KGRI Working Papers
No.4

Infrastructure and Development in Asia:
The Quality of Infrastructure and Project Implementation

Version1.0
March 2017

Fukunari Kimura 1

Keio University Global Research Institute© Copyright 2017 Fukunari Kimura
Dean, Graduate School of Economics and Professor, Faculty of Economics, Keio University
Chief Economist, Economic Research Institute for ASEAN and East Asia
1E-mail: fkimura@econ.keio.ac.jp

Infrastructure and Development in Asia:
The Quality of Infrastructure and Project Implementation

January 2017
March 2017 (revised)

Fukunari Kimura
Dean, Graduate School of Economics and Professor, Faculty of Economics,
Keio University
Chief Economist, Economic Research Institute for ASEAN and East AsiaThe original version of this paper was presented at the CAG-GSEC
Workshop “The Asian Century and China-Japan Cooperation” held at the
Keio Mita Campus on January 16-17, 2017. The author would like to thankProf. Masahiro Kawai, Prof. Masaya Sakuragawa, and other workshop
participants for useful comments and suggestion.
1

Abstract
Infrastructure development is essential to economic development inless developed countries (LDCs).

In particular, ASEAN Member States(AMS) and developing East Asia have applied development strategies that
aggressively utilize global value chains (GVCs), and logistics infrastructure
and industry-supporting infrastructure services have been crucial.

In

addition to the long-lasting effort of the official development assistance (ODA)
and other official funds (OOF) provided by OECD-DAC countries andinternational organizations, the recent deeper commitments of China andother newly developed economies to infrastructure development further
activate infrastructure development in the region.
We however have to notice that the current bottleneck ininfrastructure development is not necessarily the availability of investingmoney but how to identify and implement good projects accompanied withlong-term commitments.

Countries should think much of infrastructure ofquality appropriate for its economic development and implement projects ofgood quality.

These principles must be applied for all projects including

what China and other stakeholders participate in.

In addition, theemergence of new players such as China will eventually call for new
international rules on the information disclosure, discipline on government’s
involvement, and the positioning of foreign aid.

Supporting regional effort

in further utilizing GVCs for economic development, Japan and China should
lead the establishment of efficient and dynamic policy environment for
infrastructure development.

2

1. Infrastructure to support global value chains
Forerunners of ASEAN Member States (AMS) and China have beensuccessful in participating in manufacturing production networks, and someof them have started forming industrial agglomeration together with tightlinks with global value chains (GVCs).

Although the key manufacturing

subsectors are designed and controlled by multinational enterprises (MNEs),
industrialization has continuously been rapid as well as being effective inenhancing the income level and reducing the population below the poverty
line.

This was a novel development strategy different from what Japan,

Korea, or Taiwan applied in the 1950s to 1970s.
Infrastructure is essential to effectively utilizing GVCs indevelopment strategies.

To set up quick and frequent transactions with time

precision, logistics infrastructure becomes crucial.

Once industrial

agglomeration starts to be formed, large-scale economic infrastructureservices such as electricity and water supplies and metropolitan logistics
infrastructure are required.

Infrastructure development has actually madea decisive competitive edge for AMS and China vis-à-vis other parts of thedeveloping world in effectively utilizing GVCs.

Economic integration in theform of free trade agreements (FTAs) and the enhancement of connectivity,
soft and hard, are the core elements of regional effort for economic
development.
Although AMS and China have a number of similarities in theirdevelopment paths, they are different in a few important points.

One is theabundance of human capital and entrepreneurship. Another is the politicalsystem.

As for infrastructure development, the political system makes

crucial differences in the government budget allocation and land acquisition.
Although the efficiency should be empirically assessed, China has been at theend very successful in setting up infrastructure.

On the other hand, most of

AMS have experienced difficulties in investing in infrastructure smoothly,
particularly after democratization.

Although causality may work in both

directions, better infrastructure is apparently correlated with better
performance in utilizing GVCs.

By following the world trend, financial

resources for infrastructure development have gradually shifted from 100%3

public, including foreign aid from bilateral donors and internationalorganizations, to some combination of public and private money or, in a wide
definition, public private partnership (PPP).

Private participation, however,has not been an easy job for countries with relatively weak governance.
Since the Global Financial Crisis, China has drastically enhanced its
political and economic presence in the global scene.

In the context of

infrastructure development, the establishment of Asian Infrastructure
Investment Bank (AIIB) in December 2015 and the One Belt One Road
(OBOR or B&R) initiative moved in parallel are regarded as the epochmaking progress of the Chinese international commitment.

In the past two

decades, China was already one of the largest foreign aid donors even though
it did not belong to either Organisation for Economic Co-operation andDevelopment (OECD) or its Development Assistance Committee (DAC).
Novel aspects of the new Chinese commitments are software, not just money.
China now intends to provide an organization or a conceptual framework for
infrastructure development in the world. Although large incumbents suchas the US and Japan seemed to have some resistance in accepting the new
initiatives immediately, many countries in the world, particularly potential
recipients of the financial support, basically welcomed China’s new initiatives.
LDCs are certainly happy to enjoy multiple sources of possible financial aid.
It is often said that a huge demand for infrastructure exists in East
Asia.

This is true, but the amount of available money is not the current

bottleneck.

From the viewpoint of LDCs, the real issue is how to design good

infrastructure projects and make proper financial arrangements with longterm commitments.

While taking advantage of a sort of competition among

outsiders, LDCs should have good eyes to look at “the quality of
infrastructure.”

There are two components here: the quality of

infrastructure itself and the quality of the design and implementation of
infrastructure projects.

This paper discusses these two aspects of thequality of infrastructure.
In addition, we argue that a new set of international rules will
eventually be required in order to set a healthy and efficient competition
among various stakeholders.

Information disclosure among various
4

stakeholders

will

becomedevelopment in LDCs.

increasingly

importantforinfrastructure

In addition, as liberalization of trade in goods, trade

in services, and investment proceeds, policy discipline on governments’
involvements in economic activities will surely attract attention.

The paper

discusses the framework of international commercial policy order in this
aspect.
The paper plan is as follows: the next section will provide theconceptual framework of the tier structure in effectively utilizing GVCs inorder to identify a proper quality of infrastructure. The third section will
discuss the issue of the quality of infrastructure projects from several angles.
The fourth section will argue the necessity of new international rules among
various stakeholders for infrastructure development.

The last section willconclude the paper.
2. Quality of infrastructure
Governments in LDCs always face with small fiscal space and thus
tend to jump into “cheap” projects.
to be low in quality.

But in general, inexpensive projects tend

We always need to make a decision on how to set theproper quality for infrastructure, considering the cost at the same time.

The

Japanese Government has a campaign that claims the importance of thequality of infrastructure from 2013, and Asia-Pacific Economic Cooperation(APEC) and Asian Development Bank (ADB) followed up the initiative invarious forums.1

From the viewpoint of expanding infrastructure projects

abroad, it is natural for Japan or developed countries to sell infrastructure ofhigh quality.

However, from the viewpoint of LDCs, infrastructure of highquality is almost certainly more expensive than of low quality.

The

important thing is to choose infrastructure of appropriate quality withreasonable cost consideration.
How to choose infrastructure of proper quality?

There is certainly

a sophisticated method to make project appraisals at the project level.
However, the overall assessment of economic benefit is not easy to quantify.
1

See Government of Japan (2015) and APEC (2014).
5

Thus the sectoral masterplan is going to be important.

The issue is thatsuch a masterplan is often drafted only by engineers and the economic role ofinfrastructure is not analyzed enough. For example, logistics infrastructuresuch as roads, ports, and airports is sometimes designed from purely anengineering viewpoint, and we do not explicitly consider issues such as how
such infrastructure would be used, what sort of cargos would be carried on,
and how the improved connectivity would promote industrial development.
One approach to solve this issue proposed by ERIA is to utilize theframework of the tier structure in effectively utilizing GVCs (ERIA CADP
Research Team. (2015)).

Figure 1 illustrates how AMS utilizes GVCs.

Tier

3 is a stage of establishing a relatively slow type of connection with GVCs or,in Richard Baldwin’s wording (Baldwin (2011)), the 1st unbundling type
operations.

It is typical in resource-based or labor-intensive industries inrural, mountainous, or island areas. For Tier 3 type operations, we do notneed very high-grade logistics infrastructure, but the connectivity should besteady and reliable. Tier 2 is to start participating in production networks(Ando and Kimura (2005)), fragmentation of production (Jones andKierzkowski (1990)), or the 2nd unbundling type production networks. For
this type of operations, we must secure a time-sensitive high-grade logistics
infrastructure as well as the procurement of appropriate infrastructureservices such as electricity, water, and industrial estate services.

In Tier 1a,

industrial agglomeration is formed together with thick connectivity with
GVCs.

We need large-scale logistics infrastructure as well as metropolitan

development to support efficient agglomeration.

In the last step, Tier 1b, a

country must create an innovation hub and attract good people by preparing
good urban amenities.

AMS includes countries at widely different

development stages. Each country has economic activities in different tiers
at the same time, but a bottleneck to resolve would be found for each country.
In Figure 1, we show a rough idea of each country’s position on what tier is a
key for smooth economic development.
==Figure 1==

6

Table 1 summarizes what sort of infrastructure is required in each tier. Tier
1a and Tier 1b are merged in this table.

Infrastructure for medium and long

distance connectivity is tabulated as infrastructure for connectivity while
infrastructure for urban and suburban development is in infrastructure forinnovation.

Each country has different regions and different industries tosupport, and thus infrastructure development in different tiers should be
simultaneously taken care of. However, there typically exists a bottleneckof economic development that requires special attention.

This is a usefulguidance to choose appropriate quality for infrastructure.
The choice of infrastructure quality is a dynamic decision, and we
may need to consider a proper sequence of infrastructure upgrading over time.
One consideration should be placed on the life cycle cost structure.

If wechoose the lowest cost structure policy, the infrastructure would beconstructed quickly and at a cheap cost (see Figure 2).

However, the benefit

from the infrastructure would be low in the future.

We might need to

upgrade the infrastructure pretty soon.

On the other hand, if we would liketo maximize the time-discounted benefits minus costs, we would choose thelife cycle cost policy where the proper quality of infrastructure is chosen.
==Figure 2==
Another possible consideration would be the opposite.

When thefuture demand for the infrastructure, for example, subways, is not sure, we
may want to start the project small and make a judgment on whether toexpand or not after removing some uncertainty for the future demand.

This

is a sort of “option.”
In any case, the choice of the quality of infrastructure should bemade in considering the dynamic evolvement of project implementation andover-time costs and benefits.
3. Quality of infrastructure projects
The other important element to consider is the quality of
infrastructure projects.

I would like to separate this issue from the quality7

of infrastructure itself because many other important considerations arecoming in.
(1) How to finance the project
One important decision is how to finance the project, which willcertainly affect the quality of infrastructure projects.
One of the fundamental difficulties in procuring infrastructure
comes from the nature of infrastructure.

Infrastructure generates positive

externalities or works as a sort of public goods and thus the “financial” returnto the project, i.e., the return to the project itself, would be too small even if
the “economic” return of the project, i.e., the return to the whole economy,
were large.2

This is a typical market failure and explains why necessary

infrastructure may not be provided only by the private sector. And thus in
the past, it was taken for granted that infrastructure should be provided
100% by governments.
However, some infrastructure could be financial profitable, andactually the private sector might do a better job in efficiently providing suchinfrastructure.

Based on these thoughts, there was a boom of privatizationin various public services and infrastructure procurement in the 1980s.
However, we eventually realized that privatization did not help provide thewhole infrastructure in demand.

Naturally, the private sector would do so-called cream skimming, concentrate on their operations in the profitable
portion, and possibly neglect universal services. We then started thinkingof how to combine the role of governments and the private initiative in aproper manner.
Figure 3 illustrates the emergence of PPP.

Some infrastructure hasa very low financial return despite a high economic return so that we shouldstill depend on 100% public scheme.

On the other extreme, someinfrastructure is financially viable so that the private sector can 100% take
The wording of “financial” and “economic” returns here follows theliterature of project evaluation. The former means the return directly
captured by the operating body while the latter includes the return to thewhole economy including positive/negative externalities.
28care of it. The issue is in between. In the middle range, if we can set a
proper job demarcation between the public and the private in terms offinancing or operating a project, the infrastructure may be provided efficiently.
We here define PPP in a wider sense as such.
==Figure 3==
Figure 3 depicts that the boundary between public 100% and PPP
and the boundary between PPP and private 100% depend on the country’s
development stage or the ability of governance.

Indeed, the design andimplementation of PPP are not often straightforward in LDCs. In designing
PPP, we basically separate the whole project into a financially viable portion
and a non-viable portion and let the private work on the former while thepublic takes care of the latter.

Various risks regarding project

implementation, exchange rate fluctuation, policy changes, and others should
be clearly allocated to the private and the public in the contract.

The whole

process of the design and the implementation must be transparent and keep
healthy competition among private stakeholders in order to avoid various
adverse effects and corruption when the public and the private work together.
Careful, well-thought project design is essential, and still we may encounter
some unexpected difficulties in the process of implementation.

In such acase, all stakeholders must sincerely cooperate and overcome problems.
These are not easy operations.

The most successful areas for PPP

in the wide definition are electricity generation.

The system of independent

power producers (IPP) is widely accepted, and the established job
demarcation between the public and the private is commonly applied.

In

cases of large ports, there also exists a widely accepted understanding thatthe base infrastructure is taken care of by the public while container yard
operations may be provided by the private.

However, in other fields ininfrastructure such as roads, railways, airports, water supply, and othersocial services, the job demarcation between the public and the private is still
pretty much case by case, the matter of negotiation.
A difficulty comes when the public and the private walk in with9

different incentives.

If the public tries to minimize the fiscal expenditureand risks that it has to bear, there may be an empty set for the contract.
With such an attitude, even if the project begins, further difficulties will
surely emerge when some unexpected troubles come.

An important thing is

a strong initiative by the government for creating a “market” for the private
counterparts.

At least, the government should bear the cost of a policy riskthat is caused by policy changes during the implementation.

Risks due toexchange rate fluctuation are also crucial to take care of in an agreeable
manner.
In the past several years, many AMS made substantial progress inestablishing institutional arrangements for PPP and conducting the firstbunch of PPP projects.

PPP is not easy but can be a powerful tool toeffectively and efficiently provide a certain type of infrastructure.
is now in a learning process to further utilize the mechanism.

ASEAN

ERIA recently

published the ASEAN Public–Private Partnership Guidelines (Zen andRegan, 2014) to promote this move.3
Although the effort for PPP should continue, it is obvious that PPP
is not a panacea.
inparticular,

We observe recent deep troubles in India where PPP and,viability

gap

funding

wereextensively

introduced.

Infrastructure development must still be at a hand of the government. To
keep up with the speed of industrialization, we need investments on
infrastructure at the level of at least 5-8% of gross domestic product every
year.

Some countries including the Philippines do not reach this level ofinvestment.

It is urgent for these countries to secure the fiscal space andthe political will to invest in infrastructure.
(2) Project design and implementation
The construction of infrastructure takes time, and its financial andeconomic returns are realized over a long period. We must thus properly
design projects in the time horizon.

The project design should include theFarquharson, Torres de Mastle, and Yescombe (2011) and The WorldBank and others (2014) are also useful references for PPP.

3

10

wholeperiodofthefeasibility

study,

procurement,

construction,

operation/maintenance, and ex-post evaluation. Proper planning of the wholeproject is important not only for the sake of the project itself but also for theinterface with the private sector’s decision-making.

This is because

infrastructure is by nature tightly connected with the rest of the economy.
The bidding process is important to identify the most capable
company or consortium to implement projects efficiently.

In addition to its

fairness and transparency, the quality of bidding depends on its openness.
As a part of the government procurement, the government may want to limit
bidders only for domestic companies in the logic of protecting infantindustries.

However, particularly in large-scale and technically difficult

projects, the bidding had better be open to foreign bidders on the nondiscrimination basis because more competition may result in infrastructureof better quality and possibly accelerate technology transfer and spillover.
In the bidding process, we certainly have to consider the quality of
infrastructure in addition to the cost consideration.
In construction, the timeliness is very important.

A delay inconstruction may seriously affect the profitability of projects.

This must beemphasized because some government officials do not care much about
interest rates.

A delay in construction occurs often due to difficulty in landacquisition and various legal procedures.
issue.

Land acquisition is a difficult

Unfair displacement of residence is not acceptable, particularly in a

democratic society. Yet, various forms of misuse of compensation scheme
are observed in many countries.

The establishment of a fair, transparent,and efficient procedure is necessary. On the other hand, legal procedures
are mostly what the government should improve. Unnecessary regulatoryburdens and paper works must be removed so as to make legal procedures
predictable and timely.

Strong support of the government for the

implementation is needed.
A project does not end until efficient operation and maintenance arestably provided.

Maintenance is often completely neglected in the overallplanning of infrastructure projects.

For example, in road construction,

maintenance costs are not typically included in the project budget; they must11

be covered by the annual government budget, which is often unstable overtime.

Although the maintenance cost is not huge, infrastructure does notwork without it. One idea is to collect small amounts of toll fees from users.
By doing so, even if the whole construction cost may not be recovered, someamount of money is secured for maintenance.
(3) Externalities and the interface with various stakeholders
An infrastructure project may possibly cause negative effects to acertain group of people or generate negative externalities that are not fullyinternalized in the market such as air pollution, noise, and others.

Project

planning should build in the structure to deal with such possibly negative
impacts from the beginning.

A typical concern about infrastructure projects

is their possibly negative impact on the environment and local society,disaster prevention, and others.

Specific studies on environmental andsocial impact, for example, must be incorporated in project planning andimplementation.

Such studies should be open to the public as far as possible.

Public hearings and other opinion exchanges should likewise be held to solve
incomplete information and minimize social conflict.

Communication withvarious stakeholders, including the private sector, local governments, andlocal residence, is essential.
Infrastructure projects may also generate indirect positive effects aswell as positive externalities.

For example, projects may acceleratetechnology transfer and human resource development for engineers,managers, and operators.

It is worth planning a built-in mechanism toenhance such positive impacts in the project design.
4. Necessity of new international rules on the involvement of governments(1) Why are new international rules needed?
China’s deeper involvement in infrastructure development has
overall provided benevolent stimulus for accelerating infrastructure
investment in AMS and the rest of the world.

At the same time, because

China does not belong to OECD or DAC and thus does not necessarily have12

to follow traditional international rules, some friction emerges as China’s
involvement becomes sizeable.

In particular, international policy disciplineon the involvement of the government at various stages of infrastructuredevelopment have substantially nullified in the international arena.

China

and some other newly developed economies have by now become significant
aid donors.

Outward foreign direct investment (FDI) by China has been

conducted mainly by state-owned enterprises (SOEs).

Activities bysovereign wealth funds from newly developed economies have drasticallyextended the scope of their activities.

Under OECD and DAC, developed

countries (DCs) have been bound by certain policy disciplines, though veryloose, when they have the government’s involvement in investment, foreignaid, procurement, and others.

New players including China do not careabout such disciplines and enjoy freedom in introducing the government’s
involvement.
The initial reaction of recipient countries would be that looseinternational discipline on the government’s involvement might rather
strengthen their bargaining power in selecting advantageous counterparts toimplement projects.

However, eventually, they may also have domestic

private players who face unfair competition vis-à-vis foreign subsidized
players.

Although the incumbent donors may not be completely clean insuch disciplines, we may need to start talking about international rulemaking on those issues.
I do not think that such international rule making would start
immediately.

However, I would like to show where the problems would

reside and discuss what sort of international rule should be developed in the
future.
(2) Information disclosure
Infrastructure development includes various stakeholders, andstrengthening partnership amongst stakeholders is the key for making
projects be successful.

Stakeholders include central and local governments,

public utility companies, consultants, constructors, private banks, otherprivate companies, local residences, non-government organizations, foreign13

governments, foreign governmental financial institutions, internationalorganizations, foreign consultants and constructors, foreign private banks,
other private companies, and others.

Although reconciling all sorts ofconflict over costs and benefits of various stakeholders is difficult, we should
strengthen the partnership amongst stakeholders as far as possible in atransparent way.
A problem is that communication amongst development partners
often looks thin.

It is important to strengthen partnership amongst

development partners.

For example, to keep the fiscal sustainability ofrecipients, we need information on the amount and term conditions in details
for all sorts of foreign loans. We have to check whether the whole programof development partners is consistent with each country’s development
strategy.

We would like to watch whether the ownership of recipients on the

program is secured or not.

However, some development partners do not fully

disclose these types of information.
The establishment of AIIB is a good occasion for new partners tocome into the international community. All kinds of bilateral donors andinternational organizations working as development partners in this region,
including AIIB and OBOR Initiatives, must disclose basic information on
lending and other activities and conduct objective ex-ante and ex-post
evaluations.
(3) Government’s involvement and competition
In the international rule making in the context of the World Trade
Organization (WTO), free trade agreements (FTAs), and bilateral investment
treaties (BITs), two trends have steadily advanced.

One is liberalization or

introducing the non-discrimination principle consisting of most-favorednations (MFN) principle and national treatment (NT) principle, which isenforced for trade in goods, trade in services, investment, e-commerce,
government procurement, and others.

The other is international rules tosupport or supplement liberalization, which includes intellectual property
rightprotection,competition

policies,

disciplineongovernments’

involvements in the market such as subsidies, SOEs, sovereign wealth funds,
14

ODAs, as well as labor, environment, and others (Figure 4).

Infrastructuredevelopment may fall into the category of services, investment, orgovernment procurement, which is relatively a lagging behind area forliberalization.

The government in the host country can so far have a lot ofroom for discretionary policies for infrastructure development. However, if
the liberalization further proceeds in the future, some backups to level a
playing field are going to be essential.
==Figure 4==
For example, think of a situation in which a foreign SOE subsidized
by the foreign government wins bidding for an infrastructure project.

If theliberalization principle is not imposed, the host government can freely say yesor no for the participation of the SOE.

Although such discretion may

generate inefficiency, the host government may not be noticed.

However,

once the liberalization principle comes in, the host government must accept
everybody.

This may surely make it notice a problem when, for example,

some domestic competitor or a capable foreign firm is defeated in the bidding
in an inefficient manner.

Once we introduce the liberalization principle, weneed a backup for leveling a playing field.

Otherwise, the liberalization

effort could lead to distorted choices of firms in charge, which would end up
with inefficient implementation of infrastructure development.
So far, liberalization on services, investment, and government
procurement has not been fully imposed. In the case of services, the General
Agreement of Trade in Services (GATS) under the WTO imposes the nondiscrimination principle, but most of the LDCs do not commit the high-level
liberalization in the positive list method. Policy discipline on investment islargely incomplete in the WTO.

Government procurement is a plurilateralagreement under the WTO, and very few LDCs participate in it so far.
However, bilateral and mega FTAs as well as BITs have rapidly beendeveloped, and some of them include advanced liberalization commitmentson services, investment, and government procurement.

15

It means that even

LDCs may increasingly obey the non-discrimination principle including MFN
and NT.
Then how about the backups for fair competition?
incomplete coverage on subsidy.

The WTO has an

Only in the case of trade in goods, export

subsidy is banned, and domestically subsidized exports would be subject tocountervailing duties imposed by the importing country.

However, the textof the Trans-Pacific Partnership (TPP) agreement includes a path-breaking
chapter on SOEs and others. Although a lot of exemptions are listed, thechapter basically tries to provide an important policy discipline that levels
the playing field when an SOE potentially subsidized by the home country
sells or buys goods, services in the home country or abroad.

This would bein principle applied to cases in which a foreign SOE would participate in
bidding for an infrastructure project in the context of government
procurement or would invest in the host country as independent
infrastructure service provider.

SOEs should basically prove themselves,

when being requested, that they are not directly or indirectly subsidized sothat the competitive environment is not distorted.4
As the overall liberalization will proceed in the future, I believe that
we will eventually have to think of such international rule making seriously.
This would affect the behavior of Chinese investment in which SOEs
dominate. Actually, players from DCs may not be completely clean, either.
Once a governmental institution such as Japan International Cooperation
Agency (JICA), Japan Bank for International Cooperation (JBIC), or
Kitakyushu City gets involved in the project, for example, it may need toprove that the consortium is not subsidized and thus does not jeopardize thecompetitive environment.
(4) Rethinking concessionality

The SOE chapter is one of the novel elements in TPP, which was in fact
motivated by the US trying to keep fair competition against investment by
Chinese SOEs.

4

16

Another issue is concessionality in foreign aid.

In foreign aid

programs, concessionality is the extent to which a soft loan reduces the returnin terms of the amount or duration, compared with usual commercial loans.
Of course, concessionality has its own logic in foreign aid.

However, if

concessionality is used as one of the weapons to enhance competitiveness inbidding, it may jeopardize the fair competitive environment and generate
inefficiency.
There was a loose discipline on concessionality by OECD’s DAC
though new donors are not DAC members and thus do not follow it.

Ifforeign aid and investment are not strictly separated, which is observed incases of China’s involvement in infrastructure development in LDCs, it may
make the playing field uneven due to concessionality.

Foreign aid agencies

in DCs may not also be completely clean in this regard. For example, JICA
sometimes participates in a consortium including private banks andcompanies to implement an infrastructure project. Although interest rates
are currently very low everywhere in the world, these activities in principle
include concessionality and may jeopardize the competitive environment.
One idea would be to limit the recipient countries, sectors, or typesof projects for concessional foreign aid in order to avoid possibly adverse
effects on the competitive environment. For example, foreign aid could beapplied only for low-income countries.
but not for highways.

It would be applied for rural roads

Or, it must head only for some humanitarian purposes.

I guess that aid agencies like JICA may not want to limit its activities as such,
but this would be a logical conclusion from the viewpoint of thinking much offair competition.
Another idea is to limit concessionality to the financially unviable
portion of the project.

Then we can say that concessionality shows a good

will to cover what the host government should take care of otherwise andfinancially viable portion is not jeopardized. Then of course, we may need
another logic to justify why the participation of the aid agency in the
consortium is required.
5. Conclusion
17

Infrastructure development has occupied a special position in thedevelopment strategies of ASEAN and developing East Asia where both
institutional and physical connectivity have served for effectively utilizing
GVCs to accelerate industrialization.

Logistics infrastructure to support

quick and time-sensitive international production networks as well as
economic infrastructure to make industrial agglomeration effectively work
has made notable differences from other parts of the developing world. To
take advantage of forces of globalization, further development of
infrastructure is essential.

Countries in the region clearly recognize its

importance.
East Asia should be proud of steady economic development ofcountries in the region that have sequentially graduated from the ODA
program and have started their own foreign aid program and outward FDI.
At the same time, countries must be responsible for establishing efficient andvigorous economic environment.

In this context, to think of the quality of

infrastructure as well as the quality of infrastructure projects is imperative.
The cooperation between Japan and China is essential in this regard.

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