South Asia needs a new mindset
The South Asia Region (SAR) needs between US$1.7trn and US$2.5trn in infrastructure investments in the next six years to 2020 if economic growth and poverty alleviation are not to be rolled back. Governments of the region need to adopt several policy changes and a new mindset, including moving away from the build, neglect, rebuild mentality, for the effective delivery of infrastructure services, the World Bank’s Multilateral Investment Guarantee Agency (MIGA) said in its report, “Reducing Poverty by Closing South Asia’s Infrastructure Gap”. By Hamisah Samad.
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MIGA, whose mission is to promote foreign direct investment in developing countries with the aim to support economic growth, reduce poverty and improve people’s lives, is of the view that the South Asia Region – comprising Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka – lags behind the rest of the world in meeting its infrastructure needs. This is notwithstanding that the region has been experiencing economic growth similar to East Asia and the Pacific Region (EAP) for the past two decades. Average GDP growth in the SAR was 6.7% from 2000 to 2012, while that of EAP was 8.9%.
SAR needs the mammoth spending to deliver basic infrastructure services in roads, rail, power, water supply, sanitation and telecommunications, and enhance the quality of life of its growing population.
“If South Asia hopes to meet its development goals and not risk slowing down – or halting – growth and poverty alleviation, it is essential to make closing its huge infrastructure gap a priority,” MIGA said in the report.
SAR is home to the largest pool of individuals living under the poverty line compared with other regions in the world – the East Asia and the Pacific (EAP), Europe and Central Asia (ECA), Latin America and the Caribbean (LAC), Middle East and North Africa (MNA) and the Sub-Saharan Africa (SSA). Between 1990 and 2010, the number of people living on less than US$1.25 a day in South Asia fell by only 18%, while the population grew by 42%.
Five South Asian cities – Mumbai, Delhi, Kolkata, Karachi and Dhaka – are expected to surpass the 15m person mark by 2015, the report said, citing the United Nations. According to the liveability index produced by the Economist Intelligence Unit, four South Asian cities – Dhaka, Karachi, Kathmandu and Colombo – are in the bottom 10 cities among 140 countries evaluated.
Even though SAR’s economic growth in the last two decades is comparable with that of the EAP, structural changes in SAR since 1990 have been slow. SAR’s infrastructure gap – the population’s access to infrastructure – is today comparable only to Sub-Saharan Africa, the report said.
* Electricity access – Only 71% of SAR’s population enjoy the benefits of electricity access, way behind the rest of the regions at above 90%. Businesses in South Asia cite infrastructure as a major or severe hindrance to their growth and electricity access is the largest problem.
* Sanitation access – SAR ranks at the bottom (39%) with Sub-Saharan Africa (30%) with rates that are close to half of the world’s average of 64% population access. SAR ranks as the region with the highest incidence of open defecation in the world – with 680m people, or 41% of the population relying on it in 2011.
* Water access – South Asia’s water access is about even with the rest of the world and EAP, averaging 90% population access. Yet the quality and quantity of improved water may be in question. Most of the access to water is through public stands; only 25% of the population have access to piped water and 24/7 water supply is a rare exception in South Asian cities.
* Telecom access – SAR and SSA rank at the bottom (72 and 54) with less than half the access found in ECA and LAC. This situation is even more dramatic given SAR’s low level of urbanisation. (Access is measured as fixed and mobile lines per 100 people.)
* Transport access – Road connectivity is poor. Using the total length of road network per 1,000 people, SAR has 2.9km, which is close to EAP (2.5km), SSA (2.5km) and MNA (2.8km), but well below the world’s average of 4.7km, ECA (8km) and North America (24km). SAR’s transport infrastructure also suffers from a lack of intra-regional connectivity among the national road networks, unrealised potential for rail and inland water freight transport, and inadequate road and rail connectivity of ports with hinterlands. These limitations turn transport infrastructure into a hindrance for regional and international trade.
Closing the gap
To close the infrastructure gap, SAR needs a “mix of investing in infrastructure stock and implement supportive reforms” and needs to spend between 6.6% and 9.9% of its 2010 gross domestic product per year on infrastructure.
However, based on past infrastructure investment trends, “the SAR region will find it difficult to put together enough funds to meet these investment targets” and will need the participation of the private sector, the report said.
The region’s investment spending fluctuated between 4.7% in 1973 and 6.9% in 2009 but the bulk of the spending went into electricity generation, which accounted for more than a third (37%) of total spending. Investment in other sectors such as transport, irrigation and water supply and sanitation was stable at 31%, 15%, 7% respectively, although spending on telecoms infrastructure at 11% was on a steady rise.
The spending was also largely driven by India during that period. India’s infrastructure investment made up on average 79% of total investment in the region, followed far behind by Pakistan at an average share of 12%; Bangladesh at 7.9%, Nepal 1% and Bhutan 0.2%.
These differences in the shares of total infrastructure investments in the region were roughly in line with the relative size of each economy. The average infrastructure investment as a percentage of GDP for the period 1973–2009 hovered around 6% for India, Pakistan and Bangladesh, and 5% for Nepal. Bhutan was an exception, with infrastructure spending representing 14.6% of its GDP, and attached significantly higher importance to infrastructure development.
It is interesting to note that some sectors such as energy and telecommunications have drawn a lot more private investor interest than others. In transport, the private sector tends to partner with the public sector through public-private partnerships (PPPs), while in telecoms it tends to invest on its own (regulated privatisation).
When it comes to energy, the private sector chooses to invest on its own as well as through partnerships with the public sector. Many of the PPPs in the power sector in South Asia happen in power generation, mainly through build-operate-transfer arrangements, even though PPPs are in fact the optimal organisational structure in transmission, not in generation or distribution.
Public provision of infrastructure is still the norm in South Asia. According to the World Bank’s Private Participation in Infrastructure Database, there are fewer than 1,000 active projects in the energy, telecoms, transport, and water and sanitation sectors under PPPs, or fully owned by the private sector. This number is low compared with the more than 400 power plants in the region; the extension of the electricity of the electricity network; the large number of cities where electricity distribution, water and sanitation networks exist or are needed; the more than 400 seaports and airports; and the extension of the road network.
Given the infrastructure gap, the next question that needs answering, according to MIGA, is which investment projects should SAR countries tackle first? And how much financial resources should be allocated to infrastructure development within infrastructure sectors and other sectors such as health, education, public safety and national defence?
There are really no rules to determine the investment allocations – it depends on a country’s priority, economic growth, and welfare objectives. Considering that infrastructure is both a means to facilitate this economic growth and development, and a measure of the former, one could expect a higher share of GDP, including funds received from bilateral and multilateral donors, would need to be allocated for infrastructure investment.
There is also no dichotomy between prioritising large-scale infrastructure versus addressing the needs of the poor. Many large-scale infrastructure investments concurrently facilitate economic growth and increase the welfare of poorer populations.
A more interesting debate is at which stage of development a particular infrastructure investment has a higher impact on economic growth versus increasing the populations’ welfare. For example, a power distribution project may have large welfare impacts given that it enables education and health outcomes, which may in turn translate into future economic growth as a more educated, healthier labour force joins the labour market in the medium to long run. Yet, it may also facilitate growth in manufacturing today, which in turn may promote short-term economic growth.
Ultimately, both types of investments are needed – those that clearly target economic growth in the short run and those that attempt to reduce poverty in the short run. The right combination as well as the level at which design and implementation take place is highly dependent on country level institutions, the policy-makers’ objectives and the economic characteristics of the infrastructure under consideration.
Adopt a new mindset
A more important view is that SAR governments need to adopt several policy options, according to the report.
1 – SAR needs to move away from the “build, neglect and rebuild” mindset. It should invest in rehabilitating and maintaining infrastructure assets to deliver services efficiently and sustainably. Lack of adequate infrastructure maintenance is quite common across developing countries. Underspending on maintenance of infrastructure is costly. Without regular maintenance, physical infrastructure can rapidly fall into disrepair, requiring expensive reconstruction to bring it back to adequate standards. For example, the cost of full reconstruction of roads that have been poorly maintained is on average at least three times the cost of maintenance.
2 – Reform service providers and ensure financial and operational sustainability – Service providers should be financially viable, able to plan and implement sound investment strategies, and improve operational performance for the long term. This requires reliable steady and adequate revenue streams to fund operations and investment; capacity and independence without threat of political interference; and appropriate incentives for becoming and remaining more efficient.
3 – Establish solid legal, policy and regulatory frameworks – SAR governments need to have solid legal and policy frameworks as well as transparent, well-designed and implemented regulatory frameworks for both public and private operators in order to attract private investment.
4 – Decentralise service provision – SAR should be rethinking how much to decentralise; that is distribute the administrative powers or functions of a central authority over a less concentrated area as a means of improving service delivery for the smallest units of society (households and individuals).