Metro should be financed by PPP, not the budget - Route 6 planner

The NIS 150 billion plan to build a new metro train through the center of the Israel has attracted significant criticism.

Empty train.  (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
Empty train.

The Finance Ministry’s financing scheme for the massive NIS 150 billion plan to build a new metro train through the center of the country is deeply flawed, says Yehuda Raveh, co-founder and chairman of the Israel Infrastructure Fund.

Raveh, whose fund manages $2.5b. and is the largest infrastructure fund in Israel, believes that funding the project through taxes instead of as a public-private partnership (PPP) will likely cause very costly problems down the road.

“We are talking about the largest project of its type ever in Israel,” Raveh says. “For background, Israel lags far behind the OECD in terms of investment for transportation, energy and water infrastructure. The average investment throughout the OECD is $15,000 per person. Here in Israel, it is less than $2,000.”

That has serious costs for the country’s economy, he notes.

“For example, the direct and indirect value of damages caused by traffic jams around the country is estimated to be around NIS 35b. per year, when you take into account wasted time commuting, traffic accidents and other factors. A lack of investment affects everything in some way. If you want to get people to leave the Tel Aviv area and move to the periphery, you need to provide easy access to employment centers. This is a precondition for the country’s continued economic growth.”

 Yehuda Raveh, co-founder and chairman of the Israel Infrastructure Fund (credit: Kobi Magar) Yehuda Raveh, co-founder and chairman of the Israel Infrastructure Fund (credit: Kobi Magar)

In that light, the metro plan presented in the Economic Arrangements Law (EAL) accompanying the budget that the government hopes to approve in the coming weeks is an important and long-overdue infrastructure development that the country needs.

“The metro has been referred to as the subway or underground train plan in various plans that have been presented since 1930, 90 years ago. Nothing was ever done. We are talking now about a 150-km. train that will run through 24 different municipalities. It is a very important project, but the devil is in the details.”

The plan described by the ministry would begin around 2025 and not be completed before 2032, disrupting traffic for years. Unlike the light rail system now being built in the Gush Dan area, the metro would travel underground and carry many more people at faster speeds. The system would include 109 stations and span Tel Aviv westward to Givat Shmuel, and from Ra’anana in the North to Holon in the South.

The project’s NIS 150b. estimated price tag would be more than 15 times more than any other comparable project, Raveh notes. Israel’s Highway 6, the Trans-Israel Highway, which runs from Beersheba to Haifa, cost just NIS 6.5b. That project, for which Raveh provided legal counsel, was the country’s first build-operate-transfer (BOT) project, and was constructed by a consortium of private companies in return for the concession to collect tolls on the road for a certain number of years before transferring ownership back to the government.

According to the plan presented in the EAL, half of the project cost of the metro project – NIS 75b. – will come from the state budget. The other half would be financed through special taxes levied on residents living along the train’s route, according to the legislation that was recently approved in the first reading.

Currently, whenever a property’s value is increased through construction or renovations, Israel charges an improvement tax of 50% on the extra value. According to the new plan, properties situated along the route would now be taxed 75%, with 40% of that value going to the local municipality and 35% going toward the budget for the metro.

Changes to building zoning along the metro path will also be considered improvements, so if, for example, a spot is currently zoned for small buildings but is later rezoned for skyscrapers, the difference in value will also be taxed and budgeted for the metro.

FINANCE MINISTER Avigdor Liberman is taking credit for developing a budget that will not require him to raise income taxes or VAT, but this financing structure creates a number of serious problems, Raveh says.

First, Raveh says, Liberman has not explained where the government’s half of the budget will come from.

“Israel has a deficit of NIS 160b.-NIS 200b. after nearly two years of coronavirus. Where will the government get an extra NIS 75b.? Will it come from the education or health budget? It’s not clear.”

Second, financing the project through improvement taxes makes some dangerous assumptions.

“The improvement tax is only collected when a person sells his property or builds on it. What if people decide that since the government is going to take 75% of all appreciation, they don’t want to build and don’t want to sell? Also, who says all the land values will go up? Maybe some values will go down because of noise or problems related to the metro. Then, under the law, a person can sue the municipality for the decrease in value.”

There are other challenges as well.

“There is also the possibility that people can raise objections in the courts, and the bureaucracy can delay the process for years until a decision is reached. The government will have to apportion parcels of land for the metro project, and some people will be forced to give up their land for the metro project, and the bureaucracy involved with those issues can also tie things up for years. Meanwhile, project costs can spiral out of control and end up being 10 times higher than the original projection.”

Raveh cites the example of the light rail project currently under construction in Tel Aviv.

“NTA won that tender in 2007, and the first line was supposed to be completed by 2013,” he says. “Then the global financial crisis hit and the project was delayed. The original budget was supposed to be NIS 10.7b. and now it is NIS 18b., and the first line still isn’t completed. This is because the state decided to do it as a government project instead of a PPP project.”

Designing the metro project as a PPP would bring significant advantages to the state, Raveh says. Under a BOT model, private companies would build and maintain the entire network and make money on ticket sales for a fixed number of years. After that period, ownership would be transferred to the government.

“This is the reason Highway 6 was successful,” Raveh says. “When the private sector is involved, the companies want to make money, and have a financial incentive to build it quickly and efficiently. Highway 6 was scheduled to take five years to build, but it was completed in four years and three months because the companies wanted to start earning their money back. No other road that I know of was ever completed on time. If the government does it, no one has any financial incentive to try to move quickly.”

Raveh says an internal ministry report in February concluded that the metro should be constructed as a PPP, and he has not heard any reasoning from Liberman as to why it is part of the budget.

“My company advises organizations in Israel and abroad about infrastructure financing,” Raveh says. “The governments should serve as a regulator, and issue tenders for the project and conduct supervision for the benefit of the public, but it should not be involved with the building.”