Paper presented at the 24th Asia-Pacific Roundtable, Kuala Lumpur
ASEAN CONNECTIVITY AND THE ASEAN ECONOMIC COMMUNITY
ASEAN is a vibrant region of 600 million people with a gross domestic product of US$1.5 trillion and total trade of US$1.7 trillion. Connectivity is crucial for ASEAN to facilitate the realisation of ASEAN integration; building of the ASEAN Community; and ensuring ASEAN’s centrality in the evolving and dynamic regional architecture.
Connectivity will assist ASEAN to achieve competitive growth; facilitate economies of agglomeration and integrated production networks; enhance intra-regional trade; attract investments; promote deeper ties among ASEAN people] and foster shared cultural and historical bonds. Besides, ASEAN connectivity will spur domestic connectivity through economic development supported by infrastructure and communications networks as well movement of people, goods and services within the region.
ASEAN is also situated at the heart of an economically vibrant and growing region bounded by India in the West; China, Japan and South Korea in the Northeast; and Australia and New Zealand in the South. Enhanced connectivity can potentially place ASEAN at the centre of growth and development. For this to happen, ASEAN needs to seize the opportunities offered by its geographical and comparative advantages as well as the competitive challenges brought about by the global trade and investment environment. The ASEAN Economic Community is a vehicle for this as ASEAN builds a Single Market and Production Base that is competitive, sustainable, inclusive, and fully plugged into the global economy.
DEFINITION OF CONNECTIVITY IN THE ASEAN CONTEXT
Connectivity in the ASEAN context refers to the physical, institutional and people-to-people linkages that would provide the underpinning and lubricant to achieve the goals and objectives of the economic, political-security and socio-cultural pillars of the ASEAN Community by 2015. The physical connectivity will encompass transport, information communications technology and energy while institutional connectivity would cover trade and economic areas such as trade and investment liberalisation and facilitation, investment, mutual recognition arrangements and capacity building programmes. People-to-people connectivity would include tourism, education and culture.
There is also a strong positive relationship between connectivity and community building for ASEAN. Community building can be strengthened by building on physical and institutional connectivity, which will reduce business transaction costs, time and cost of travel, connect the “core” and the “periphery” in ASEAN distributing wider the benefits of growth through integration, and reduce the development divide. A more connected ASEAN will help promote a peoples-orientated ASEAN and develop a sense of “We” feeling in the population of ASEAN.
Given the broad definition of ASEAN connectivity and since some of the presenters after me will be covering the other aspects of ASEAN connectivity, I will focus my paper on transport connectivity and its links to the other components of ASEAN connectivity.
ASEAN’S PROGRESS IN ACHIEVING PHYSICAL CONNECTIVITY
Physical connectivity in transport, covering both hard infrastructure as well as the institutional and regulatory software necessary to deliver associated transport and logistics services, plays a crucial role in the process towards a more economically and socio-culturally integrated ASEAN region.
ASEAN cooperation in land transport covering roads and rail aims to establish efficient, integrated, safe and environmentally sustainable regional land transport corridors linking all ASEAN member states and countries beyond. There are four basic trends as context to ASEAN’s cooperation in land transport worth mentioning: (i) rapid growth in motorization in ASEAN in the last decade (for instance a doubling of vehicles in countries like Indonesia, Viet Nam, Cambodia and Myanmar) has not always been accompanied by infrastructure development or appropriate demand management strategies and has resulted in congestion in ASEAN’s major cities and pressure on existing road infrastructure maintenance; (ii) the coverage and quality of road networks vary widely, with Singapore’s highway network having fully paved networks with the highest standards, while for instance, Cambodia and Lao PDR have less than 10 percent of their networks paved and Singapore’s road density at least 400 times that of the Philippines; (iii) the modal share of roads for land based freight movement is high at about 65 percent; and (iv) new railway development has not been substantial across all countries except Vietnam in recent years.
Two flagship projects have been the main vehicle for ASEAN to pursue land transport connectivity: for highways, the ASEAN Highway Network (AHN) and for rail, the Singapore-Kunming Rail Link (SKRL). The ASEAN Highway Network is the ‘Trans-Asian Highway’ passing through ASEAN member states but expanded within ASEAN with the aim of eventually creating a denser network of intra-region highways. The AHN, which runs the length of 38,400 kilometres through all ten ASEAN countries, is a key flagship in ASEAN road transport connectivity. The AHN has 35 designated transit transport routes deemed crucial in facilitating the movement of goods in transit. A significant 97.4 percent of the desired AHN length had been built by 2008 but missing links remain and road quality has not been as good. About half of the AHN length still consist of ‘Class-III and below’ roads, the lowest of road standards. About 14 percent of the entire AHN in 2008 is still below Class III standards and these include some 2,069 kilometres of transit transport routes in Lao PDR, Myanmar and the Philippines. Individual member states are struggling to mobilise financing for these missing links and have resulted in significant implementation delays affecting the achievement of the ASEAN target to bring all designated routes to at least Class III by 2004.
Meanwhile, the Singapore-Kunming Rail Link (SKRL) flagship project consists of the main Singapore–Malaysia–Thailand–Cambodia–Viet Nam–China (Kunming) route, and spur lines in Thailand–Myanmar and Thailand–Lao PDR. Proposed in 1995 and expected to be completed by 2015, the SKRL is to be built upon existing national networks spanning seven ASEAN countries and targets the construction of missing sections and links to complete the rail network. The missing SKRL links are found in the connection between Thailand and Cambodia, Thailand and Myanmar, and between Cambodia and Viet Nam. Spur lines also need to be constructed within Lao PDR to the Viet Nam border and will require substantial resources to implement.
Thus far, cross border rail service in ASEAN are operational only in the links between Malaysia and Singapore and between Malaysia and Thailand. Initiatives to complete the SKRL missing links have so far resulted in the completion of feasibility studies of certain major sections while some rail tracks are already undergoing construction and rehabilitation, funded by a combination of internal resources from Member States, ASEAN Dialogue Partners and the Asian Development Bank.
In maritime transport, the ASEAN Port Network consisting of 47 designated ports in nine ASEAN countries form the backbone of the trans-ASEAN port network. The development of seaports is another important physical infrastructure agenda as sea-based freight movement is crucial to trade. Sea-borne freight is by far the most cost competitive mode for trade compared to highways, rail or air. Obstacles to achieving effective and low cost maritime transportation in the region include the great variation in port infrastructure quality and port performance as well as the poor accessibility of gateway ports to land based transport. In ASEAN, Singapore and Malaysia’s Port Klang have the most capable ports. The rest of the gateway ports are with considerable variation in their ability to handle cargo throughout.
In air transport infrastructure, the airports in ASEAN capital cities are considered sufficient in terms of runway lengths to accommodate the existing operation of aircrafts. Some ASEAN member states have also recently improved airport facilities and services, including the construction of terminals for private low cost carriers. However, some of these airports still face issues of inadequate airport facilities for air freight terminal handling and storage facilities. Failure to improve these facilities could result in limited growth potential. In addition, air navigation system and procedures in ASEAN have yet to be harmonised to anticipate the growing air traffic in the region.
For air transport services, the implementation of Open Skies policy since the early 2000s, allowed regional air carriers to take unlimited flights to all ASEAN member states and allowed rapid expansion of air services in the past decade, most notably spurring the growth of private-led low cost carriers. Airlines registered at and operating from ASEAN member states, except the Philippines, increased significantly in 2010 compared to those in 1998.
All these physical linkages will be rendered suboptimal if the goal of seamless transport does not progress in parallel through the software of regional agreements and institutional arrangements for cross border transport. To complement the developments and efforts in building physical connectivity through hard infrastructure, ASEAN is pursuing three land-based transport facilitation agreements and their protocols and three roadmaps for the integration of air and maritime transport and logistics services.
Significant progress in coming to an agreement on the framework for transport facilitation within ASEAN has been achieved. But there is urgent need to push further. Many of the protocols of the facilitation agreements, namely the 1998 ASEAN Framework Agreement on the Facilitation of Goods in Transit (AFAFGIT) the 2005 ASEAN Framework Agreement on Multimodal Transport (AFAMT), and the 2009 ASEAN Framework Agreement on Facilitation of Interstate Transport (AFAFIST) are yet to be concluded or ratified. The sometimes lengthy process of domestic ratification may well take longer because of institutional constraints, such as internal Member States’ readiness to establish national regulations on multimodal transport. And this may delay operationalisation of transport facilitation and restrain the ability of hard infrastructure to enable connectivity.
For air transport services, unlimited third, fourth, and fifth freedom of traffic rights for scheduled passenger services from and between international airports of capitals and sub-regions within ASEAN are in place. The agreements on similar traffic rights for air-freight services are also in place among any point of international airports within ASEAN. The ultimate goal for the roadmap for air transport services is to advance with full liberalisation of both scheduled passenger and air-freight services and ultimately setting the way for achieving the vision of ASEAN Open Skies. Indeed, the adoption of the ASEAN Minus X formula has proved effective in gradually advancing liberalisation in air transport services. However, for the benefits of ASEAN Open Skies to be fully utilised, it will be good to see all the air services agreements and their respective protocols ratified and implemented by all Member States.
ASEAN has set the target of realising an ASEAN Single Aviation Market (ASAM) by 2015. This will require not only air services liberalisation, but also coming to an agreement on fundamental issues of a single aviation market, such as airport infrastructure, industry structure, liberalisation of ancillary air services, air traffic management and control, and air safety and security.
Meanwhile, in the roadmap for maritime transport services, which covers both passengers and freight maritime services, the objective is to achieve a more open, efficient, and competitive ASEAN maritime transport system. The roadmap calls for the implementation of a Single ASEAN Shipping Market but its implementation will prove to be challenging owing to the need to find creative options to address the cabotage principle in the national laws of ASEAN’s archipelagic countries (Indonesia and the Philippines). Moreover, poor implementation has characterized infrastructure development in the maritime transport sector so far. Similar to the challenge of resource mobilisation in completing the missing roads and rail links, the financing requirements for modernized port infrastructure and associated logistics infrastructure are daunting.
For logistics services, the Roadmap for Integration of Logistics Services Sector has the key objectives of strengthening ASEAN economic integration through liberalisation and facilitation in logistics services, supporting the establishment, and enhancing the competitiveness of ASEAN as a production base. The roadmap covers freight logistics services and their related activities. In addition to liberalisation and facilitation measures, the measures also include human capital development in the area of logistics services, enhancing multimodal transport infrastructure as well as investment. This roadmap has a direct link for deepening connectivity, in terms of facilitating efficient transport both within and across countries. Measures to liberalise logistics services are pursued under the ASEAN Framework Agreement on Services (AFAS) initiative. The AFAS deadline for completing full commitments in logistics services is 2013.
On the whole, progress in ASEAN’s transport cooperation has defined the much needed framework, agreements, action plans and programs and projects to pursue connectivity in land, maritime, air and trade facilitation. All the flagship projects are also underway. But major challenges remain. Of the many challenges that need attention, we believe four need immediate priority attention in terms of transport connectivity: (i) implementing the operationalisation of existing transport facilitation agreements; (ii) prioritizing land and maritime transport infrastructure in major transport corridors to help reduce logistics cost and time; (iii) consolidating the accomplishments towards ASEAN Open Skies to establish the ASEAN Single Aviation Market; and, (iv) mobilising resources to implement the projects that have been identified. Here, the ASEAN Infrastructure Fund that is being explored by ASEAN needs to be firmed up.
STRATEGIC AND ECONOMIC IMPLICATIONS OF PHYSICAL CONNECTIVITY
At the strategic level, physical connectivity in ASEAN is an important building block to achieving the goals of regional economic integration and the AEC blueprint. Better internal and cross border transportation networks for a region of 600 million people with a combined gross domestic product of USD 1.5 billion is a powerful consolidating force. Seamlessly connected transport networks do not only represent on their own an achievement of AEC goals but also facilitate the achievement of broader AEC goals in market enlargement, expansion of trade, narrowing of development gaps and community building. Successful physical connectivity is an opportunity both geographic and economic integration. With greater transport connectivity, ASEAN gets to reinforce its centrality in the emerging regional architecture. More efficient cross border transport in ASEAN is an enabler and can help concretize facets of our ASEAN Leaders’ key strategic principle on ASEAN centrality in the broader regional architecture.
Indeed the distance that separate countries become less formidable when infrastructure can literally build highways and bypasses to the hubs of commerce and the hearts and minds of peoples. Successfully coordinated projects in physical infrastructure also signal credible implementation mechanisms as well as lasting structures for institutional coordination among ASEAN states and for further evolving the operationalisation of ASEAN agreements on the ground.
As well as being a strategic imperative at the geographic, socio-political and cultural level, physical connectivity historically has had a very economic implication to it. With greater connectivity, ASEAN can consolidate itself as a hub for transport and commerce and as a cultural and tourism centre. It also becomes better positioned to interconnect with the rest of the world, to other regions and global markets, leveraging lower transport and transaction costs and effectively narrowing economic distance within and beyond ASEAN’s borders. This is crucial if ASEAN wants to be a single market and production base by 2015.
DOLLARS AND CENTS OF PURSUING ASEAN CONNECTIVITY
The capital costs of transport connectivity alone are enormous. The Master Plan on ASEAN Connectivity when finalized is expected to provide more authoritative estimates on the overall financing requirements involved. But simply to demonstrate the magnitude of investment costs involved, we can take for instance the SKRL missing links.
Summing up currently available cost estimates for the SKRL missing links in Cambodia, Lao PDR, Myanmar, Thailand, Vietnam and Kunming, China indicate a requirement for some US$ 9.6 billion even as these preliminary estimates correspond to only about 56 percent of the missing rail track and does not yet involve the rolling stock and the facilities and equipment necessary to run a proper rail service.
The indicative estimates back in 2008 by ADB showed that ASEAN member states will require infrastructure investments amounting to US$596 billion during 2006–2015, with an average investment of US$60 billion per year, and specifically for transport, about US$16 billion a year. These are estimates intended to show magnitude, prior to the detailed financial and economic project analysis required to appreciate the costs and benefits on the ground. In the sub-regional programmes which complement ASEAN’s connectivity agenda, the ADB estimates US$15 billion is needed to implement transport projects alone in the 2008-2012 plan of action in the Greater Mekong Sub-region and another US$ 1 billion for priority infrastructure projects in the BIMP-EAGA for 2010-2011.
As for transport connectivity, the work and resources involved will require more than addressing the hard infrastructure. The major software agreements to effect transport connectivity does need to be operationalised – these are the three ASEAN framework agreements on transport facilitation- of goods in transit (AFAFGIT), of interstate transit (AFAFIST) and multimodal transport (AFAMT). Agreements to liberalize and develop logistics, maritime and air services need to push forward as well, noting that bottlenecks at ASEAN’s borders often hinder the efficiency of the physical transport linkages it has been able to achieve.
ECONOMIC BENEFITS OF ASEAN CONNECTIVITY
The benefits of ASEAN Connectivity, although not easy to quantify or attribute singularly to improved transport connectivity, are also expected to be substantial.
First, in the lingering aftermath of the global economic crisis, investment in infrastructure development by itself is a stimulus for economic recovery and sustained growth in the region especially as domestic consumption becomes an important driver for the region and private investments that are looking for bankable investment projects.
Second is the reduction in the economic distance to markets within ASEAN and beyond the region. We are talking of improved infrastructure connectivity directly supporting intra-ASEAN trade which as of the latest value amounts to about US$ 369 billion in 2009. The share of intra-ASEAN trade has stayed within the 24 percent range in the last 15 years and certainly can benefit from a much needed shot in the arm. ASEAN can further strengthen its competitiveness and overall productivity through investments in infrastructure and logistics development. The logistics cost of intra-ASEAN container movement alone is estimated to be US$2.25 billion a year (ASEAN Logistics Study, 2008), with about 55 percent representing out-of pocket costs (transport, terminal and access costs) and 45 percent time cost. Simulations to estimate the impact of implementing a logistics infrastructure blueprint that includes enhancing shipping modalities and improving land routes would basically reduce average logistics cost by 4 percent and logistics time by 9 percent. This is substantial- roughly about US$ 140 million dollars in logistics costs reduction a year.
Third, improved intra-ASEAN connectivity will have spill-over impacts on presumably the economic distance to move goods and services which relates to about US$ 1.15 trillion of ASEAN trade with external markets. Transport connectivity will be crucial for sustaining trade both within and outside ASEAN. Likewise, the FDI inflows to ASEAN of the magnitude of US$ 10.3 billion in 2008, which form part of the stock of regional production networks and supply chains, will also benefit from enhanced physical connectivity.
Fourth, better transport connectivity within ASEAN will help narrow the development gaps among and within ASEAN states by providing lower income countries and landlocked regions and hinterlands access to mainstream economic activities, including export to larger regional markets and linkages with regional production networks and industrial zones.
Looking beyond ASEAN, enhanced physical connectivity, which sustains economic development and deepens economic integration, will ultimately result in better connectivity with East Asia and with key global markets. Connectivity can help reinforce the economic, political and socio-cultural pillars of community building within ASEAN that fosters a dynamic, integrated and peaceful ASEAN Community able to act as a force of stability in the region and the world.
Credible initiatives to improve connectivity within the region will also help to engage ASEAN’s Dialogue Partners, development organizations and private sector resources to help expand connectivity within and beyond ASEAN and to spur resources towards the development of financing modalities for the various programmes and projects that require immediate priority attention.
The achievement of seamless transport connectivity in ASEAN has a long way to go. A more concerted and focused look at priorities need to be made and ASEAN has begun this process with the ongoing effort at developing a Master Plan for ASEAN Connectivity by the end of this year.
The paper was presented at Plenary Session 4: ASEAN Connectivity: Advancing Economic Development and Community Building of the Roundtable.
Views expressed in this paper are personal and does not necessarily represent the views of ASEAN or the ASEAN Secretariat.