Think Railways

Israel's volume of investment in urban and intercity railways is low by international comparison, while the volume of investment in roads is high, according to the Annual Report for 2014 soon to be published by the Bank of Israel.

Infrastructure projects require large investments, which frequently creates natural monopolies.  Moreover, in contrast with investment in other physical capital, such investment has positive externalities —as well as yield in terms of quality of life—that are not taken into account by the market.  The government must therefore influence the level of infrastructure through regulation, creating appropriate conditions for investment by the business sector, and subsidizing or making the investment.

In some areas—particularly metropolitan public transit—the level of infrastructure in Israel (or at least the intensity of its use) is still lower than in most other developed countries.  Studies conducted in Israel and elsewhere in the world indicate that an improvement in the level of infrastructure may contribute to the convergence of the Israeli economy to the standard of living in these other countries.  This is particularly valid regarding public transit: an improvement in infrastructure in this area will contribute to growth and to the standard of living, since it will improve the compatibility between workers and firms, and will support the population that is interested in joining the labor market but cannot purchase a private vehicle.

Figure 1 shows Israel’s relative position in a series of indices of the scope and quality of transport and communications infrastructure.  In most of the indices, Israel is ranked below the midpoint.  It is ranked predominantly well in indices of landline and cellular telephony, fields in which the companies belong to the business sector.  Reforms have been implemented in recent years in these fields, increasing competition and the volume of use.

In terms of railways, track length in relation to the country’s area is slightly below the center of the distribution.  The level of investment increased beginning in the 1990s, and rail use increased apace.  However, the rail network is still relatively small, and Israel is below the midpoint of developed countries in terms of the ratio between the use of railways and distance traveled on roads.  With railways, like with all areas of mass transit, there are advantages to a network.  Additional investments may therefore generate greater marginal benefit.

In order to estimate the level of metropolitan public transit, the report examines the intensity of use of public transit in 41 metropolitan areas in 23 OECD countries. The intensity of use in two of the metropolitan areas in Israel—Tel Aviv and Be’er Sheva—is far from the accepted level in OECD countries, which may indicate low quality.  In the Jerusalem and Haifa metropolitan areas, mass transit systems were built in recent years. In Tel Aviv, there was a recent reform in the bus lines, but almost no infrastructure investment was made in mass transit.  The Tel Aviv metropolitan area still has no mass transit system, even though attempts have been made for decades to implement the plan to construct one and the delay has heavy economic implications.  In most OECD countries, the government is streamlining and expanding public transit in the metropolitan areas, particularly in the chief metropolitan area in the country.

Investment in infrastructure

There are, therefore, a number of areas—particularly public transit—in which the level of infrastructure is still lower than in most developed countries, but even so, the volume of investment in them in recent years is lower than in the past.  In the mid-1990s, the volume of investment in infrastructure reached a particularly high level in terms of GDP, mainly due to the absorption of the large wave of immigration from the former Soviet countries.  Since then, the volume has decline almost constantly, and the decline accelerated at the beginning of the last decade.  Between 2010 and 2013, investment increased, due among other things to large investments in energy.  It seems that the volume of investment declines during economic slowdowns, which is what happened in the mid-1980s, in the early years of the last decade, and between 2009 and 2011.  According to empirical findings presented in an International Monetary Fund policy paper, an increase of about 1 percent of GDP in investment in infrastructure projects—if the projects are selected carefully and executed efficiently—is expected to raise GDP by 0.4 percent in the immediate term, and by 1.5 percent four years hence.  Among other things, the paper emphasized that investment in infrastructure makes an important contribution to economic growth during economic slowdowns.

Figure 4 shows an international comparison of investment from all sources in land transportation (roads and railways).  It shows that the volume of investment between 1995 and 2011 is higher than the volume in most countries, particularly due to high investment in roads.  In contrast, investment in railways was lower than in most countries, despite the need to improve the mass transit systems.

This box raises a number of findings.  First, according to an international comparison, distance traveled by rail is low relative to distance traveled by road.  The latter continues to grow rapidly, which may indicate that connectivity by public transit is limited, at least in some of its segments.  Second, among these segments is public transit in metropolitan areas.

If the inferior quality of the mass transit systems is not dealt with, it will over time become a very serious impediment, since the Israeli population—particularly in the center of the country—is growing more rapidly than in other OECD countries.  These findings indicate that action must be taken more vigorously to improve public transit in Israel, but even so, the volume of investment in urban and intercity railways is low by international comparison, while the volume of investment in roads is high (Figure 4).

While many areas of infrastructure were privatized long ago, and government policy has an effect on them mainly through regulation, the government’s influence on transport infrastructure is both through regulation and through budget.