account for the social and environmental issues of these trade-offs related to the directly impacted population?

**Moreover, it is not feasible to expect South Asian governments alone to shoulder the entire financial burden.** This means that SAR cannot continue on a business-as-usual trajectory. Rather, it should seize this opportunity to rethink and improve the infrastructure service provision paradigm currently in place. Two important elements of the service provision paradigm are (i) the service provision approach, which refers to the organizational form that defines and structures the roles of the public and private sectors; and (ii) the degree of decentralization in the provision of services.

**There are many possible approaches for service provision – such as traditional (or public) provision, public-private partnerships (PPPs), and privatization (regulated or deregulated).** Different organizational forms offer different incentive structures to internalize the efficiency gains from life-cycle cost reductions and to tackle the trade-off between life-cycle efficiency and quality considerations. At a conceptual level, economic characteristics (e.g., returns to scale, feasibility to charge user fees, quality contractibility), and planning and coordination aspects of a specific infrastructure service determine the best incentive structure to deal with this trade-off. However, once political economy realities are considered, the optimal organizational form might change.

**The nexus between service provision and decentralization is diverse and complex.** For example, connective infrastructure (such as interstate transport and telecommunication) may have a higher direct impact on economic growth by facilitating agglomerations, making it a good fit for central service provision/regulation. However, water and sanitation provision may have a higher impact on welfare—at least in the short term in countries where economic sectors are not highly dependent on water as an input—making it a good fit for local service provision/regulation. At a conceptual level, the economic dimension of individual infrastructure services, technologies available for service delivery, and political economy realities guide this nexus. For instance, the economic dimension of an infrastructure subsector in terms of service delivery could fall into five broad categories: economies of scale; network effects; cross jurisdiction externalities; market failures (e.g., public bads, club goods); and allocative efficiency. These categories may hint at the jurisdiction that should provide this service and thus where the gap should be addressed. However, available technologies may result in a diverse response to addressing service provision, and political realities may add an extra layer of complexity. Ultimately, preestablished formulas are difficult to come by, and policy makers are left primarily with guiding principles that will need to be adjusted to specific realities.

**In this paper we identify and assess SAR’s infrastructure needs, and we analyze how to address them efficiently and effectively.** The paper is organized as follows. We begin with how to assess infrastructure needs, then present a framework for this effort, and then compare the status of infrastructure in SAR with other regions, as well as among and within SAR countries. This is followed by infrastructure investment trends in SAR countries, our estimate of the total cost of regional infrastructure needs, and a proposed framework for assessing priorities. Finally, we examine ways to rethink infrastructure service provision and the degree of decentralization.<sup>3</sup>

Our conclusion is that infrastructure deficiencies in South Asia are enormous and a mix of investment in infrastructure stock and supportive reforms will enable the region to close its infrastructure gap. One

> 3 Additional information on methodology, models, background papers, stock taking reviews, and data used can be found in the Infrastructure Needs Regional Study webpage: <u>http://go.worldbank.org/URIGW1E4W0.</u>

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