Excerpt from the "Bank of Israel – Annual Report for 2014" to be published soon: The level of infrastructure and infrastructure investment in Israel: International comparison and examination over time

v  The level of infrastructure in Israel remains lower in some areas—particularly in the area of metropolitan public transit—than in most developed countries.
v  The volume of investment in urban and intercity railways is low by international comparison, while the volume of investment in roads is high.
v  The findings in this box bring into sharper relief the need for the government to act with greater urgency to improve public transit infrastructure.
Infrastructure projects require large investments, which frequently creates natural monopolies.  Moreover, in contrast with investment in other physical capital, such investment has positive externalities[1]—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.
This box shows that 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[2] and elsewhere in the world[3] 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.  Wide-scale and efficient public transit in the large cities will make it possible to cluster employment areas and increase population density.  It therefore has significant economic advantages.  The availability of public transit also has quality of life implications, since long travel to and from the work place has a negative impact on the balance between leisure and work time, and the large-scale use of private vehicles has a negative impact on environmental quality.[4]  Investment in public transit infrastructure is mainly derived from government policy, and the findings in this box bring into sharper relief the need for the government to act more determinedly to improve it.
1. The level of infrastructure[5]
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 the Internet field, the rate of users in 2012 was 69 percent, while the OECD average was 77 percent.  This may indicate low demand, but it may also indicate that limited competition in terms of infrastructure—where there are just two companies—has a negative impact on supply and makes use more expensive.  In contrast, the rate of broadband users out of all Internet users is in the center of the distribution.  The government is acting to improve competition through the addition of an infrastructure competitor—“the fiber initiative”—and through the “wholesale market” of Internet infrastructure.[6]
In the ports, Israel is in a dual position:  The Liner Shipping Connectivity Index[7] shows that the number of ports is reasonable and in the center of the distribution, but their overall quality is in the lower portion.  The government decided to build two new terminals that will be operated by parties unconnected to the current operators, with the objective of increasing competition and improving service at the existing ports as well.
In terms of road infrastructure, road safety is just slightly below the midpoint.  The ratio between the number of fatalities in accidents to distance traveled is just slightly above the midpoint.  The length of roads in relation to the country’s area is lower than in most other countries, and the same is true for the length of roads in relation to population (figure not shown).  While investment in roads in recent years has been greater than in other countries (Figure 4), that investment is almost not reflected in additional road length—the comparison variable in Figure 1)—since it has focused on adding interchanges and improving existing roads.  A study conducted by the Bank of Israel found that improvement in infrastructure also contributes to a decline in the number of accidents.[8]  In terms of road infrastructure, Israel is therefore ranked at a reasonable level, which is consistent with the comparison presented in the Bank of Israel Annual Report for 2009.[9]
The use of private vehicles is growing more rapidly than the use of public transit in Israel.  Between 2000 and 2014, the distance traveled by private vehicle increased by 4 percent, while the characteristics of the volume of public transit—number of seats on regular bus lines and number of busses and distance traveled by them—increased by only about 2 percent per year, similar to the rate of growth of the population aged 15 and above—the main consumers of public transit.  However, these characteristics began improving in the past three years.
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 (Figure 1).  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, we examined the intensity of use of public transit in 41 metropolitan areas in 23 OECD countries.  For each metropolitan area, we calculated two values: The first is actual public transit trips as a share of total travel.  For this calculation, we used the number of trips per passenger—how many times the passenger boarded and disembarked from a means of public transit—and included walking and riding a bicycle.  The second value is the forecast share of trips, based on a regression in which the dependent variable is public transit as a share of the passenger’s trips, and the explanatory variables are per capita GDP, average family size in the metropolitan area, and population density in the metropolitan area.[10]  After that, we calculated the difference between the first value and the second.  Metropolitan areas with higher-than-average intensity of use obtained a positive difference, which may indicated that public transit in those areas is characterized by high quality.  We weighted these differences by the size of the population in the metropolitan area in order to obtain the average intensity of use in the country.  By way of illustration, in Spain we found high intensity, which may indicate that there are developed mass transit systems in Spain.  We also found that the standard of living—according to per capita GDP and size of family—has, as expected, a negative effect on public transit as a share of total passenger trips, while population density has a positive effect (Figure 2).
We found that 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.[11]  In Tel Aviv, there was a recent reform in the bus lines[12], 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 (see Box 6.2) 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 (Figure 3), 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[13], 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.  We found that the intensity of use of public transit in the Gush Dan are Be’er Sheva areas is particularly low by international comparison (Figures 1 and 2).  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.  The government has already made decisions to deal with some of the problems mentioned above, but as Box 6.2 shows, the implementation of those decisions is one of the main challenges with which the executive branch must deal.

[1] Externalities are the effects of factors that are not involved in a certain action.  For example, the paving of a road has externalities on the quality of life of the residents in the surrounding area, including improved access (positive effect) and air pollution (negative effect).
[2] Sharabany, R. (2008), “The effect of infrastructure capital on manufacturing industries in Israel, 1990–2003”, Discussion Papers Series 2008.05, Bank of Israel Research Department (in Hebrew); Bergman, A. and A. Merom (1993), “Growth factors in the business sector (1958–1988)”, Discussion Papers Series 93.02, Bank of Israel Research Department (in Hebrew).
[3] Coenen, G., C.J. Erceg, C. Freedman, D. Furceri, M. Kumhof, R. Lalonde, D. Laxton, and others (2012), “Effects of Fiscal Stimulus in Structural Models.” American Economic Journal: Macroeconomics 4 (1): 22–68
[4] According to the OECD quality of life indices, these are two of the areas in which Israel particularly lags behind the other members of the organization.  Housing affordability, security, and civil rights are also among these areas.
[5] The data on infrastructure quality are mainly from the World Bank; data on traffic accidents are from the International Road Federation (IRF); data on the quality of ports are from the World Economic Forum; and data on metropolitan public transit are from the European Metropolitan Transport Authorities (EMTA).
[6] The fiber initiative will add another company to the Internet infrastructure field, and the wholesale market for Internet infrastructure will make it possible for content companies to purchase infrastructure services and offer consumers a single package of infrastructure and content services, where until now customers have been forced to purchase them separately.
[7] This index shows to what extent a country is connected to the global network of shipping lines, and includes a number of sub-indices, including the state’s accessibility to the sea and port availability.
[8] Brown, L., R. Sharabany and N. Zussman (2014), “Causes of traffic accidents with casualties on intercity roads in Israel”, Discussion Papers Series 2014.04, Bank of Israel Research Department.
[9] The examination included a number of countries and two comparisons of road capital—normalized by GDP and normalized by distance traveled.
[10] The regression suffers from an endogeneity problem, since it is not clear what direction to make the connection between population density and the use of public transit:  Does density cause an increase in public transit as a share of travel, or the opposite.  When the regression included only average family size as an explanatory variable, we found that the order of the countries is similar to the order in the regression that also included density.
[11] Even though Jerusalem and Haifa have high shares of the population, they are not included in the estimation due to lack of up-to-date data for the period after the mass transit systems were constructed.
[12] Likewise, investment was made in laying out bicycle paths, and a bicycle rental project was launched.  These may contribute to a reduction in the use of private vehicles.
[13] The Time Is Right for an Infrastructure Push http://www.imf.org/external/pubs/ft/survey/so/2014/res093014a.htm