Analysis

Finding More Bread for All of Israel’s Jams

Israel’s roads are going to get even more crowded if more money isn’t spent building infrastructure. A public-private partnership could be the answer

A traffic jam on the outskirts of Jerusalem.
Olivier Fitoussi

Do you spend two to four hours in traffic every day? Well, the worst is yet to come.

“[Israel’s] transportation infrastructure is insufficient and congestion will double by 2030, with every driver expected to waste an additional 60 minutes a day at a cost of 40 billion shekels [$11 billion] to the economy,” Amir Levy, the head of the Finance Ministry’s budget division, said at a conference last week.

He was one of several speakers at the annual conference of the Interdisciplinary Center Herzliya’s Aaron Institute for Economic Policy to address the issue. Israel spends some 20 billion shekels a year on building and maintaining roads, railroads, ports and airports, but that isn’t nearly enough.

According to an analysis by economists Zvi Eckstein and Avihai Lifschitz, Israel is behind other developed states in spending by between 470 billion and 600 billion shekels, the equivalent of two years of state spending.

In August, the government unveiled a five-year, 60 billion shekel plan for spending on public transportation, mainly on metropolitan railways. By Israeli standards, that’s a huge sum, but the Aaron Institute study estimates that’s only half the amount required to make up for the underspending of the past.

Israel’s annual spending on transportation infrastructure amounts to 2% of gross domestic product, compared to 4% of GDP in South Korea. The Bank of Israel also says that the state is tightfisted when it comes to outlays on public transportation, spending less than only two other developed countries. “Fiscal anorexia” is how Tel Aviv University economist Prof. Daniel Tsiddon put it. Business investment is nearly as thin.

Tsiddon says Israel must double its spending on transportation infrastructure over the next 15 years, even if it means raising the budget deficit to 3.5% of GDP. Since improving transportation systems contributes so much to economic growth and the tax base, Israel’s debt-to-GDP ratio won’t deteriorate.

But not everyone is so enamored of this kind of supply-side economics. Some argue that it’s easy for politicians to agree to increase the deficit, but hard to get them to stop and harder still to ensure the deficit spending is invested in growth-inducing projects.

Anyone needing a reminder of the inability of government to control spending and to oversee complicated projects can look at the failed Ashdod desalination plant developed by the government water company Mekorot. The plan is plagued by technical problems and will probably never run at full capacity and Mekorot can’t service the debt it took on to build it.

The solution is for the government to outsource transportation projects to private companies.

The private sector builds and operates facilities, and the government buys their services, just as private power stations have been developed.

The Prime Minister’s Office, together with the Finance Ministry, is trying to instill a culture of private-public partnerships in government ministries. The system not only addresses the problem of government incompetence but enables projects to financed off-budget.

The PMO is now gathering information on all big infrastructure projects scheduled for the next five years, marking the first time officials will have a clear picture of what it is undertaking. The it will examine them to see which of them are the best candidates for private financing.

This could solve the problem of the government’s inability to act efficiently and enable it to step up spending without endangering the budget. Israel could even reach the 4% figure.

There is one risk, which the economists at the Aaron conference acknowledge: With the investment costs paid off over years and decades, politicians will be tempted to take on unneeded and potential expensive commitments that it will be somebody’s else’s problem to cope with in the future.

The PMO and the treasury say they can cope with the problem with proper safeguards, but the devil, of course, is in the details.