than to maintain, because building new projects gives them more visibility, and hence, political benefits. But this is an inefficient path. Under-spending on maintenance of infrastructure has direct and indirect costs. 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 (World Bank, 2005). But while funds for new construction may be easier to obtain and implement, those for maintenance are more difficult as they need to be sustained on a regular basis.

**Fortunately, policy makers can use a variety of mechanisms to improve maintenance in different infrastructure sectors.** In the road sector, some governments have adopted or considered adopting a “road fund” type of arrangement for supporting maintenance. Under such arrangements, maintenance funds are assured from a mandated tax on gasoline and diesel and are deposited into an assured and independently operated fund, possibly overseen by a Board that includes the public sector, or the private sector, or both. In addition, policy makers may consider altering organizational forms, given that incentives to undertake appropriate maintenance are stronger under private ownership than under traditional provision, thanks to bundling of construction, operation, and maintenance, and funding by user fees. On the one hand, paying users exert more pressure on the provider than when the government provides the service through traditional provision. On the other hand, the government has higher incentives to enforce the private firm’s obligation to maintain the quality of the service, because the government does not benefit from under spending on maintenance. Hence, PPPs or regulated privatization provide strong incentives for adequate maintenance.

**That said, private participation in infrastructure is not a panacea, and weaknesses in its implementation can create fiscal risks.** The sale of state-owned enterprises provides a temporary increase in fiscal resources for the current administration. In some cases, the choice of privatization is based more on the government’s resource needs than on organizational merits – but selling assets to cover fiscal holes caused by problems unrelated to the specific asset is a policy bound to fail. PPPs also reduce pressure on the immediate budget deficit, but impose important future costs on the government through explicit and implicit obligations, some of which are kept off the balance sheet. Governments typically do not concentrate on the risk that comes from such obligations, particularly from contingent liabilities when assessing their overall risk profile. Adequate measures to capture the long-term nature of infrastructure projects in the budgetary process and proper accounting of liabilities stemming from PPPs are essential for their selection to be based on social welfare considerations and not on short-term fiscal benefits.

**At this point, a traditional or public provision approach is still the norm in South Asia, even though private participation in infrastructure has been increasing, mainly in the past decade.** According to the World Bank Private Participation in Infrastructure Database,<sup>29</sup> there are fewer than 1,000 active projects

in the energy, telecom, transport, and water and sanitation sectors under PPPs or fully owned by the private sector.<sup>30</sup> This is quite low compared with the more than 400 power plants in the region, the extension of the electricity transmission network, the large number of cities where electricity distribution, water, and sanitation networks exist or are needed (in India only there are more than 5,000 towns and urban agglomerations), the more than 400 seaports and airports, and the extension of the road network.

> 29 <u>http://ppi.worldbank.org</u>

> 30 The database considers 7 possible statuses for a project (i.e., cancelled, concluded, construction, distressed, merged, operational, under development). We consider a project is active, if it is not cancelled or concluded.

27