Thursday, April 3, 2014

Infrastructure gap in South Asia: Between 6.6% and 9.9% of GDP per year

A latest World Bank report argues that South Asia faces infrastructure gap (transport, electricity, water supply and sanitation, solid waste, telecommunications and irrigation) of between US$1.7 trillion and US$2.5 trillion (at current prices) until 2020 [US$1.4 and US$2.1 trillion at 2010 prices]. 

In terms of GDP, it amounts to between 6.6% and 9.9% per year (spread evenly over the years until 2020). Overall, infrastructure investment in South Asia was 6.9% of GDP in 2009. Infrastructure investment in India accounts for, on average, 79% of total investment in South Asia. Nepal’s share is just 1%, second lowest to Bhutan’s 0.2%. To close the infrastructure gap, the report suggests going for a mix of investment in infrastructure stock and implementation of supportive reforms.


In terms of access to infrastructure services in Nepal, 47 per 100 people had telecom access (2011), 75% of population had electricity access (2010), 35% of population had access to improved sanitation (2011), 88% of population had access to improved water (2011), total road network was 0.8 km per 1000 people (2008), and 54% of roads were paved (2008). Nepal’s telecom access per 100 people was the lowest in South Asia. These provide an indication of how large the unmet infrastructure demand is.

The report shows that Nepal faces a financing need of between 8.24% and 11.75% of GDP per year until 2020 (at 2010 prices). The cumulative investment requirement over 2011-2020 (at 2010 prices) is estimated between US$13 billion and US$18 billion. 

Specifically, the financing needs to bridge the infrastructure gap are as follows:
  • Transport: 2.32% to 3.49% of GDP
  • Electricity: 3.34% to 4.46% of GDP
  • Water supply and sanitation: 1.08% to 1.62% of GDP
  • Solid waste: 0.24% to 0.30% of GDP
  • Telecom: 0.27% to 0.40% of GDP
  • Irrigation: 0.99% to 1.48% of GDP
  • Total: 8.24% to 11.25% of GDP

A 2010 ADBI study showed national investment need of about US$1.3 billion per year until 2020. As a share of GDP, it amounts to around 8.48% of GDP. Sector-wise investment need was 1.65% GDP for transport, 0.59% GDP for electricity, 5.14% of GDP for ITC and 1.10% of GDP for water and sanitation.

Nepal’s existing infrastructure investment hovers around 5% of GDP. There is a need to scale up investments especially in electricity and transport as the inadequate supply of these are the most binding constraints on growth.

Some of the policy recommendations proposed by the study are as follows:
  • Rehabilitate and maintain existing assets
  • Reform service providers and ensure financial/operational sustainability (no political interference and appropriate incentives to perform efficiently)
  • Establish solid legal, policy and regulatory frameworks (including PPPs)
  • Decentralize service provision
The report assesses the infrastructure gap using a four-step process: (i) where a country is today (infrastructure investment as a share of GDP); (ii) where a country would like to be at a given point in time; (iii) financing and policy options available at present to march towards the goal; and (iv) the remaining financial gap that will be needed to be bridged.