Financing the establishment of the metro project in Gush Dan

Box from the Bank of Israel Annual Report for 2020:

Financing the establishment of the metro project in Gush Dan

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  • The project of establishing 3 metro lines in Gush Dan (the greater Tel Aviv area) is expected to cost, according to government estimates, approximately NIS 150 billion over about 15 years.
  • In view of the assessment that a permanent increase in transportation infrastructure investment in Israel is required, most of the financing should be carried out via long term fiscal steps, including raising taxes—taxes on the public overall and/or designated taxes on the population expected to benefit from the project.
  • Due to the high economic cost of delays in carrying out the project, it is important to decide in advance that if there will be timing gaps between the revenue designated for funding the project and the expenses for executing it, the government will bridge those gaps, and prevent a delay in the project for cash flow reasons.

 

In November 2021, the Knesset approved the main sections in the Subway Law (the “Metro Law”), which establish the setting up of a metro authority that will advance and manage the Metro project, and regulate the manner of its financing. According to the Law, the investment in the project will total NIS 150 billion. Half of that amount will be financed by the government budget, and half from unbudgeted sources that were noted in the law.

The plan is for the metro to be built over the course of more than 15 years, and most of the expenditure will be required over a range of about 10 years (currently 2026–36). At its peak, the annual expenditure is expected to be about 1 percent of GDP. This is an investment that is expected (a large part of it) to be added to other investments in the economy. Although the project is of tremendous scope, spreading it out over 15 years enables the government to finance it through a combination of raising taxes, reigning in the growth of other expenditures, and temporarily increasing the public debt. In view of the assessment that a permanent increase in transportation infrastructure investment in Israel is required, including expanding the transportation system in the center of the country and in the metro itself—with an increase in population in the coming decades—a considerable portion of the investment should be financed by a permanent increase in government revenues or restraint in the growth of other expenditures.

The law that was approved establishes that the investment in building the metro is to be financed by a combination of taxes on the overall public, taxes on owners of assets expected to benefit from the development of the infrastructure near their asset, and taxes on the residents living in or employed in the areas where the metro will be developed. The intention is not that future users of the subway will finance the building of the infrastructure, as its existence is expected to ease the congestion on the streets and to assist with the mobility of all transportation users in the geographical region in which it is developed. Thus, this investment is different from investments in infrastructures for electricity, water, and sea and airports, in which the benefit is focused solely on the consumers themselves, and therefore are financed by their users. As the reference is to a large scale investment, the manner of dividing the financing burden of the metro lines among the overall population, the main beneficiaries (based on residential and employment areas), and the owners of assets expected to benefit from capital gains due to the development of the infrastructures near the assets they own, is to a large extent a question of social preferences.

Regarding projects of establishing (or expanding) transportation infrastructures in the world, we found that in many cases the financing is divided between the central government and local government.[1] In Israel, where tax policy, including local taxes, is managed exclusively by the central government, the collaboration of local government in establishing a national infrastructure project is unfamiliar. However, the high cost of the metro project and its main beneficiaries being residents and businesses of Gush Dan (the greater Tel Aviv area), justify the imposing of designated taxes on the beneficiaries of the project.

Approximately half of the project’s financing will arrive, as noted, from the state budget, meaning taxes on the overall public. The source of the financing expected from the Israel Lands Authority is also essentially the general public (even though officially it is considered a non-budget source). In contrast, the revenues from congestion pricing, betterment tax (defined in the Metro Law), the local authorities in the geographic area of the project, and the income from construction above the depot and the stations are revenues the source of which is the asset owners and residents who are expected to benefit from the project.

At this stage there are still no assessments regarding the gaps in timing between the revenue designated for financing the project and the expenditures on its execution, but because of the unique attributes of some of the revenue and the dependence of a considerable part of them on individuals’ decisions regarding when to realize the assets whose value will be impacted by the project (meaning the date of paying the taxes on them), it is plausible that there will be a gap. In such a case, the government should bridge over it by financing from the State budget. Such gaps are typical of many infrastructure projects, and often disrupt their execution, and therefore it is important that the government promotes an overall budget framework that supports the execution of quality investment in infrastructure.

At this point in time, the details regarding carrying out the project have not yet been formulated. Parts of it will likely be executed by transferring some of the responsibility (and the risk) of carrying it out to the private sector, i.e., through Public-Private Partnerships (PPP), Although financing in collaboration with the private sector increases the capital cost of the project, it transfers, as noted, part of the risk of its execution to the private sector. The collaboration of the private sector also creates a good platform for efficient utilization of knowledge on building a metro that was accrued abroad and exists in the private sector. In the past two decades, the government has expanded its investments in infrastructure via Public-Private Partnerships, which included dividing the responsibility and risks alongside a financial component. This collaboration reduces the need to increase the reported public debt, due to raising private capital against a government commitment to pay in the future. Thus, for example, the establishment of the IDF’s Training Campus in the Negev region was financed by the company building it, and the government pays for its establishment via annual payments over 25 years. The financing and expense-coverage agreement in building Road 431 is another example of a Public-Private Partnership in financing the building of infrastructure. In this case, the reimbursement of expenses by the public sector is carried out by payments to the operator over the period of use of the road and in accordance with the scope of its use. This condition encourages the private operator to provide quality service, but also increases the risk of the company building the infrastructure, and it raises the cost of the capital used to build it.[2] Similarly, the establishment of the metro project in collaboration with the private sector is expected to increase the cost of capital, but could increase the efficiency of its use.

 

 

 



[1] Thus, for example, a considerable part of financing the establishment of the London Crossrail came from local public entities; as well as in the subway to connect the international airport of West Sydney (WSIA); and the Gautrain Rapid Rail in South Africa.

[2] Additional large infrastructure projects that were financed by Public-Private Partnerships in recent years are the main section of Road 6, desalination plants in Ashkelon and in Palmachim, and the Red Line of Jerusalem’s light rail. Paving Road 531 and the Red Line of the Tel Aviv light rail began as collaboration with the private sector but the collaboration was unsuccessful, and the government took upon itself the execution of these projects under its sole management.