Shortage of quality infrastructure in South Asia impedes growth: ADB

Manila, Philippines: South Asia suffers from severe and persistent shortages of quality infrastructure that threaten to halt its progress as the fastest growing subregion in the world, according to a new paper from the Asian Development Bank (ADB).

The Working Paper on Infrastructure Financing in South Asia says that to sustain growth and deal with the threat of climate change, South Asia needs to invest almost 9.0% of its gross domestic product (GDP) on infrastructure up to 2030, with India alone requiring $260 billion.

“Unless it takes urgent steps, South Asia’s existing infrastructure could soon prove to be a roadblock in sustaining its growth momentum and addressing poverty and inequality,” says the paper, authored jointly by ADB Principal Economist Shikha Jha and Rosa Mia Arao, a former Research Associate.

Infrastructure in South Asia lags most other regions such as East Asia, Latin America, and the Caribbean, the paper says. Sectors such as mobile cellular subscriptions and sanitation facilities surpass the performance of only sub-Saharan Africa.

There are large deficits in transport and connectivity, poor logistical performance at borders and ports, and a consistent deterioration over the last decade in quality of roads due to lack of maintenance.

On access to electricity, some of South Asia’s countries lag those in Southeast Asia and East Asia. For example, only about 60% of the population in Bangladesh and 80% in India has access to electricity, compared to almost the whole population in countries such as the People’s Republic of China, Thailand, and Viet Nam.

On average, firms in South Asia suffer the most outages compared with other regions. In a typical month, they see an average of 25 power outages compared with 2.2 in Latin America and 5 in East Asia. Economists have estimated that such power outages can reduce revenue in India, for example, by 5% to 10%, since frequent power disruptions interrupt production and significantly reduce productivity. The issue is particularly serious in Nepal where almost 70% of firms face frequent power disruptions.

The quality of services such as safe drinking water and sanitation also remains low in South Asia. In 2015, only 56% of South Asian residents used a safely managed drinking water service, in comparison with 71% of the global population. With only 48% of its population having access to at least basic sanitation services (facilities not shared with other households), South Asia performs worse than all other world regions except sub-Saharan Africa.

In order to provide adequate high-quality infrastructure, South Asia will need to mobilize more private finance, the report says while making more efficient use of budget spending to raise public expenditure.

Public sector finances over 60% of South Asia’s infrastructure investment but suffers from low collection of user charges (with tariffs for power and water set too low, for example). Corrupt practices are also found to pervade publicly provided infrastructure services from the planning stage through to service delivery.

During the last 25 years, South Asia accounted for the largest share at almost 40% of public-private partnership (PPP) investments among all the subregions of developing Asia. Most of this was accounted for by energy infrastructure followed by information and communications technology and transport.

Private investors, seeking cost recovery and predictable revenue streams, shy away especially from roads because they can only charge toll to vehicles but cannot exclude other users even if they do not pay for road use.

However, despite improvements in PPP readiness, South Asia is not private sector-friendly compared with other regions, the report says. The report cites inconsistencies in India, where it takes 30–40 days to start a business, while enforcing a contract could take 600 days in the small city of Guwahati but 4 years in the commercial centre of Mumbai. A stable and predictable environment is vital in providing confidence to domestic and foreign investors.

In general, as countries move to higher income levels, meeting the infrastructure challenge will require development of capital markets, insurance companies, and pension funds, which could share the infrastructure risk, the report concludes. Apart from finance, technical expertise and good management practices from the private sector can also improve infrastructure efficiency.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 67 members—48 from the region. In 2017, ADB operations totalled $32.2 billion, including $11.9 billion in cofinancing.