# **1. Introduction**

**Despite recent rapid growth and poverty reduction, the South Asia region (SAR) continues to suffer from a combination of uneven economic growth, a population boom, slow urbanization, and huge infrastructure gaps that together could jeopardize future progress.** SAR has the largest population below the poverty line of any region. Between 1990 and 2010, the number of people living on less than $1.25 a day decreased by only 18 percent,<sup>2</sup> while the population grew by 42 percent. At the same time, structural change has been slow, with urbanization (around 31 percent) lower than in any other developing region, despite economic growth rates that have exceeded most other regions over the past two decades. In effect, departing from similar points, South Asian countries are remarkably “underurbanized” when compared to East Asian countries over the past half century (income and urban population as percentage of total population). The result of these trends has been a dramatic rise in demands for infrastructure—but access to infrastructure services is generally below other developing regions, the only exception being Sub-Saharan Africa. Yet, as urbanization continues, it is creating growing demand for infrastructure services that are already severely stretched. According to the United Nations, five South Asian cities (Mumbai, Delhi, Kolkata, Karachi, and Dhaka) are expected to surpass the 15 million-person mark by 2015. Furthermore, according to the livability index produced by the Economist Intelligence Unit, four South Asian cities (Dhaka, Karachi, Kathmandu, and Colombo) are in the bottom 10 cities of the 140 countries evaluated.

**SAR needs to invest between US$ 1.7 trillion and US$ 2.5 trillion (at current prices) to close its infrastructure gap.** Many people living in the SAR remain unconnected to a reliable electrical grid, a safe water supply, sanitary sewerage disposal, and adequate roads and transportation networks. Meanwhile, both the number of poor and the poverty rate are expected to increase in some of the more vulnerable and low-growth economies of the region. This region requires significant infrastructure investment (roads, rails, power, water supply, sanitation, and telecommunications) not only to ensure basic service delivery and enhance the quality of life of its growing population but also to avoid a possible binding constraint on economic growth owing to the substantial infrastructure gap. A mix of investment in infrastructure stock and the implementation of supportive reforms will allow SAR to close its infrastructure gap. A preliminary estimation of the cost of doing so by 2020 gives a lower bound of US$ 1.7 trillion and an upper bound of US$ 2.5 trillion at current prices. If investments are spread evenly over the years until 2020, SAR needs to invest between 6.6 and 9.9 percent of 2010 gross domestic product (GDP) per year. These estimates represent an increase of up to 3 percentage points from the 6.9 percent of GDP invested in infrastructure by SAR countries in 2009.

**But faced with this enormous demand for infrastructure investment and only limited available financial resources, it is critical for SAR to prioritize infrastructure investment needs.** The criteria used to accomplish this must be able to answers questions about short-term needs versus longer-term development needs, especially in developing countries. For example, should infrastructure investment in the electricity sector be given priority over the transport sector? Given substantial lock-ins associated with infrastructure investments, should a country continue attempting to fill current gaps or direct investments to infrastructures that are likely large bottlenecks in the medium term? How does one

> 2 The proportion of people living on less than $1.25 a day decreased from 54 percent to 31 percent (a 42 percent decrease), between 1990 and 2010, mainly due to the increase in population.

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