Infrastructure? (Not) boring!

Infrastructure? You intend to anesthetize us helpless readers with 2,500 words on infrastructure?!

By SHLOMO MAITAL
August 15, 2019 09:25
Infrastructure? (Not) boring!

A high-speed bullet train passes through peach blossoms near Juyonguan in Beijing. (photo credit: REUTERS)




Infrastructure? You intend to anesthetize us helpless readers with 2,500 words on infrastructure?! Doubtless, laced with a Saskatchewan blizzard of numbers? Bo-o-o-oring. I would rather read the 1957 Kfar Saba telephone book.

I hear you, reader. Perhaps you are right. But please, bear with me for just a moment. I will explain what infrastructure is in 100 words, and why we all should care deeply about it. Then, if you wish, you can bail out and read something really interesting like your vacuum cleaner’s instruction manual. However, if you find it meaningful, hopefully you will choose to read on.
OK, but I’m certain this is not going to end well.

Here goes. Infrastructure comes from two Latin words, meaning “below” (infra) and “structure.” Infrastructure literally means all the unseen things underground – once, water and sewage – that support our lives and make them worth living. Of course, most infrastructure today is above ground – communications, transportation, energy, waste collection, education, public services. All these affect us crucially.

And if you read on, you’ll see why Israel, the US and other countries are in deep trouble. Because we’ve under-invested in infrastructure for years, even decades, and as a result the damage to our quality of life is immense. We need an emergency crash program to fix our crumbling infrastructure, but our politicians are too busy to care or to listen.

I think that’s more than 100 words.

True. It’s 127 words. You know, everything is 20% higher these days. Inflation.

I might read a bit more. But not much.

Take the US, for instance. Remember comedian Henny Youngman’s one-liner? Take my wife – please!

Take the US. Please! Because its infrastructure is crumbling. America is the poster boy for what happens when you under-save, under-invest, and let your infrastructure crumble. As a result, you become Third World.

The US invests only $440 billion a year in infrastructure, out of a near $20 trillion economy. That is only 2% of GDP! Now, 2% of GDP is not even enough to repair worn out roads, highways, bridges, schools and airports, let alone build new ones. Here is why.

America’s capital-output ratio is roughly three dollars of physical capital per dollar of GDP. So the value of US physical capital is about $60 trillion. Let’s say capital has a lifetime of, say, 20 years. Bridges live for 70 years, but computers live for only three or fewer. So every year on average 5% of the capital wears out. That means capital consumption, or what we call depreciation, is 5% of $60 trillion or $3 trillion annually. For decades, America has not saved and invested enough even to replace its worn out capital.

An example? Bridges and airports. According to ARTBA (American Road and Transportation Builders Association), bridges across the United States are deteriorating. More than 47,000 bridges in the United States are in crucial need of repair. It is estimated that it will take more than 80 years to fix all of them, at current rates of investment! Can you believe it? In one of the world’s richest nations, there are nearly 50,000 collapsing rust-eaten bridges.

Have you ever seen Beijing Capital International Airport? Compare it to New York’s aging LaGuardia, Newark International Airport or Los Angeles International Airport. And long before Beijing Capital Airport becomes overcrowded, the new Beijing Daxing International Airport will handle 72 million passengers a year by 2025 and 100 million by 2040. It will open in fewer than three months.

Spending on air travel has exploded. In the West, investment in airport infrastructure has stagnated. And we travelers suffer.
Who cares about America! What about Israel? How is Israel doing?

Not much better. Are you willing to ponder over a few numbers?

I knew that was coming. If the Romans, Hindus and Arabs hadn’t invented numbers, you economists would be sweeping streets.
Let’s start with communications and the Internet. With today’s smartphones, everything depends on them. How does Israel, Start-Up Nation, hi-tech front-runner, rank globally in download speed?

The Times of Israel, an English-language online news site, noted last August that “Israel ranks 70th out of 200 nations surveyed, and is losing pace compared with other nations. The nation has an average download speed of 7.64 megabits per second, well below the global average of 9.10 Mbps, for the period studied. In the same period a year earlier, Israel ranked 60th out of the 189 nations surveyed, with an average download speed of 7.2 Mbps. Israel’s Internet speed is listed among the lowest for European states, just above Bosnia and Herzegovina, ranked 71st.”

The source of the data is highly respected: M-Lab, a partnership between Google, Princeton University and others.
According to the report, in Israel “it takes 1 hour, 29 minutes and 21 seconds to download a typical High Definition (HD) movie compared to 11 minutes and 18 seconds in Singapore.”

Why is the Internet so slow in Israel? Lack of investment in infrastructure. Bezeq and cable provider HOT pay out dividends to their shareholders instead of reinvesting them in Singapore-speed Internet.

Blame a lot of this on privatization – trusting capitalists with society’s crucial public infrastructure. Tycoons bought privatized government companies with borrowed money and plundered the companies’ profits to pay back the loans, instead of reinvesting those profits in modern technology.

Writing in the business daily TheMarker, Ido Baum and Attorney Ilan Verdnikov explain how Shaul Elovitch gained control of Bezeq in April 2010 by borrowing billions and then recouped the debt by paying himself billions in dividends. This so-called ‘leveraged buyout’ (leveraged means funded by debt) was challenged in court – and the courts inexplicably approved the plunder. Bezeq, as a company, was mortally wounded by Elovitch. Its share price has fallen from a peak of about 7 shekels in 2015 to today’s level of under three shekels. Don’t expect Bezeq to upgrade your Internet service any time soon.

Many countries now have fiber-optic cables connecting homes and businesses. Transmitting information with light through fiber-optics (invented in Israel, by the way, by a company called Fibronics) is far faster than with copper wire. But according to Stephen Levey, writing in the business daily Globes, “fiber penetration to the home in Israel remains in the very low single digits. The OECD estimated that in mid-2018, less than 2% of homes in Israel had access to fiber as part of their fixed broadband connection. This compares to an OECD average of around 25% with some far less economically developed countries such as Latvia and Lithuania already at 60% penetration or higher.”

Israel is a rich country that seems to pretend, when it comes to infrastructure, that it is very poor. We should not have privatized Bezeq and left our communications in the hands of tycoons.

Trust our government to invest? Really?

Well, no, not really. That’s not ideal either. For example, on April 21, 2013, Israel ratified the Open Skies Agreement with Europe. That brought many low-cost airlines to Israel, and as a result air travel boomed. Could we reasonably expect the Transportation Ministry to anticipate this boom? We could.

Ben-Gurion Airport handled 23 million passengers in 2018. That’s three times the population of Israel. In five years it will handle 30 million passengers.

The good news? The Transportation Ministry did sign the Open Skies agreement that slashed air fares for Israelis and visitors. The bad news? It failed to anticipate the rapid expansion in air travel. Only now is a billion-dollar expansion plan being drawn up and implemented.

Rip Van Winkle slept for 20 years before waking; Israel’s government seems to aspire to do the same, when it comes to infrastructure.

Somehow the supply of infrastructure always seems to lag behind the demand and need for it, no matter whether government ministries or private companies are responsible. Unless you’re Singapore.

Can you please get to the point?

Sure. Israel and Western nations have a spend-spend mindset, instead of save-invest. We build shopping centers so people can buy more and more stuff to fill their closets instead of using our resources to build roads, railways, buses, high-speed Internet, schools, universities, and so on.

Israel saves about 20% of its GDP, and invests around the same. That’s called ‘“gross investment.” It includes replacing worn-out stuff. Deduct that depreciation and you get about 8% of GDP as net investment. That’s not enough. It has to be at least double to keep our economy viable and productive.

China invests 42% of its GDP! Ever ride the fast train from Beijing to Shanghai? The world’s fastest passenger train goes 350 km an hour (217 mph), and the whole 1,200 km (720 mile) trip takes just over four hours.

Try taking the train from Carmiel to Tel Aviv. Good luck! If you’re lucky, it takes over two hours to travel 132 km.

New York Times columnist Thomas Friedman recently defined the recipe for China’s success. “China grew out of poverty using a strategy of hard work, delayed gratification, smart investments in infrastructure and education, and big investments in research and manufacturing the innovations of others.”

Israel’s recipe for growing its economy? No hard work, no delay of gratification (saving), no smart investments in infrastructure and education. Yes, investment in R&D, and yes, our own innovations. But the latter two ‘yeses’ will crumble if we don’t fix the previous three ‘nos.’

There seems to be no strong lobby and no political party of any flavor that is fighting for save-invest and infrastructure. As a nation, Israel appears to have swallowed whole the American malady of consumption-driven capitalism. The recipe: Privatize infrastructure firms, let them plunder the profits instead of reinvesting them, and then ignore the resulting damage.

But I don’t get it. Israel is flooded with money. Every day banks, credit card companies, even supermarkets offer to lend us money. If there is so much money around, why should we have a problem with investment?

You know how people sometimes say “it’s all semantics” when they brush off a problem? Well, what we call “investment” isn’t really what economists mean by investment. It’s semantics. But it’s also a very real deep-seated problem.

When we Israelis say we “invest,” we buy bonds or stocks or other financial assets. As a result, by definition, someone sells them. So this is simply a change in the name of the owner. It doesn’t mean a building or a machine or a highway has been created.

Today you can borrow almost any sum to spend – to buy cars, vacations, anything. But most real capital investment originates with governments that save, plan and build, and with businesses that build buildings and machines with their profits. And we have a dearth of both in Israel.

Today the Israeli government has a growing budget deficit, nearly 4% of GDP, that reflects bad management. For years, the government had windfall tax revenues from several huge exits – purchases of Israeli start-ups by US companies, like Intel’s $15b. purchase of Mobileye. When those ran their course, the government found (surprise!) that it had a big hole in its pocket. And a budget deficit is simply negative saving: spending more than you earn, instead of less. Even if private saving was higher, negative government saving offsets a lot of it.

Bad policy for families. Bad policy for governments. Bad for all.

All this is gloom and doom. You economists all see the tunnel at the end of the light. Tell me something good.

No problem. Israel is a world leader in desalination – producing fresh water from sea water. As climate change creates multi-year droughts, Israel is planning its sixth desalination plant, which will provide 200 million cubic meters of water annually – and it will be the biggest in the world to use reverse osmosis. That is a process that forces brine through a membrane that removes the salt and leaves fresh water. The new plant will be located near Sorek, in the south. It will come on line in 2023.

And here is a good-news story from Israel’s history. In 1953, long before the full project plan was finished, construction under prime minister David Ben-Gurion began to bring water from Lake Kinneret in the north to Tel Aviv and the parched Negev. It became known as the National Water Carrier, the movil artzi in Hebrew. It was 130 km (81 miles) of giant pipes, canals, tunnels, reservoirs and pumping stations.

The project cost 420 million lirot, about $3b. in today’s money. It was planned by Tahal and built by Mekorot, two government-owned companies, and was completed in June 1964, 55 years ago. In the 1990s, the National Water Carrier supplied half of Israel’s drinking water. It was crucial for Israel’s growth, development and well-being.

Tahal was privatized in 1995. Mekorot is still government-owned.

In 1953, Israel was a desperately poor country, trying its best to absorb a million new immigrants. Despite that, its leaders had the vision to engage in enormous costly infrastructure projects.

Today Israel is vastly wealthier than it was in 1953, but its leaders pretend that Israel is too poor to supply world-class infrastructure and slough the problem off on privatized firms that spend profits as dividends rather than re-invest them.
You call that good news?

Well, it was good news when the National Water Carrier was completed. And to this day it is a fine example of how our government once built our future rather than mortgage it with debt – or gift it to politically connected tycoons.

Let’s talk about smartphones. A recent global survey ranked Israel second in the world in smartphone usage. Everybody has them, even children. Smartphones are infrastructure, right?

Yes, right. But here’s the problem. Current smartphone technology is called 4G (Fourth Generation). The next technology breakthrough is called 5G. Now, 5G will be a real revolution. It could be up to 1,000 times faster than 4G. The companies that lead in developing 5G are Qualcomm (US), Ericsson (Sweden), Samsung (South Korea) and Huawei (China).

Why is speed important? 5G will be the technology that will transmit traffic information to and from self-driven autonomous vehicles. Speed is important, because at present 4G has a lag of several hundred milliseconds in transmitting information, and for self-driven cars that’s like a lifetime. 5G will be nearly instant. That will enable much safer self-driven cars.

When will Israelis get 5G? Don’t hold your breath. Prime Minister Netanyahu once told his ministers, “be like Kahlon,” referring to then-communications minister Moshe Kahlon, who drastically lowered cell phone costs by opening the market to competition.
This was immensely popular. But it had a downside. Israel’s cell phone companies are now not sufficiently profitable to invest heavily in 5G infrastructure. Whatever profits do exist are mostly paid out in dividends to shareholders – just like with Bezeq.
In July, Netanyahu appointed his favorite lackey and unconditional supporter, David (Dudi) Amsalem, as communications minister. Amsalem has no technical knowledge or background at all. Is he the ideal leader to guide Israel into its 5G future?
Look, Israelis are innovative! They can overcome nearly anything.

Each year, WIPO (World Intellectual Property Organization) and partners publish the Global Innovation Index, which ranks countries by their overall innovativeness. In the latest edition just released, Israel rose to 10th. That is the good news.
The bad news? Israel ranks only 33rd in “infrastructure” and 89th (out of 130 nations) in “gross capital formation as a percentage of GDP.”

Creative ideas need capital and infrastructure to make them happen. Otherwise, they are just scrawls on paper – like da Vinci’s drawings of submarines in 1515.

No, dear reader, infrastructure is not boring. It is partly a sad tale of privatization gone awry, and partly a woeful story of a society that has abandoned thrift and decreed that the future is not what it used to be.

As a result, it will prove far harder and costlier to repair the damage than it was to prevent it in the first place.
Postscript: On July 3 the first privatization of an Israeli electricity-generating plant was announced – the Alon Tavor plant was sold to a group of investors, including a Chinese company, for 1.9 billion shekels ($534 million). Four more such plants will be privatized in the future.
Given past failures of privatization, why is the government doing this?

In 1962, Bob Dylan knew. “The answer is blowin’ in the wind,” he sang. And Pete Seeger responded, also in song, “When will they ever learn?”

The writer heads the Zvi Griliches Research Data Center at S. Neaman Institute, Technion, and blogs at www.timnovate.wordpress.com


Related Content

Black Cube logo
August 24, 2019
Black Cube was hired by the Defense Ministry, operated out of intel base

By OMRI RON

Cookie Settings