Financing Cross-Border Infrastructure Projects – Sharing of Responsibilities and Benefits

When a cross-border infrastructure project is planned, it must be decided how the costs, benefits and responsibilities will be divided between the respective parties.

All parties involved in a cross-border infrastructure project will have to determine early on how they will share costs and responsibilities, in line with benefits and other contributions. 

Investors need certainty of the division of responsibilities between the various parties involved in the project, as well as a clear commitment of payment from the parties, before becoming involved in the project themselves. This requires countries to have reached a clear and durable commitment to their respective responsibilities.

Although a straightforward approach would be that each country is simply responsible for paying for the infrastructure up to their border, the benefits derived from a cross-border project may not be in proportion to the infrastructure cost of the assets within each country involved.

For example, in a transport corridor project, interests of pure transit countries will differ to the countries benefiting from the physical transport link itself. Landlocked countries may benefit more from access to ports, compared to their neighbours with the port infrastructure.

In addition, because most regions have imbalances in terms of income and GDP, there may be a need to introduce measures aimed at quelling fears about unequal economic benefits derived when jointly investing in regional infrastructure projects.  

As an example, the European Union introduced cost allocation regulation for a selection of TEN-E energy projects in 2013. National regulatory authorities had to agree on the cost allocation of sufficiently mature projects within six months. If they could not, the Agency for the Cooperation of Energy Regulation (ACER) was to decide on their behalf [1].

Comparison of the economic net present value between participating countries may show gainers and losers to be considered for any compensating arrangements between countries.

In the Northern Economic Corridor project, it was found that the benefits would largely accrue to China, whose exporters and importers would gain significant savings in logistics costs, while Thailand and Laos would face larger economic and social responsibilities and costs. This included the displacement of people, risk of damage to protected areas, and risk of the spread of disease.

It was therefore very important to align incentives and financing arrangements in a way that transit countries would also benefit from cross-border linkages, and also to design the project in a way that would mitigate negative social impacts.

Since most immediate benefits accrued to China and Thailand, these two countries shared two thirds of project investments and provided Laos with concessional resources.  The project also adopted a social and environmental management plan and made contracting arrangements that aligned the incentives of the construction firms to mitigate social and environmental risks[2].

Social inclusion should be considered when undertaking cross-border projects to ensure that low-income groups and those in remote areas also benefit. Whilst many social benefits can be derived through cross-border infrastructure—such as the connection of isolated communities, knowledge dissemination, and the creation or bridging of cultural networks—cross-border infrastructure is also subject to negative externalities, which can be heightened through the project, rather than diminished.

Political and social risks can cause delays and jeopardise a project’s bankability and its ability to generate long-term financial returns.

It is important that governments address concerns and convey the benefits of an infrastructure project in order to improve outcomes as well as gain public support and acceptance. This could include the broader socio-economic benefits of the project, including direct and indirect employment, and regional economic spill over effects[3].

Inclusive infrastructure is increasingly being expressed as a political priority for a number of developed and developing countries. In response to this, the Global Infrastructure Hub is currently developing a reference tool on Addressing Inclusion in Large Infrastructure Programs, to be released later this year. As part of this project, the reference tool will include case studies of infrastructure projects which have successfully addressed inclusion, including cross-border examples.

The final blog in this series – Currency Risk and Credit Ratings – will be released in the coming weeks.