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Regional connectivity

Regional connectivity

While some markets around the world may be ramping up the protectionist and isolationist rhetoric, countries in Asia Pacific are reinforcing their commitment to regional connectivity. But – even when geo-political visions align – the reality is that building infrastructure across borders is a daunting task. KPMG in Malaysia's QingLin Fang zooms in on Malaysia to find out how this booming South East Asian market is overcoming obstacles to improve its electricity and transport connectivity.

Last July – as talk of walls and tariff wars filled the international news cycles – the ten states that make up the Association of Southeast Asian Nations (ASEAN) community were meeting to work towards a remarkably different outcome: regional connectivity. Sitting down together in Manila to discuss the Master Plan on ASEAN Connectivity (MPAC) 2025, delegates from each country worked in cooperation to find and explore mutually beneficial outcomes. 

What the ASEAN member states recognize is that regional connectivity is key to delivering on their policy objectives. Better transport connectivity between nations leads to improved economic growth and trade. Improved regional ICT infrastructure unlocks innovation, new competition and huge social benefits. Greater energy connectivity allows for better resource planning, energy pooling and fuel source diversification.  

However, unlike the European Union, the ASEAN community has no ‘Central Commission’ with authority to bind governments together around an investment plan. There is no ‘Junker Plan’ option for the ASEAN community. And that means that each new connection must be negotiated – often on a case-by-case basis – between the countries involved. Progress is often slow.

As a Founding Member of the ASEAN community, Malaysia has long been focused on improving connectivity between its neighbors and within the region. Air connectivity is already very strong – in fact, the Kuala Lumpur to Singapore route recently became the world’s busiest, the Kuala Lumpur to Jakarta route is the world’s fifth busiest. The country has also enjoyed significant success improving regional (largely bilateral) connectivity in other sectors, particularly energy.  

So what have Malaysia’s infrastructure leaders learned about creating, designing and executing cross border integration projects? I recently sat down with Abdul Razib Bin Dawood, COO of Energy Commission Malaysia and Megat Khairulazhar Khairodin, Chief Strategy and Transformation Officer of Prasarana Malaysia Berhad to talk about their experiences. Here are the five lessons I took from our conversations:

1. Shared Vision. “Aspiring to, sharing and working towards a common objective are essentially integral components to establishing a strong foundation for mutually beneficial cooperation between two or more nations,” noted Megat Khairulazhar. “Ideally, the social, infrastructural and economic returns are equally beneficial to participating nations that it merits expediting the implementation of such projects.”  

Governments need to recognize that infrastructure development is not a winner-take-all process; sometimes governments find themselves holding little more risk than they would like in order to make sure the project gets delivered but this is a decision that is often precipitated bythe benefits and positive impact the project is expected to have on their respective citizens and economies.

2. Get governments talking. “You really need a strong commitment from each of the governments involved to overcome some of the big harmonization challenges that must be faced when building and operating infrastructure across jurisdictions. There are different regulatory regimes, different laws and commissions, different sovereign debt ratings and different procurement practices. It takes strong government-to-government initiative to achieve that,” noted Abdul Razib.

Megat Khairulazhar added that stakeholders also need to consider differences in culture, as well as reward and compensation packages between the different countries. 

Most cross-border projects start with a political announcement from governments. But, shortly after the media walk away, the project gets handed off to the bureaucrats to manage. The problem is that many of the big challenges that need to be overcome when developing cross-border connectivity projects are political in nature. Solving them will require leadership at the highest levels. 

Experience also suggests that governments need to be talking not only to other governments but also to their citizens about the benefits and impacts of their cross-border connectivity projects. Without sufficient transparency these projects have a tendency to become highly politicized. 

3. Have a strong business case. “Even if the project is majority or fully funded by government, it is vital and imperative to embark on a strong business case. We have the responsibility to make sure the project is financially, socially and economically viable, that it is warranted at that particular time, that we are able to keep costs competitive and in check, and that we are optimizing the procurement process –doing everything we can to anticipate and address any commercial risks that may surface over the entire lifecycle of the project,” added Megat Khairulazhar. 

Far too often, cross-border connectivity projects are evaluated with a heavy weighting on symbolism. In some cases, projects may not have been thoroughly thought out, vetted or opportunities for additional revenue generation could have been overlooked.  In other cases, project plans are adapted or changed in order to serve some higher political purpose, thereby risking driving up costs and reducing the overall value of the project. Long term business cases and plans must be evidently clear on the commercial and economic value that could be generated by the project.

4. Understand the wider benefits. “It’s often the case that you only see the real benefits once the project is complete. When Thailand experienced electricity shortages a few years ago, we were able to quickly supply emergency exchange. It’s also changed our planning assumptions – due to time-zone differences, we experience peak electricity usage at different times than our neighbors – better integration will allow us to balance those peaks in a much better way which, in turn, impacts our investment requirements,” noted Abdul Razib.

As many of the articles in this edition of Insight Magazine illustrate, improved connectivity can drive a wide range of social, economic and commercial benefits that are not always quantifiable for the purposes of a business case. A certain amount of value must be assumed on faith.  

But that does not mean that infrastructure planners and cross-border project owners should not be thinking about and planning for those benefits. That may mean spending a bit more today to allow for anticipated improvements in the future. Or it may mean working with other groups and commercial interests to identify new ways to generate value from the project. The first step, however, is identifying the wider benefits that could be achieved.

5. Expect some political reconsideration. The current situation in Malaysia illustrates this point perfectly. When I sat down with Mr. Abdul Razib and Mr. Megat Khairulazhar, Malaysia had just voted in parliamentary elections. By the time of writing a few weeks later, several of Malaysia’s existing international projects had already been revisited by the new government. While this move is understandable given the new governments’ priority to balance the books (and therefore desire to sort out debt issues as quickly as possible), we expect that this government, like those before, will return to an agenda of greater regional connectivity.

The challenges ASEAN needs to steer clear of however, are those born out of the move towards increased protectionism and territorialism. As we have seen in a number of developed and emerging markets, the recent shift towards these more populist agendas has led to the undoing of a number of planned cross-border projects. 

This, unfortunately, can become a cyclical phenomenon. Protectionism generally leads to reduced economic trade which, in turn, undermines the value of cross-border connectivity projects. The more uncertainty politicians create around the changing world order, the more difficult these types of projects will become. And the less valuable they will seem to citizens and politicians alike.

The good news is that, even with the recent reconsideration of some projects, both Abdul Razib and Megat Khairulazhar are optimists. “In principle, all member countries have envisioned what is to become an integrated ASEAN community by 2025 and I am convinced that all member states and parties recognize the exponential benefits that will bring to the entire region as an emerging world economy,” argued Abdul Razib. 

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