procedures and e-boarder management systems also complement hardware for regional connectivity.

There is little doubt that such cross-border projects have contributed to Asia’s rapid economic development, by stimulating flows of goods, services, investment and people across the borders of neighbouring countries. By improving connectivity, they have also fostered regional peace and cooperation among the region’s small and large countries alike. Safeguards and public policies have been pursued to reduce negative effects from such projects, including displaced people, environmental degradation and crime.

Model-based studies have shown that significant welfare gains can be achieved by investing in physical connectivity and associated software to link parts of Asia. As part of the work related to the Comprehensive Asia Development Plan (ERIA, 2010) prepared by the Economic Research Institute for ASEAN and East Asia (ERIA) for the East Asian Summit, Kumagai et al. (2013) used the IDE/ERIA geographical simulation model, a detailed regional model, to estimate impacts on the cumulative increase of GDP of countries in the two regions from 2010 to 2030 relative to the base case for a number of connectivity projects, including the Mekong–India Economic Corridor (MIEC), the Dawei and Kyaukphyu deep seaports in Myanmar and the India–Myanmar–Thailand Trilateral Highway. For the MIEC alone, they found cumulative impacts of over 5% of GDP for Cambodia, Myanmar, Thailand and Vietnam, and over 2.5% for India.

Wignaraja et al. (2015) examined the welfare gains from connecting South and Southeast Asian economies. The study uses an advanced CGE model featuring recent innovations in heterogeneous firms’ trade theory into the CGE framework. One of its most striking findings is the vast size of potential economic gains from infrastructure-led integration, amounting to at least US$ 568 billion. This is a conservative estimate under a comprehensive integration scenario. The study finds that more populous South Asia would see a larger gain of US$ 375 billion (8.9% of GDP) than Southeast Asia’s US$ 193 billion (6.4% of GDP). Most participating countries show large gains, especially the smaller countries of South Asia. The comprehensive integration scenario involves: (a) The removal of all tariffs associated with South Asian and Southeast Asian trade; (b) a 50% reduction in associated non-tariff barriers; and (c) a 15% reduction in trade costs, reflecting improved trade facilitation and investments in infrastructure.

Infrastructure Investment Gap

Recent research has examined the plethora of infrastructure challenges facing developing countries such as missing links in critical national and regional infrastructure, variable returns to infrastructure investment, fiscal space and debt sustainability, environmental and social impacts and weak cybersecurity (see AIIB, 2020). In this vein, infrastructure finance remains one of the most pressing issues (Peel & Mitchell, 2017). At the macro level, the enormous infrastructure investment gap—defined as the difference between investment needs and current investment levels—looms large. Studies vary in their methodologies and estimates of infrastructure investment gaps.

McKinsey Global Institute (2016) found that the world needs US$ 3.3 trillion annually from 2016 until 2030 to support projected growth while it invests US$ 2.5 trillion a year in infrastructure. This gives a world infrastructure investment gap of US$ 0.8 trillion annually.

Worryingly, Asia’s infrastructure investment gap appears to be widening rather than narrowing over time. An early ADB study conservatively estimated Asia’s infrastructure investment needs at about US$ 750 billion annually between 2010 and 2010 (ADB, 2009). A later ADB study suggested a doubling of the region’s annual needs to US$ 1.7 billion until 2030 to maintain regional growth, eradicate poverty and respond to climate change (ADB, 2017).² Subtracting actual infrastructure investment of US$ 881 billion a year from the annual needs puts the region’s infrastructure investment gap at a staggering US$ 819 billion per year until 2030.

Furthermore, AIIB (2020) estimated that high-income economies in Asia invest between 3% and 6% of GDP on infrastructure, like the global average. However, developing countries in Asia such as India, Indonesia, Malaysia, etc. with larger populations and significant infrastructure needs, continue to invest lower shares of GDP on infrastructure.

The Spread of Mega Infrastructure Initiatives

Asia’s enormous investment gap has stimulated a new form of infrastructure investment, namely, the growth of MIIs led by major global economies of which China’s BRI is probably the most scrutinised (see Wilson, 2020; Zhao, 2023). MIIs provide commercial loans (or a mix of commercial loans and grants) to finance large-scale infrastructure projects in recipient countries. The projects are often delivered under Turkey/tied aid arrangements involving imported construction services, intermediate inputs and capital goods. Some MIIs portray vast geographical ambition, covering much of Asia, and beyond while others focus on specific Asian sub-regions.

However, studying MIIs is challenging because of inadequate data about project pipelines, financial terms and procurement procedures. Official information is absent about smaller initiatives like Korea’s Northern and Southern Policy or Russia’s Trans-Eurasian Belt Development. Neither China’s BRI nor Japan’s PQI, which have had signature projects under implementation for some time, post online a complete project list and the financial terms granted to recipients. The ASEAN Infrastructure Fund (AIF) appears more transparent with details of financial terms for its project pipeline as some projects are being implemented by multilateral development banks (MDBs).

Table 1 shows data from different sources on important MIIs involved in Asia. Five observations can be noted.

Table 1.

An Overview of Selected Mega Infrastructure Initiatives in Asia.

Launch Date and Major Economy	Name	Committed Funds (US$)	Focus Sectors and Key Actors
2013 September, China	Belt and Road (BRI) Initiative	US$ 340 billion–US $1 trillion (a)	Port, transport and energy infrastructure across Asia, Africa and Europe. China’s state-owned enterprises (SOEs), China Development Bank (CDB), Export-Import Bank of China (EIBC), a Silk Road Fund and the Asian Infrastructure Investment Bank (AIIB).
2013 December, ASEAN	ASEAN Infrastructure Fund (AIF)	US$ 4 billion 2013–2020 (b)	Projects listed under the ASEAN Master Plan for Connectivity (like power and water) exclusively for Southeast Asian economies. Multinational corporations (MNCs) from ASEAN and elsewhere and co-financing by the AIF, ASEAN economies, the ADB and the World Bank.
2019 April, ASEAN	ASEAN Catalytic Green Finance Facility launched under AIF	US$ 1 billion	Sovereign green infrastructure projects (e.g., sustainable transport, clean energy and resilient water systems). MNCs and co-financing from ADB, KfW, EIF and Agence Francaise de Development.
2015 May, Japan 2016 May, Japan	Partnership for Quality Infrastructure (PQI) Enhanced Partnership for Quality Infrastructure (EPQI)	US$ 110 billion 2016–2020 US$ 200 billion 2017–2021 (b)	Port, transport and energy infrastructure projects across the world. Japan’s MNCs, Asian Development Bank, Japan International Corporation Agency (JICA) and Japan Bank for International Corporation (JIBC).
2017 November, US	Free and Open Indo-Pacific (FOIP) Strategy	US$ 70 billion (a)	Energy infrastructure (LNG plants), digital connectivity and cybersecurity, safe storage/transport of nuclear materials across Indo-Pacific region. US MNCs, International Development Finance Corporation (IDFC), Millennium Challenge Corporation (MCC) and the World Bank.
2018 October, EU	EU Strategy on Connecting Europe and Asia (EUSCEA)	US$ 140 billion (Euro123 billion) 2021–2027 (c)	Transport, energy and digital infrastructure to link Europe with Asia. European MNCs, European Union, European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD).
2012, India	Trilateral Highway	US$ 500 million–US$ 1 billion (c)	Highway connecting India, Myanmar and Thailand with proposal to extend it to Cambodia, Lao PDR and Vietnam.
2023 September, India, EU US, UAE and others	India-Middle East—Europe Economic Corridor (IMEC)	US$ 500 billion (c)	Multimodal transport corridors and energy pipelines between India, UAE, Saudi Arab and European countries such as Germany, Italy and France. Major contributors are USA, EU, Saudi Arab, India and UAE.

Sources: Complied from Hillman (2018); Izumi (2017); http://europa.eu/rapid/press-release_MEMO-18-5804_en.htm; https://www.state.gov/secretary/remarks/2018/07/284722.htm http://icr.unwto.org/fr/content/asean-infrastructure-fund-aif-asian-development-bank; Jinping (2017) and Pompeo (2018).

Notes: (a) Estimate. (b) Official Pledge. (c) Proposed.

First, MIIs are a recent addition to Asia’s infrastructure space since the 2008–2009 global financial crisis. The first movers were in Asia rather than the West. India’s Trilateral Highway was initiated in 2012 along with China’s ambitious BRI and the ASEAN AIF, both in 2013. Japan announced its significant PQI in 2015, and in 2016 its Enhanced Partnership for Quality Infrastructure (EPQI). The US-led Free and Open Indo-Pacific Strategy (FOIP) was launched in 2017 and the EU Strategy for Connecting Europe and Asia in 2018. The post-COVID pandemic era saw another ambitious initiative, the 2023 IMEC, supported by multiple coalitions of the EU, US, India, UAE and others.

Second, India’s role as player in Asian regional infrastructure has been somewhat below the radar. But this could change over time as India’s rapid growth trajectory increases its global economic weight and appetite for regional infrastructure investment. Indian government to government aid and private investment have contributed to several cross-border infrastructure initiatives such as the Trilateral Highway,³ IMEC, Eastern Maritime Corridor and NSICT (see De et al., 2020). India has also been an influential player in supporting the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Masterplan for Connectivity under the purview of ADB.

Third, MIIs are driven by a mix of economic, commercial and geopolitical motives.⁴ These range from providing broad philanthropic support to improve connectivity in poorer parts of Asia to narrowly promoting the commercial interests of state-owned enterprises (SOEs) and multi-national enterprises (MNCs) of major economies. The export of surplus capital and manpower is a related motive. Countering China’s influence in Asia’s infrastructure space has motivated Japan’s EPQI, the US-FOIP and the multi-country IMEC. Security motives include strategic competition between major powers, freedom of navigation in critical Asian sea lanes, defence-related interests and cyber-security threats.

Fourth, MIIs vary significantly in their geographical scope and resource envelope. Historically, China and Japan’s MIIs seem more ambitious geographically and have committed more funds than the US and EU. In fact, China’s initiative (US$ 340 billion) was larger than those of the US (US$ 70 billion) and EU (US$ 140 billion) combined before 2023, if one takes the lower-end BRI estimate. It is also larger than Japan’s EPQI (US$ 200 billion). Meanwhile, ASEAN’s initiative (US$ 4 billion) and that of India (US$ 0.5–US$ 1 billion) are a fraction of the size of the other MIIs in Table 1. It is noteworthy that the IMEC entails a grand vision and even larger ambition than the BRI (US$ 500 billion). The IMEC’s project pipeline, national financial commitments and procedures are still under discussion by the parties. This has led to some skepticism about its impact suggesting that it is an ambitious initiative that risks getting fizzled due to lack of finances or improper planning (e.g., Panda, 2023). Only time will tell if this becomes the reality.

Fifth, the MIIs listed in Table 1 collectively only modestly contribute to financing Asia’s enormous infrastructure needs according to our back-of-the-envelope estimate shown in Table 2. The top line shows the ADB (2017) figure for the region’s annual infrastructure needs of US$ 1.7 trillion until 2030. From this is subtracted the annual regional infrastructure spending figure of US$ 881 million from ADB (2017) and our estimate of the combined annual value of five key mega-regional infrastructure initiatives which comes to between US$ 108 billion to US$ 151 billion.⁵ The balance amount of US$ 668 billion to US$ 711 billion annually until 2030 is taken as the region’s revised infrastructure investment gap (MII adjusted estimate). Adding IMEC and assuming that all of it is disbursed in 2025–2030 only reduces this figure to US$ 568 billion to US$ 611 billion annually until 2030. Financing Asia’s unmet infrastructure needs thus remains a significant development challenge for the region despite additional financing from MIIs.

Table 2.

Asia’s Infrastructure Investment Gap (MIIs Adjusted Estimates).

(1) Annual infrastructure investment needs of Asia until 2030	US$ 1.7 trillion
(2) Annual infrastructure investment in Asia	US$ 881 billion
(3) Annual value of Five MIIs in Asia (the BRI, the AIF, PQI/EPQI, EUSCEA and FOIP)	US$ 108–$ 151 billion
(4) Annual value of Six MIIs in Asia (the BRI, the AIF, PQI/EPQI, EUSCEA, FOIP, IMEC)	US$ 208–251 billion
(5) Infrastructure investment gap in Asia (adjusted for Five MIIs) (1) – Sum of (2) + (3)	US$ 668–711 billion
(6) Infrastructure investment gap in Asia (adjusted for Six MIIs) (1) – Sum of (2) + (4)	US$ 568–611 billion

Source: Authors estimates based on ADB (2017) and Table 1.

‘Noodle Bowl’ Risks of Mega Infrastructure Initiatives in Asia

It is still early days for MIIs in Asia. Some appear better designed than others; with deep project management, high-quality engineering solutions, strong buy-in from recipients and sizable financial commitments. As good management, engineering, and donor practices spread, laggard initiatives may well emulate their predecessors, and a coherent architecture of MIIs could eventually emerge in Asia.

But multiple and overlapping initiatives in Asia, as shown in Figure 1, also risk creating a ‘noodle bowl’ phenomena more usually associated with multiple overlapping free trade agreements, which bring high transactions costs for economies and business (Kawai & Wignaraja, 2011). Clearly, many common attributes as well as differences do exist between these MIIs including in terms of their vision, ambition, time horizons, financial commitments, co-financing approaches and implementation strategies (Wignaraja, 2015, 2019). For instance, several initiatives are looking to establish cross-border transport links in prosperous Southeast Asia, albeit with different plans and financing.

Figure 1.

Noodle Bowl of Mega Infrastructure Initiatives (MIIs).

The risk of an entangled ‘noodle bowl’ of MIIs in Asia may be exacerbated by three factors.

First, scarce finance may be packaged in a complex way that could make the ‘noodle bowl’ effect more pronounced. As mentioned, Asia has a large infrastructure investment gap. Recipients and donors want to stretch these limited funds in clusters of projects and individual projects through innovative financial means; such as procurement rules favouring single sourcing by SOEs and MNCs from the donor economy, co-financing mega projects with MDBs, state guarantees to incentivise private investors, fully-fledged public-private partnerships (PPPs) and re-packing of various financing instruments. Governments often need to finance increased spending for mega infrastructure projects in cash-strapped national budgets through international bond issues. Indeed, a bewildering array of partnerships, instruments and financial terms will likely make managing the financing of infrastructure projects more difficult to fathom by recipients and coordinate among the various actors. The more complex the project and the larger the number of bidders, the more difficulties for recipients. The potential ‘noodle bowl’ problem is illustrated by competition between China and Japan for a high-speed rail project in Indonesia, Southeast Asia’s largest economy (see Prasad, 2018).

Second, intense selling by some bidders from major economies under MIIs can lead to ‘white elephant’ projects which pose economic risks to participating economies. Lucrative project contracts coupled with a lack of transparency in tendering procedures provide incentives for rent-seeking activity in recipients. The problem of ‘white elephant’ projects seems illustrated by the Sinamale bridge project in the Maldives which connects the airport and the wider metropolitan island of Hulumale and Male (Macan-Markar, 2019; Saara, 2019). A recipient’s infrastructure landscape could become littered with large infrastructure projects which are over-budget, loss-making and low-return generating. The consequences are debt sustainability, governance and transparency issues in participating countries. Asian economies, with weaker financial capacity and governance standards, may be more susceptible than richer countries to these risks, and may find that their implementation capacity is overstretched. China’s portfolio of BRI projects in Sri Lanka (such as the Hambantota Port and Mattala Airport) is often cited as a case of debt-trap diplomacy.⁶

Third, MIIs will likely create winners and losers. Winners arise when initiatives (a) reinforce comparative advantage reflected in trade and foreign direct investment patterns in Asia, to avoid the risk of ‘building ports and airports to nowhere;’ (b) are backed by open regionalism initiatives and domestic structural reforms; (c) incorporate adequate safeguards (e.g., for the environment and resettlement) in formulating projects; and (d) coordinate among themselves in key areas such as planning, project formulation, procurement practices, financing and implementation.

Losers from initiatives are hard to predict, as the devil is in the detail for specific projects. Landlocked countries like Nepal or Uzbekistan, or island states like the Maldives or Fiji, that are somewhat excluded from MIIs may be marginalised. The same might apply to distant provinces within large Asian economies like Indonesia or Bangladesh. Some transport routes—either land or maritime transport, for instance—and some workers, such as port workers, may also fail to benefit from efficiency-seeking PPPs.

Ironically, the quest to maximise the benefits of MIIs could contribute to the ‘noodle bowl’. Asian economies should collectively adopt offsetting measures to avoid this outcome and mitigate the negative effects of such initiatives. Creating Asian variants of the EU’s regional development funds would address regional development imbalance; these funds are best established under the framework of sub-regional cooperation bodies like ASEAN, BIMSTEC or the South Asian Association for Regional Cooperation (SAARC).

ADB’s Role in Regional Cooperation

Being a smaller financial actor than some MIIs in Asia’s infrastructure landscape, the ADB makes a more limited contribution to closing the region’s infrastructure investment gap. ADB’s estimated total lending for all sectors (with the bulk going to infrastructure projects) amounted to US$ 29.1 billion in 2020 while $ 21.2 billion was committed in 2021 (ADB, 2021). But ADB’s uniqueness comes from its rich history and operational experience of regional cooperation.

The rationale underlying ADB’s regional cooperation and integration (RCI) agenda recognises that economies of scale can accrue to business from operating in larger regional markets as opposed to isolated national markets. Gains from globalisation, information and communication technologies, and trade-led growth suggest that economic development is consistent with RCI based on outward-oriented development strategies. Sharing of gains from regional cooperation between countries leads to mutual trust and confidence (Thomas & Gatti, 2016). Regional cooperation can also promote social stability, peace and security, which are conducive to improved governance and better economic performance. The win-win characteristics of gains for all cooperating entities lie at the heart of this self-perpetuating process.

Accordingly, ADB broadly defines regional projects including regional infrastructure projects as those requiring collective efforts and actions of two or more countries to produce goods and services which are for the good of all participating countries. An example is the Almaty–Bishkek Regional Road Rehabilitation Project (completed in 2007) between the commercial city in Kazakhstan and the capital of Kyrgyz Republic to support regional connectivity and trade in Central Asia. However, others use narrower definitions than ADB’s. The Inter-American Development Bank, for instance, identifies regional integration operations according to four non-mutually exclusive indicative criteria: (a) cross-country focus—projects that contribute directly or indirectly to a greater regional or global insertion of Latin America and Caribbean (LAC) countries; (b) regional additionality—projects that generate additional value added through the incorporation of objectives of regional cooperation; (c) national subsidiarity—projects that contribute to aligning domestic reforms and of national/sub-national investments with cross-border objectives; (d) compensation of coordination failures—projects that generate incentives that compensate market failures, coordination failures related with the complex execution of regional collective initiatives (IADB, 2011).

Growing RCI Agenda

ADB’s RCI agenda has evolved and broadened over time as it implemented various policies, plans and initiatives (see Figure 2). The charter⁷ that established ADB in 1966 mandated the bank to support regional cooperation among its members. But, it was only in 1994 that the first Regional Cooperation Policy was adopted signalling the start of a formal RCI agenda (ADB, 1994). ADB was expected to be a catalyst for regional cooperation by underwriting some of the risks associated with regional cooperation. It was to provide information, act as an honest broker and leverage public and private resources for regional investments. During 1994–1996, regional cooperation initiatives were quite limited, with just two subregional programmes, of which only the Greater Mekong Subregion (GMS) economic cooperation programme was active.⁸ There were only a few assistance modalities provided and limited work was done on regional public goods.

Figure 2.

Notes: AFC = Asian Financial Crisis (1997), ASEAN = Association of Southeast Asian Nations, BIMP-EAGA = Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area, BIMSTEC = Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation, CAREC = Central Asia Regional Economic Cooperation, GFC = Global Financial Crisis (2007–2008), GMS = Greater Mekong Subregion, IMT-GT = Indonesia Malaysia Thailand Growth Triangle, MTR = Medium-Term Review, RCIS = Regional Cooperation and Integration Strategy, RCP = Regional Cooperation Policy, SASEC = South Asia Subregional Economic Cooperation, SARS = Severe Acute Respiratory Syndrome, SASEC = South Asian Subregional Economic Cooperation.

Subsequently, the RCI agenda expanded. During 1997–2005, ADB supported building institutions for regional financial and macroeconomic monitoring. It established the Regional Economic Monitoring Unit after the 1997–1998 Asian financial crisis to perform regional macroeconomic monitoring, to assist the ASEAN and ASEAN+3 finance ministers process. In 2005, REMU became the Office of Regional Economic Integration (OREI) to act as the focal point for knowledge and to drive ADB’s RCI agenda.⁹ Two new subregional programmes were also added to implement the RCI agenda, one for Central Asia and another for South Asia.

Perhaps the biggest change occurred with the approval of the RCI Strategy (RCIS) in 2006 to guide ADB’s support for the ongoing RCI initiatives in Asia and the Pacific and to shift from stand-alone programmes to a strategic approach (ADB, 2006). Following ADB’s historic focus as an infrastructure bank, subregional economic cooperation programmes on cross-border infrastructure and related software was the main pillar of the four-pronged strategy.¹⁰ The rest were: trade and investment cooperation and integration (Pillar 2), monetary and financial cooperation and integration (Pillar 3) and cooperation in regional public goods (Pillar 4). These were intended to be mutually reinforcing to contribute to achieving ADB’s overarching goal of poverty reduction. In addition, the RCIS envisaged ADB playing four roles in supporting RCI: (a) as a financial institution―increasing finance available for RCI projects and technical assistance and helping countries mobilise finance; (b) as a knowledge bank―expanding the creation and dissemination of knowledge on RCI to countries; (c) as a capacity builder―supporting countries and regional institutions to build their capacity to manage RCI; and (d) as an honest broker―strengthening ADB’s role as a catalyst and coordinator of RCI.

Assessing ADB’s RCI Agenda

ADB’s project approvals grew rapidly between 2003 and 2014. Regional infrastructure has been the main focus of loans, grants and private sector operations, while regional public goods have received the bulk of the technical assistance support. The Central Asian Regional Economic Cooperation and the Greater Mekong Subregional Economic Cooperation Programmes received about two-thirds of ADB’s RCI assistance. ADB also produced an increasing number of RCI knowledge publications over the same period. There has been a notable diversification of ADB’s RCI work over the period, with an increasing amount of its support being allocated to multi-pillar work. In addition, ADB’s RCI activities have become more diverse across its members.

The performance of RCI projects, dominated by regional infrastructure, was evaluated by the RCI Thematic Evaluation Study (TES) undertaken in 2015 (ADB, 2015). The TES found that RCI projects were on average 81% successful, compared with ADB’s overall average success rate of 61%, and non-RCI success rate of 59%. This positive performance is significant, given that RCI projects are usually more complex and have more stakeholders. Further analysis using project evaluation sub-criteria indicates that part of the explanation is due to the fact that RCI projects had better project designs than many non-RCI projects, perhaps reflecting the more careful preparation of the projects to meet the needs of the multiple stakeholders.

Overall, ADB (2015) found that ADB has done well across the four envisaged RCI roles, but especially as an honest broker. The RCIS broadly described the honest broker role as ADB acting as the catalyst and coordinator of RCI for its countries. There is strong evidence that ADB’s secretariat support role for the three main regional or subregional programmes was crucial in ensuring the build-up of successful operations. ADB has also used its neutral position to broker agreement on projects such as the Nam Theun 2 Hydropower Project and the Northern Economic Corridor Project in Lao PDR. Furthermore, ADB increased its coordination with a wide range of regional and non-regional institutions. These include the ASEAN Secretariat, the ASEAN+3 Macroeconomic Research Office, Asia-Pacific Economic Cooperation, the Boao Forum for Asia, the SAARC Secretariat, the BIMSTEC Secretariat, the United Nations Economic and Social Commission for Asia and the Pacific and the World Trade Organization. Key country stakeholders often cited this as one of the most important roles that ADB played and consistently gave high marks in this area.

Lessons for Future Lending for Regional Infrastructure Projects

Several useful lessons to inform future regional infrastructure operations are suggested by ADB (2015). Three main positive lessons are (a) success rates of RCI projects are much higher than non-RCI projects; (b) key stakeholders rate ADB highly for its RCI work; and (c) the main subregional cooperation programmes have been effective in undertaking regional projects. However, some negative lessons should also be considered. One is that ADB’s RCI agenda did not pay enough attention to fragile, island and linchpin countries. Another is the existence of coordination gaps in ADB’s intra-subregional, inter-subregional and operations/non-operational RCI work.

ADB’s track record in the field of infrastructure development gave it an advantage and its well-established subregional cooperation programmes have been successful in coordinating the planning and implementation of infrastructure projects and the associated software. ADB (2015) made the following recommendations for continuing the regional infrastructure agenda. (1)

Completing the large unfinished regional infrastructure agenda (not just in the individual subregions, but also intra-subregionally), including both the massive infrastructure investment programme and providing cross-border systems and procedures for clearance of people and goods.

(2)

Assisting in addressing the emerging new regional agenda in regional infrastructure, including new subregional initiatives and intraregional transportation (e.g., the Republic of Korea’s Eurasia Initiative).

(3)

Expanding innovation and value addition within regional infrastructure lending and technical assistance support in line with the ADB’s agenda on expanding knowledge and innovation.

(4)

Developing new lending and technical assistance support by using the strong RCI platforms that ADB has established as a vehicle for advancing key regionally- and subregionally-relevant sector agendas in many countries, including in such areas as road safety, road asset management and logistics development.

In addition, ADB (2015) made two additional broader suggestions that referred to both regional infrastructure and non-infrastructure projects. One was that ADB should partner more with DMCs, regional institutions and international agencies on regional initiatives (e.g., BRI). Another was that ADB should develop new RCI project models, including private-sector and PPP models, to complement ADB’s conventional modalities.

Conclusions

This article explored the roles played by MIIs and the Asian Development Bank (ADB) in improving the region’s infrastructure investment landscape.

The literature and rich development experience underscored the links between infrastructure investment, economic development and regionalism in Asia. Alongside outward-oriented development strategies and building human capital, significant investments in infrastructure at the national and regional levels were a major contributor to Asia’s impressive economic miracle and emerging regionalism over several decades. Model-based studies also showed that significant welfare gains can be achieved by investing in physical connectivity and associated software to link different parts of Asia. Nonetheless, the region faces many residual infrastructure challenges, particularly an enormous infrastructure investment gap.

This gap has encouraged the spread of MIIs led by major global economies over the past decade or so. Some implications follow from the analysis of MIIs in this article. First, major global economies deserve credit for attempting to fill Asia’s large infrastructure investment gap with MIIs and various project pipelines. However, the growth of such initiatives may give rise to an Asian ‘noodle bowl’ of multiple overlapping initiatives, which could raise transactions costs for small regional economies. Second, it is important for small Asian economies to develop coherent national strategies to reap the benefits while minimising the costs of MIIs. Developing a medium-term national infrastructure master plan and ensuring prudent macroeconomic and debt management are important elements of national strategy. Third, major global economies can support borrower ownership of projects in Asian recipients through technical assistance for improved data collection, and capacity building and training in infrastructure development and anti-corruption measures.

Active in Asia’s infrastructure development since the mid-1960s, ADB has gradually ventured into regional cooperation activities since the mid-1990s. Its agenda on regional cooperation and integration has evolved over time. The 2006 RCI strategy was a landmark development was which signalled a coherent and strategically focused approach. Regional infrastructure activities implemented largely through subregional cooperation programmes lie at the core of this multi-pillar RCI strategy. A comprehensive RCI TES found a high rate of success for better-designed RCI projects compared to non-RCI projects. ADB had also fulfilled an important role as an honest broker in bringing parties together to undertake cross-country regional projects. Nonetheless, there is room for improvement in ADB operations. Suggestions include completing the large unfinished regional infrastructure agenda in given regions and intra-subregionally, assisting in supporting emerging initiatives for infrastructure by major global powers and expanding knowledge and capacity-building activities on regional infrastructure.

Footnotes

Acknowledgments

Authors are grateful to one anonymous referee for useful comments. Views are authors’ own. Usual disclaimers apply.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The authors received no financial support for the research, authorship and/or publication of this article.

Notes

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