To Close Gap And Boost Productivity, Israel Considering Infrastructure Spending

Israel is planning a potential increase in spending is bound to offer the private sector a raft of new opportunities as the country wakes up to its dramatic shortfall in infrastructure compared to most developed economies.

The formation of a committee that will issue recommendations on infrastructure spending by December was announced last week by the government. And Israel’s low labor productivity to the gap in infrastructure capital was linked by one of the country’s economic institutes.

“We focus on what the government can do to improve productivity and we suggest it’s a good time for the government to invest in transportation capital, in public transportation, roads, mainly trains, buses, bus routes etc.,” Zvi Eckstein, head of the Aaron Institute for Economic Policy that published the study on productivity, said.

A decision to improve public transport in the country’s metropolitan areas was taken in 2016 and the government committee follows that 2016 decision. Transportation, including roads and railways, generally accounts for 70 percent of infrastructure investments in developed economies, said Eckstein, a former deputy-governor of the Bank of Israel.

Eckstein said that Israel would have to double its current, low level of infrastructure spending from 1.8 percent to close to 4 percent over the next 15 years in order to close the infrastructure gap with the U.S. and Europe. And given for example the U.S. level of spending that stands at some 3 percent, that was not such an outlandish thought, he noted. A study showed that the infrastructure shortfall translates into some NIS470-600 billion ($132-169 billion).

Eckstein said that the link to productivity is obvious: “For the U.S., there have been many studies by academic economists that show that the impact of the huge interstate investments in the 50s and the 60s was one of the major sources for the huge growth of GDP per capita and really made the U.S. into what it is today.”

The study says that given the current low interest rates, public investment alone is not out of the question either while it also recommends public-private partnerships, PPPs, or build-operate-transfer, BOTs, to achieve the needed infrastructure investments.

“We claim it would be reasonable to actually increase debt, taking a loan either international or local because we find from our estimate that doubling investment will increase the growth rate by one percent. And given that it will increase the debt also by one percent, debt-to-GDP would stay constant,” said Eckstein.

And a high likelihood is getting the private sector involved. Institutions such as pension funds and insurance companies would jump on such investment opportunities because there is a lot of liquidity with them. Eckstein estimated that the opportunity would  also be welcomed by foreign investors.

The market has taken notice that new projects may be on the horizon, said Tom Maurice at Tel Aviv consultancy TASC. “We’re going to have a very interesting few years in the infrastructure market in Israel. There is a lot of potential here as there are many projects that need to be accomplished.”

“With the proven track record of the private sector in delivering projects I think there’s a lot of reason to believe a lot of that investment will go through the private sector,” he said.

(Adapted from CNBC)

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