OECD Economic Surveys: Israel 2018

Report

OECD Economic Surveys: Israel

11 March 2018

Chapter 2. Improving infrastructure to boost productivity and well-being

Abstract

Suitable and well-functioning infrastructure is a key requirement for growth and well-being. The benefits to activity of efficient spending in energy, water, transport, communication and social sectors go well beyond their contributions to capital accumulation. Good infrastructure facilitates trade, bolsters market integration and competition, fosters the dissemination of ideas and innovations and enhances access to resources and public services. These benefits are particularly important for Israel because of its high population density and relative remoteness from other markets. Nevertheless, Israel has an important infrastructure deficit. To ease these shortages the authorities have put bolstering infrastructure at the top of their economic policy agenda. This entails greater expenditure in this area, but also structural reforms to optimise public and private investment choices and the use of existing facilities with better regulation. This chapter reviews the state of Israel’s infrastructure and the government’s related action programme.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

The capacity and quality of current infrastructure need to be enhanced

Adequate infrastructure capacity and its efficient operation both matter to the economic performance and well-being of the population. A reliable, low-cost supply of water and energy, good transport and telecommunication networks, and appropriate social infrastructure all improve the quality of life of households. Good infrastructure helps people enter the labour market and also strengthens business competitiveness, trade, competition and the dissemination of ideas and innovations, which in turn stimulate private investment, productivity and wages. Infrastructure therefore generates benefits that go far beyond its direct contribution to the accumulation of capital in the economy. But infrastructure development often calls for heavy investment, and its positive externalities are not always recognised by markets. Governments must therefore either create the conditions for its deployment by the private sector or build it themselves.

Infrastructure needs concern many sectors

The authorities have pledged to strengthen Israel’s infrastructure. This is needed because it lags significantly behind in this area. Infrastructure capacity and quality fail to meet the needs of the economy and the population, both of which have grown over recent decades, driven by strong economic and demographic growth, technological progress and the need to confront environmental challenges.

The biggest infrastructure gap concerns the transport sector (BoI, 2015). Urban and intercity public transport, especially, fail to meet the needs of a growing population that is concentrated in the urban areas of central Israel. Services are slow, since they rely mainly on coach and bus networks that have few reserved lanes (State of Israel, 2012a), while the railways, which account for just 2% of land-based passenger transport compared to the OECD average of 8%, remain underdeveloped (Figure 2.1, Panel A). Moreover, public transport services do not operate during weekends and religious holidays. Due to the high population density of the country, private vehicles are intensively used for travel (Panel B), thereby causing serious road congestion. Goods transport is also beset with difficulties, even as needs are rising (BoI, 2014). The quality of maritime and rail freight services is particularly low by international standards (Panels C and D).

Figure 2.1. Snapshot of Israel’s transport infrastructure

Energy infrastructure is also inadequate in many areas. The electricity sector is inefficiently organised – dominated by a vertically integrated public enterprise (PUA, 2016a; OECD, 2016a). The economy could derive a greater benefit from production from the offshore natural gas fields discovered in 2009-10 by lifting the barriers to the development of local demand for this kind of energy, which is less polluting than oil or coal. The production of electricity from renewable sources is also very low in the light of the country’s potential capacity, especially for solar energy (Figure 2.2, Panel A). Yet this sector needs to be strengthened to meet the commitment made by the Israeli government in Paris in 2015 to cut greenhouse gas emissions and reduce pollution, which is a serious concern, as evidenced by the high concentration of fine particles in the air compared to other countries (Panel B). Moreover, expanding the renewable electricity production will likely require additional infrastructure investment in the electricity grid (BoI, 2017a).

Figure 2.2. Electricity production from renewables and air pollution

Several other sectors also need improvement, such as wired Internet broadband telecommunication services, which are relatively undersubscribed, and where competition is relatively weak due to the duopolistic market structure (Figure 2.3). Sub-standard regulation hampers the cost-quality ratio of airport services. The country’s management of its water needs may be exemplary (Annex A.2.1), but nevertheless requires constant attention to ensure that its limited natural resources are better protected from the real threat of overexploitation in light of declining precipitation rates (Figure 2.4).

Moreover, some social infrastructure is undersized. Israeli hospitals are overcrowded: the number of beds per head of population is low and their occupancy rate is extremely high (Figure 2.5). There is also insufficient childcare for children aged under three from low-income families, with the number of places available in crèches in 2015 sufficient to accommodate just a quarter of the children of families entitled to this support (BoI, 2016).

Figure 2.3. Telecommunications indicators

Figure 2.4. Intensity of freshwater useref refid="fn-0085" format="note"/>

2015 or latest year available

Another major issue for the authorities is ensuring a fairer balance between regions and communities in terms of access to infrastructure services. Prior to 2009, a significant number of Arab towns had, for instance, no bus connection to the rest of the country (Knesset, 2014). Although the situation has since improved, and work is currently underway to guarantee greater fairness between communities, Arab towns remain relatively poorly served by public transport (Sikkuy, 2016a and 2016b), which penalises their residents and creates barriers to employment, especially for women, who are less likely to be licensed to drive and/or own a car. Moreover, Arab towns often lack adequate public facilities provided by local authorities, which generates high level of dissatisfaction (Figure 2.6, Panel A). The use of broadband Internet services is also unequal across regions (Panel B), although this may partly reflect divergent community preferences (for example, a low rate of use of high-speed Internet services in the Haredi community) rather than access problems.

Figure 2.6. Indicators of regional variation in well-being

The infrastructure sector’s shortcomings are caused by a mix of factors

There are a number of reasons for the deficiencies in infrastructure development, which are linked to the country’s history, the management of public accounts (including at local level), issues with land registries in Arab towns and the regulation of network industries. The state of Israel was created less than 70 years ago, and in terms of investment in public transport therefore lags behind most OECD countries, which began developing rail networks and mass transport systems much earlier. Compared to major cities in other countries, the shortfall in public transport infrastructure in Israel’s three main cities was judged at the beginning of the current decade to represent the equivalent of around NIS 250 billion or 25% of GDP (State of Israel, 2012a). The estimated amount of cumulated investment in urban public transport in the agglomerations of Jerusalem, Tel Aviv and Haifa, calculated on the basis of 2008 prices, came to between EUR 1000 and EUR 2000 per capita compared to an average of EUR 13 000 in the major cities in the OECD area (Figure 2.7, Panel A). This reflects the fact that urban public transportation relies mainly on buses, which need much less investment than subway or light rail infrastructure. More generally, both public investment and the estimated stock of public capital are lower than in most other OECD economies (Panel B).

Figure 2.7. Stock of capital and investment in public transport

Closing the investment gap has not been made easier by the far-reaching budgetary consolidation Israel has been pursuing for the last 20 years. Public debt has been brought down from almost 100% of GDP in the late 1990s to a little over 60%. During that period, however, this adjustment led to a sharp fall in public investment, which also weakened against the average for OECD countries (Figure 2.8). This kind of spending is relatively easy to reduce or defer and therefore made a greater contribution to budgetary consolidation than current spending on wages, social transfers and interest payments. Moreover, the decline in public investment has partly reflected the expanding role of state-owned enterprises that invest in infrastructure, which are not part of the government sector, but have benefited from public capital transfers. Consequently, the reduction in the public deficit of more than six percentage points of GDP between 1998 and the onset of the financial crisis in 2007 led to a concomitant fall of over 42% in public investment, measured as a share of GDP, while other spending fell by around 16% (Table 2.1). Spending on public infrastructure, which recovered after 2007, was then cut again between 2013 and 2015 to bring the public deficit back under control after the slippage in 2012 (BoI, 2017b). But these sorts of fluctuations in investment financing complicate the task of implementing most infrastructure programmes, which are long-term projects that require strict scheduling.

Figure 2.8. Public investmentref refid="fn-0090" format="note"/>

	General government, per cent of GDP
	Net lending	Total receipts	Total disbursements	Investment1	Total disbursements, excl. investment
1998	-6.8	44.9	51.7	3.5	48.2
2007	-0.7	41.9	42.6	2.0	40.6
Difference	6.1	-3.0	-9.1	-1.5	-7.6
% changes		-6.7	-17.6	-42.4	-15.8

1. Excluding capital transfers to state-owned enterprises for infrastructure development, which have been significant in Israel.

Source: National Accounts and OECD calculations.

Up until the first years of the millennium, the development of public transport infrastructure had been increasingly focused on extension and improvement of the road network, to the detriment of the railways, which require heavy investment, especially in urban areas (Figure 2.9, Panel A). The country’s rapid population growth, however, and the spectacular rise in population density over the last few decades (Panel B) have fuelled a dramatic increase in the need for urban mass transit. Non-road transport investment has been rising for several years; as a proportion of GDP, however, it remains relatively modest and has therefore failed to catch up, lingering around the OECD average since 2002 (Panel C).

Figure 2.9. Investment in transport infrastructure and population pressure

With more than half of public investment undertaken by local government, the financial disparities between municipal councils also contribute to unequal access to infrastructure services between regions and communities, despite the higher central government transfers received by poor municipalities. Average municipal spending per resident in 2014 ranged between NIS 3 232 and NIS 23 316, according to councils’ ability to levy taxes, especially by attracting businesses (OECD, 2017a). Taxes on commercial and industrial property are higher in Israel than those on housing, which are generally insufficient to cover the costs of the infrastructure services required in residential areas (Fitoussi et al., 2016). Local authorities’ financial capacity therefore partly depends on the extent to which they can allocate a greater share of land to businesses than to housing. Even though businesses setting up operations in towns with less financial capacity receive state subsidies to mitigate this disparity, Arab towns are generally in a weaker position than Jewish or mixed towns (Figure 2.10).

Figure 2.10. Commercial and industrial area in relation to residential area in Israeli cities

Municipalities/local councils with more than 10 000 inhabitants, 2014

Infrastructure development in Arab towns is also hampered by a lack of available public land (OECD, 2017a). This may seem paradoxical for a country in which almost all (93%) land is publicly controlled, but for historical reasons most of the land in Arab towns is held by private individuals who are usually reluctant to sell it for cultural and/or political reasons. Moreover, a large proportion of this land is not correctly recorded in the land registry, and the development of Arab towns in the last few decades has not been guided by any consistent overarching plan, because the rigid, centralised Israeli urban-planning procedures are not adapted to the specific nature of Arab communities. To absorb a growing population these towns have developed by building extensions to existing homes and properties to accommodate and allow the cohabitation of several generations of a single family. In the absence of a detailed urban development plan, these constructions have often been carried out on the private plots of their owners without planning permission and without any regard for the need to cater for public services. Obstacles to the operation of public transport lines include excessively narrow alleys and a lack of adequate space for bus stopping bays. In all, this trend has led to the development of dysfunctional urban areas that lack space and public infrastructure, as is apparent from a comparison with Jewish or mixed towns (Figure 2.11).

Figure 2.11. Areas for public amenitiesref refid="fn-0015" format="note"/>

Medianref refid="fn-0093" format="note"/> of municipalities/local councils with more than 10 000 inhabitants, 2014

It has taken longer to reform the regulation of network industries in Israel than in many OECD countries (Figure 2.12, Panel A), and this has also thwarted the development and effectiveness of some sectors. Regulation remains some way from best practice in several fields, held back by insufficient competition (Panel B). The railways, the two Mediterranean ports of Haifa and Ashdod, and airports are still managed by public firms with national or local monopolies, which provides poor incentives for efficiency. The electricity sector remains dominated by a vertically integrated public enterprise, which is politically powerful but inefficient, hampering efforts to reform it (OECD, 2016a). It should also be noted that reducing the presence of public firms in network industries (Panel C) has not fostered the emergence of effective competition in some sectors, such as wired broadband telecommunications (see below).

Figure 2.12. Product market regulation in the network industriesref refid="fn-0095" format="note"/>

Index scale from 0 (least restrictive) to 6 (most restrictive)

Improved infrastructure would boost growth and promote well-being

A body of empirical research highlights the economic and social advantages of adequate, well managed infrastructure. According to the IMF (2014), an increase of 1% of GDP in infrastructure investments in developed countries adds an average of 0.4% to output in the short term and 1.5% after four years, if the projects are carefully selected and executed. Using a panel of OECD countries, Égert (2016) also shows that the competition-friendly regulation of network industries generates statistically significant productivity gains. High-quality public investment (broadly defined to encompass health, education and R&D spending) also boosts growth and productivity (Mourougane et al., 2016). By improving training, personal mobility and day-care provision for young children, this investment helps to curb inequality in market revenues, which reduces the need for redistribution through taxes and transfers (OECD, 2017b). A greater number of subsidised crèche places for children aged under three would, for example, help Israeli women, especially those from the Arab community (Schlosser, 2011), to increase their participation in the labour market and their wage income (BoI, 2016). This would in turn help to combat gender inequality, which is more marked in Israel than the OECD average.

According to recent OECD research, an increase in public investment could be especially beneficial in Israel. All other things being equal, the return from this spending is higher when the stock of public capital is low, which is the case of the Israeli economy (Fournier, 2016). An increase in high-quality public investment could therefore have a favourable long-term impact on household incomes (Fournier and Johansson, 2016). Empirical research also suggests that the positive fall-out for long-term growth of such spending might be higher for investment in transport and telecommunications than for other sectors (Barbiero and Cournède, 2013; Bom and Ligthart, 2009). Sharabany (2008), for example, demonstrated the advantages that the development of telecommunications and transport in Israel between 1990 and 2003 delivered in terms of manufacturing-sector production in the form of productivity gains and improved infrastructure services, which support private businesses in this sector.

Improved public transport networks would offer many advantages to Israel’s major urban agglomerations, starting with road decongestion. Six years ago, traffic congestion caused every road user to lose an estimated 60 minutes per day, and this figure would in all probability be even higher today (State of Israel, 2012a). Reducing the cost of this congestion to the economy – thought to amount to NIS 15 billion (1.5% of GDP) for 2012, a figure which could reach NIS 25 billion by 2030 in the light of the current trend in population density – would improve well-being and productivity. Better urban transport, including further development of the rail network, would also be beneficial for the environment, since it would bring down GHG emissions and pollution. Furthermore, reliable, high-quality public transport would help to reduce the housing shortfall, improve conditions in areas where property is more affordable and help bring people living in remoter regions into the labour market. More generally, better infrastructure, including social infrastructure, especially in peripheral areas and Arab towns, would stimulate growth in the economy and local employment and enhance living standards and quality of life for inhabitants in those locations, which would in turn help to level out inequalities (Figure 2.13).

Figure 2.13. Socio-economic index – Arab vs Jewish municipalities

Aggregated information of municipalities and local councils with 10 000 inhabitants and more,ref refid="fn-0096" format="note"/> 2013 or latest available

The government is aware of these problems and has taken steps to improve the situation

Developing and improving access to operational and efficient infrastructure nationwide, while maintaining healthy public finances, is a priority for the Israeli government. Reforms have been adopted in recent years, with remarkable progress being achieved in the water sector (Annex A.2.1). More recently, measures have also been taken in maritime freight and renewable energies. Faced with problems in stimulating the efficiency of existing ports through the introduction of regulatory changes, in early 2013 the authorities launched the construction of two new ports in Ashdod and Haifa, to be managed by two private operators, one Dutch and one Chinese. These projects will open the market and allow the ports to accommodate the growth in container traffic that the current infrastructure can absorb only until 2019 (BoI, 2014). In order to reduce greenhouse gas emissions, there is also a plan to increase the share of electricity generated from renewable sources to 17% by 2030, by encouraging increased private investment amounting to a total of around NIS 38 billion or 3.1% of GDP. In order to expand the use of natural gas by local businesses, the government also included tax incentives in the 2017-18 budget to stimulate investment in the expansion of the gas network and the adaptation of business premises to this energy source. There has been significant underinvestment in the natural gas distribution sector, which requires around NIS 350 million for connecting SMEs, hospitals and shopping centres to the network.

Israeli-Arab communities’ access to different infrastructure services is also being improved. Since the beginning of 2016 a five-year economic programme worth NIS 15 billion, or 1.2% of GDP, has been rolled out to support the development of Arab towns in terms of the economy, transport, education, social services and housing. This programme adapts the mechanisms of budgetary allocation in order to ensure that the resources earmarked for the Arab sector under various items of expenditure reflect its demographic weight of 20%. In several areas, the proportion of budgetary resources granted will be even higher than this percentage in order to ensure fairer access to public services between all communities. For example, the Ministry for the Economy will assign over 40% of all funds allocated to the various ministries for new industrial developments to Arab communities and regional industrial areas that contain at least one Arab town. The Ministry for Social Affairs will allocate 25% of the financing dedicated to the creation of new crèches to Arab towns. The Ministry for Transport will allocate 40% of its development budget, out of that amounts to only about NIS 100 million per year, to improving public transport in Arab communities in order to ensure equal coverage of all communities by 2022 (Knesset, 2015; Iataskforce, 2016a).

The most intense investment efforts have been aimed at public transport, however, beginning a few years ago with the construction of a rail line between Ben Gurion airport and Tel Aviv in 2005, a rapid bus system (Metronit) in Haifa in 2007 and the Jerusalem Light Rail system in 2011. The development of transport systems in peripheral parts of Galilee and Negev was launched in 2010 under the Netivey Israel plan, which includes rail connections, electrification of the entire rail network by 2021 and the replacement of diesel locomotives. In the last two years, over 50% of transport investment concerned public transport. The building of a high-speed rail link between Jerusalem and Tel Aviv should be operational by in the course of 2018. The government also plans to provide funding for the construction of light rail systems in the country’s three main cities between 2019 and 2023 at a total cost of NIS 60 billion (4.9% of GDP), in part through public-private partnerships. The same budget includes funding for the Mahir ba’ir programme, which will improve bus transport in Tel Aviv by financing 330 km of special bus lanes and introducing provisions designed to ensure compliance by private vehicles through agreements between the Ministry for Transport and municipalities in this area that agree to give priority to public transport in return for financial compensation. Moreover, in mid-2017 an inter-ministerial committee was also set up to improve infrastructure planning and advance, monitor and coordinate these projects (Flug, 2017).

In a longer-term perspective the Ministries for Transport and Finance have produced a new strategic plan for the development of mass transport systems in Israel’s three main agglomerations that is more ambitious than the plan currently being implemented. This plan, which is worth a total of around NIS 250 billion (20.4% of GDP) over 25 years, is currently the subject of a feasibility study and has not yet been approved by the government. It would create a denser network of urban rail transport, including underground lines in Tel Aviv. The national programme for transport investment also provides for the building of two new airports in the north and south of the country and the construction of a high-speed rail link between Tel Aviv and Eilat, although this latter project seems questionable from an economic point of view (see below).

Building more infrastructure and improving its efficiency will require reforms in several areas

The measures taken and announced by the government to respond to the country’s infrastructure requirements are a step in the right direction. Nevertheless, it is important that their funding be secured while minimising the pressure on the public finances. Reforms would be beneficial in improving the selection, management and execution of these projects through better governance. In several areas progress in regulation would improve the provision and efficiency of, and access to, infrastructure services for all Israeli citizens.

The planned increase in infrastructure funding must not erode public finances

The use of private-public partnerships is welcome but could be improved

Since the mid-2000s the private sector has played an increasingly important role in infrastructure financing in Israel, as in many other OECD countries. This trend is partially attributable to privatisation in certain sectors, such as telecommunications, as well as, to a lesser extent, being the reflection of the increased use of new financing models, such as public-private partnerships (PPPs). In fact, PPPs have been used for over 10 years in Israel for infrastructure projects in the water, energy and public transport sectors (MoF, 2017). In addition, they are set to be used extensively in coming years to finance the development of public transport in the metropolitan areas of Jerusalem, Tel Aviv and Haifa, where investments are set to represent NIS 43 billion (3.5% of GDP), i.e. over 70% of total planed expenditure on ground transportation over the 2019-23 period (BoI, 2017b). Moreover, the authorities have approved the creation of an official database of potential PPP projects in several other sectors, including renewable energy, electricity and water that could be carried out over the 2017-21 period (Globes, 2017a).

PPPs can help improve infrastructure investment without increasing public debt and also limit the negative impact of budget cycles on development programmes (Lavee et al., 2011). When used properly, they can help the government make the most of private-sector know-how in the development of public services involving both the construction and long-term maintenance of complex infrastructure requiring specific technical knowledge and expertise. Through this type of agreement the planning, construction, management and maintenance of an infrastructure project are associated with and mandated to a sole private company, which therefore has a strong incentive to maximise the cost efficiency of its services (Arezki et al., 2017). In Israel the benefits of these contracts are clearly visible, for example in the water sector, with the construction of very energy-efficient desalination plants. PPPs have also helped reduce the costs of new electricity production facilities based on renewable resources by introducing competitive mechanisms to reduce their feed-in tariffs, which were previously established by the authorities (PUA, 2016b).

Nonetheless, PPPs are difficult tools to use and are not without risk for government finances, in that failure to manage them properly can lead to contingent public debt, as has been for instance the case in Portugal (Araújo and Sutherland, 2010; Jaeger, 2014). In order to limit these risks, the Israeli authorities have introduced a selection system for projects financed by these contracts (MoF, 2017). First, a feasibility study based on pre-defined criteria assesses the possibilities for effectively distributing the risks, the size and complexity of management and maintenance tasks, and the private sector’s capacity to bring its know-how to the project in question. The shortlisted projects are then allocated to private operators using competitive tenders. These can include concession agreements, which set out the quality, quantity and price of the services to be provided, along with the process for the financial closing of the project. The system for monitoring both the construction and the undertakings stipulated in the concession agreement is then put in place.

However, this system has not prevented certain management problems with recent projects, such as the light rail systems in Jerusalem and Tel Aviv, and Route 531, which crosses the country. The PPP-based projects significantly overshot their construction costs and schedules, by as much as five years in the case of the Jerusalem light rail system. There were also disputes and contract renegotiations, with projects being nationalised in two cases (BoI, 2015 and 2017b). As the Bank of Israel observed, these issues could be avoided by aligning the management procedures for PPPs more closely with best practices based on international experience (Araújo and Sutherland, 2010). In the first place, this will involve greater centralisation of public-sector expertise and experience in PPPs by entrusting the supervision and management of these contracts to a single public agency, contrary to the provisions of recent transport plans for large agglomerations (BoI, 2017b). Such a change, which has recently been adopted by the authorities, will also be preferable to better leverage the expertise of private operators by involving them in the planning stage of infrastructure projects, even if it is important that the government itself has previously taken the necessary legal steps for obtaining work permits and other administrative authorisations. Nonetheless, it appears that the government is still in charge of planning development projects prior to the bidding phase, which leaves little room for interaction with private companies at that moment (BoI, 2017b).

Institutional investors could play a larger role in financing infrastructure

Moreover, infrastructure development could benefit from closer ties with institutional investors. In Israel, as elsewhere, pension funds, life insurers and sovereign wealth funds have been looking into diversifying their portfolios into the infrastructure sector, whose long-term returns are often attractive and generally protected from inflation (OECD, 2014a). Inflows from these funds would also help lower the funding cost of such projects. That said, these investors have already allocated a small proportion of their assets to infrastructure, often in the form of indirect investments through listed companies and fixed-income instruments. Investments by institutional investors in the infrastructure sector accounted for about 4% of their total portfolio in 2015, with direct investments in PPP projects representing less than 0.5% of the said portfolio. Greater involvement and more substantial direct financing is hampered by a lack of information and transparency on PPPs, which stems from the complexity and heterogeneity of these projects, and the lack of risk-assessment expertise among these investors (OECD, 2015a). To remove such obstacles, the authorities could therefore encourage the development of an intermediary body with the technical knowledge required to resolve these information-related issues and promote infrastructure as a specific asset-class (Arezki et al., 2017, OECD, 2016b; Inderst and Della Croce, 2013).

PPPs are not, however, the ideal solution for all projects. Their high transaction costs, which are largely unrelated to the size of the work, mean that the model is inappropriate for small projects (Araújo and Sutherland, 2010). The same applies to projects with relatively simple management and maintenance requirements, which would therefore not benefit from the input of private companies. The cost of financing infrastructure via the private sector through PPP contracts is also higher at first glance than if it were covered by government borrowing at low interest rate and a regular tender process. In addition, it is important to make sure that the sole reason for choosing PPPs is not just to be free from budget constraints.

Budgetary funding for social infrastructure, including hospitals, should be increased

In many sectors budgetary financing of infrastructure investment is the best solution, and the Israeli authorities could make the most of the current low-interest-rate environment to finance their deployment, in the social field for example. The redistribution effect entailed by the collective financing of this type of infrastructure under the budget is appropriate, given the solidarity objective underpinning their development. And insofar as new infrastructure also benefits future generations, it might also be acceptable to use debt-financing solutions on a temporary basis, if that is compatible with maintaining fiscal prudence and the downward trajectory of public indebtedness. Alternatively, the Israeli authorities could finance this expenditure with a slight increase in relatively low tax rates. This would be a suitable approach if the taxes increased were those creating the least distortion and if the projects were carefully selected and generated significant long-term economic and social benefits. This is the case, for example, for social infrastructure projects, such as increasing the number of places in childcare centres and expanding the number of hospital facilities.

Although Israel’s health system is known for its efficiency, broad coverage and good results, the pressures weighing on current capacity for this kind of care are such that hospital facilities need to be extended (OECD, 2013; OECD, 2016c). The low number of hospital beds and their average occupancy rate of over 94% between 2010 and 2014 (Figure 2.5, above) testifies to this tension. Services are under even greater pressure in remote regions, such as the south of the country, where waiting times for non-urgent operations are almost 45% longer than the national average because of the scarcity of beds (Taub, 2016). The low level of hospital spending by international standards (Figure 2.14), even though it may partly reflect the Israel’s younger population than most other OECD countries, contributes to this lack of capacity and, crucially, makes hospitalisation conditions difficult during certain times of the year in which epidemics tend to peak. When patients outnumber beds, they are often left in corridors or eating areas (Ben-David, 2017). Combined with the lack of medical staff, especially nursing staff, this lack of capacity causes frustration and distress for both patients and their families, leading to tensions with, occasionally, violence against medical staff (Ben‐David, 2017). In addition, these problems undermine care quality because they also promote the development of hospital-acquired infections, which have contributed to an upsurge in the infectious and parasitic disease mortality rate in Israel in the last 20 years to a rate far higher than in other OECD countries (Figure 2.15). To prevent recurrent hospital overcrowding at particular times, facilities should be extended at the cost of increasing slack during the rest of the year.

Figure 2.14. Total hospital inpatient spending

As a percentage of GDP, 2015 or latest year available

Figure 2.15. Deaths from infectious and parasitic diseases

Improve price signals to encourage a proper adjustment of supply and demand

In order to encourage good management of infrastructure outside the social sector, it is preferable to ensure that the services they provide are user-financed. This is already the case in water management, with positive results. Indeed, an efficient pricing mechanism helps to identify the extent of needs and encourage adjustments to services demand based on available capacity. Charging users directly for the choice of services they receive ensures a more disciplined approach when selecting investment projects that need to pay for themselves and encourages innovation as a means of reducing prices for users (Glaeser, 2016). Under-pricing on the other hand leads to overutilization of existing capacities, increases environmental and congestion costs, and reduces the resources available for, and the incentive to invest in, modernisation. The authorities should therefore pursue efforts to reform the charging systems for the use of public infrastructures so as to ensure that costs, including externalities, are completely recovered by users over the long term.

From this viewpoint, the budgetary financing of road infrastructures by central and local governments in Israel is inefficient. Most levies and taxes related to road transport have no direct link with the use of infrastructures. Very high vehicle taxation is related to ownership rather than usage (OECD, 2013). The various fees paid by owners either annually or upon registration are also fixed costs. While it is true that fuel taxes are linked to the use of private cars, the lack of differentiation in the impact of these various levies for all car journeys, regardless of the section of the road transport network used and the degree of congestion, significantly reduces their utility as an instrument for managing travel demand (Alberta and Mahalel, 2006).

Road tolls are generally considered to be powerful traffic regulation systems (Alberta and Mahalel, 2006), and although there are only two such systems in Israel, they have proved to be effective in reducing congestion. The launch in 2011 of a toll lane at the entrance of Tel Aviv on the road from Jerusalem with a variable price system dependent on lane occupancy has had positive results. This system, which includes free usage for vehicles with three or more passengers, and which provides a dedicated parking facility at the entrance of Tel Aviv and free shuttle rides to the city centre, has led to many private car users changing their habits. According to available survey data, the shuttle service is used by 20 to 25% of vehicle owners working in close proximity of the shuttle rides in Tel Aviv, thereby lessening congestion (Rafiah and Cohen, 2016). Government plans to develop this type of infrastructure in other high-density traffic zones are therefore welcome.

It would nevertheless be worth examining the possibility of a more ambitious overhaul of the framework for managing and financing road transportation. Advances in mobile communication and computer technology now make it possible to price the use of road networks through the creation of metering systems. This would pave the way for users, rather than taxpayers, financing road transport network services by introducing an efficient pricing system similar to those found in other network industries (Cramton and Geddes, 2017). The authorities could transfer the management and maintenance of road transport to public companies, as they have done for water. This would then be financed by revenues generated from the use of the road transport network and overseen by a regulator responsible for defining the pricing system while taking into consideration the cost of maintaining and modernising the infrastructure, as well as environmental and congestion costs. This would also prevent cross-subsidisation of budgetary financing for road infrastructure, which undermines fairness (Glaeser, 2016).

The implementation of this type of reform, which would strengthen the coherence of decision making on expenditure and income in road transport and would foster more effective use of infrastructure, is under discussion in other OECD countries. A toll system for transport services already exists in Germany and Poland for goods vehicles (Queiroz et al., 2016). Australia also plans to introduce a similar system for freight transport within the next five years and for all vehicles within the next ten years (Infrastructure Australia, 2016).

However, the realisation of this kind of reform requires time and significant public consultation in order to ensure its acceptability, so it would be preferable to launch discussions soon (Infrastructure Victoria, 2016). In the absence of an adequate public transport system, it could be difficult to introduce financing for road transport based on use of the network, and improving the Israeli public transport system will take time.

In the shorter term, however, consideration should be given to adopting a less ambitious approach aimed at diversifying car taxation by transferring at least part of the burden to vehicle use rather than ownership. A recent experiment called Naim Leyarok (“Going Green”) found that relatively modest financial incentives in relation to private car use reduced rush-hour travel in congested areas (Bar-Eli, 2016). According to the results of the experiment, which was launched in 2012 in the agglomerations of Jerusalem, Tel Aviv and Haifa, 16.5% of motorists who took part made significant changes to their travel practices in order to avoid urban congestion (Hazut and Cohen, 2016). Many drivers, therefore, have some leeway to change their behaviour by deferring non-urgent travel, taking public transport, adapting their working hours or working from home if they have an incentive to do so. It is important to pursue these experiments to confirm the results, because such a significant reduction in rush-hour traffic in congested areas would lead to a sharp fall in traffic problems at a cost far less than that which would be required to develop public transport.

The need to improve the management of demand using better price signals does not apply solely to transport. Better price signals in the electricity sector also help leverage the use of available facilities. A more responsive pricing approach as far as electricity consumption is concerned removes the need to construct expensive production capacities just to meet peak demands. In these areas technology can also be of valuable assistance. The use of smart meters, as in the water sector, enables users to better adapt their consumption to the different prices during the day. Smart meters have already been installed for big consumers, who account for 62% of total electricity consumption, and the authorities are considering extending their use, but the plan will be subject to a cost-benefit analysis after a pilot project has been implemented. The authorities should encourage the installation of these smart meters everywhere it would make economic sense. Contracts providing for interruptions to, or restrictions on, electricity consumption during short periods of high demand in exchange for lower prices outside peak periods could also be offered to consumers, as is already the case in a number of other OECD countries.

The infrastructure sector needs better governance

The selection of infrastructure projects should be more rigorous and transparent

To meet the country’s infrastructure needs, it is vital that investment in this area is carefully selected, planned, co-ordinated and executed by means of a good governance system. Reliable ex ante evaluations of infrastructure projects’ rates of return are especially important to ensure good investment quality. The Israeli authorities have developed a robust evaluation method for this purpose, particularly in transport (Shiftan et al., 2008). These cost-benefit analyses draw on a common approach set out in a regularly updated guide, which aims to integrate the best practices applied internationally, which allows all projects to be compared on the same basis. The last edition of this guide was published in 2012 and includes surveys of environmental impact and safety, and takes account of induced demand phenomena related to the development of new infrastructure when road congestion problems are important (State of Israel, 2012b). The estimates of projects’ overall costs and benefits are, moreover, backed by a separate assessment of their distribution among various population groups. These analyses must be made before any decision is taken concerning a central or local government project. But current procedures do not require the systematic publication of the detailed results of this work, which runs counter to good practice for promoting transparency and accountability in administrative decision-making (OECD, 2016d).

There also exists a consensus recognising that, in practice, cost-benefit evaluations are not always up to the task of assessing what they aim to measure and that project choice does not depend solely on the estimated value of returns on investment (OECD, 2011a). While positive cost-benefit analyses give the go-ahead to investment decisions, negative conclusions do not necessarily block them. A decision to approve an infrastructure project can be legitimate and justified despite a negative evaluation, if that evaluation has not properly measured the benefits from the investments that the authorities want to prioritise in order to promote, say, regional development or other strategic objectives. It is important, however, to ensure that these decisions are taken according to a rigorous and transparent process, and this would be helped by reforms that increased decision-makers’ accountability for their choices after the project evaluations have been carried out. Using infrastructure investment to reach objectives related to equality, for example, can be costly, since the economic advantages to the beneficiaries are often modest compared to the costs of the projects put in place. Society as a whole and the populations targeted can draw greater benefit from monetary transfers as an alternative mechanism for redistribution (Persson and Song, 2010).

This situation is illustrated in Israel by the project to build a freight and high-speed passenger rail line between Tel Aviv and Eilat, adopted by the government at the beginning of 2012. A report commissioned after this decision points out that the cost of the project, which could amount to NIS 40 billion (3¼ per cent of GDP), would greatly exceed the expected benefits. The link between the Red Sea port of Eilat and that of Ashdod on the Mediterranean will not be able to rival freight services transiting through the Suez Canal. It is hard to justify the outlay represented by the improvement of passenger services to Eilat with a high-speed rail link in the light of the essentially tourism-related nature of journeys made on this route. It is also likely that the benefits delivered by the project for the development of the south of the country, especially the Negev, including the reduction in road accidents in this area, will be limited, whereas its execution will take a significant toll on the environment (Feitelson et al., 2013).

To avoid these problems, it would be advisable to entrust responsibility for conducting the cost-benefit analyses of projects under consideration to an independent agency, along the lines of Infrastructure Australia, and to publish them systematically before the government’s decision in order to more widely test reaction to the proposal. Another positive step would be to ensure that decision-makers were then obliged to explain and publish the reasons for their choices, especially those that rejected technical assessments. Such a reform would increase the transparency of the decision-making process and increase its resistance to the risk of interference based on subjective reasons, which can undermine investment quality. Creating a specialised, independent entity in charge of evaluating infrastructure projects would also present the following advantages:

As the body responsible for conducting and disseminating the cost-benefit analyses, it could also compile them automatically in order to carry out regular ex post audits, which would be useful in helping to improve the quality of analysis and evaluating the consequences of public decisions (Terril, 2016). This new body could also supplement project-by-project analyses by a more strategic approach taking on board the possible complementarities between projects.
This institution could also be useful in evaluating the trend in supply and demand for services in different sectors and regions. Recent research into the demand for electricity is a useful example of this kind of contribution (Gallo, 2016). This would help the authorities to better establish the country’s most urgent infrastructure needs.
It could examine the impact on the need for infrastructure services of current and future technological changes, such as the expansion of wireless communications, driverless cars and the fall in the production cost of photovoltaic electricity. The possibilities represented by these changes could have a big impact on investment profitability and choices by reducing the opportunity cost of the time lost in transport, for example (Thomopoulos and Givoni, 2015; Bruun and Givoni, 2015).

The management and execution of infrastructure projects can be enhanced

An international comparison of infrastructure governance systems, produced from the results of a detailed survey (Hertie School of Governance, 2016), suggests that there is some leeway for improvement in terms of Israel’s project management (Figure 2.16). An examination of transport spending between 1998 and 2009, for example, reveals that almost 65% of investments carried out cost more than initial estimates and 82% were finalised with a delay of, on average, 64% of the time that had initially been planned for the project (BoI, 2010). Although these kinds of problems are frequently encountered in most countries, they seem to be more significant in Israel. Cost overruns came to an average of 31% in real terms and 45% for projects of over NIS 100 million, whereas in other countries they tend to fall between 21% and 28% (Flyvvberg et al., 2004; Frontier Economics, 2009). These implementation problems, which recently hit the Netivey Israel plan and the construction of the first light-rail line in Tel Aviv, are hampering the development of the infrastructure that the country needs, because the projects in the pipeline are often completed only partially or with delays (BoI, 2015). In 2012, for example, there was a plan to increase public investment in transport to NIS 23 billion by 2015, but the actual amount spent was only NIS 10 billion (Figure 2.17).

Figure 2.16. Infrastructure governance indicators,ref refid="fn-0099" format="note"/> 2016

Index scale from 0 (least performant) to 100 (most performant)

Figure 2.17. Change over time in transport investment plans for 2015

NIS billion, 2014 prices

These problems with infrastructure execution have a number of features. It often takes a long time to publish calls for tender and select the contractors, and changes to the project specifications are frequent because of evolving priorities at government level, disagreements between agencies and poor planning. Initial estimates of cost and the capacity of the companies in charge of carrying out the projects are sometimes too high, occasionally leading to their being replaced, and hence to further delays as in the case in the construction of the light-rail systems in Jerusalem and Tel Aviv (BoI, 2017b). The lengthy bureaucratic procedures to unblock budget lines and obtain planning permission, in addition to the difficulty in finding available sites, especially in Arab towns, also contribute to delays in developing infrastructure. This is the case, for example, with subsidised crèches for children aged under three; the government had pledged to build 400 new crèches between 2013 and 2017 (i.e. an increase of 20%), but by the end of 2015, only 10% of these new crèches had been built (BoI, 2016). Recent improvement in the administrative processing of these projects, including a simplification of land registration, helped speed up the construction of crèches to 115 by July 2017, i.e. to almost 30% of the government’s objective. This is a good example of the how planning problems and administrative difficulties afflicting infrastructure can be overcome. In general, projects would benefit from greater resources at the planning stage, and those being managed by PPPs would also profit from better liaison with the private operators selected for the construction phase.

Co-ordination failures between ministries or between central and local government are not infrequent, moreover, and they hamper the development of public transport services that meet the needs of the population. This was the case, for example, during the reorganisation of Tel Aviv’s bus network, launched in 2009 to cut passenger transit times, and is more generally typical of all proceedings concerning the town of Modiin, which was created in the mid-1990s to satisfy the need for housing linked to the wave of immigration from the former Soviet Union (State Comptroller, 2013; Feitelson and Gamlieli, 2010). Despite having the right conditions for the creation of an integrated public transport system, Modiin lacks adequate bus and rail networks because of a lack of co-operation between the Ministries for Housing and Transport, with the result that its inhabitants, most of whom work in Jerusalem or Tel Aviv, tend to travel by car. Similarly, the programmes currently underway to rapidly increase housing supply, such as those promoted by the national Vatmal committee for the development of preferred housing projects, could be better co-ordinated with the need for transport infrastructure (Zanzuri et al., 2015; Tziaon, 2016; OECD, 2017a) to lower road congestion and environmental damage, which undermine both the economy and the well-being of the population.

To solve these problems, the operation of infrastructure planning bodies, which are slow at the regional council and district levels (Bousso, 2016), would have to improve and co-ordination between different ministries and local government to increase in order to ensure the coherence of investment projects in their entirety. In the case of public transport, this will mean, first and foremost, paying greater attention to the mobility needs of the population to give them a viable alternative to using their cars (Givoni and Banister, 2010), by improving public consultation, which often seems inadequate, as in Modiin or during the reorganisation of the bus lines in Tel Aviv. Improved public consultation, especially in the initial phases of projects, is also particularly helpful in preventing resistance to project implementation in densely populated areas.

It will also mean setting up a decision-making body for each project, endowed with the information and instruments it needs to deal with the inevitable obstacles to implementation and to manage the trade-offs between the divergent interests of the various parties to the project in order to ensure effective execution on the ground (State Comptroller, 2013; Feitelson and Gamlieli, 2010). By way of example, train and bus timetables defined by different companies have to be consistent and, if special bus lanes are created, must be enforced by the competent authorities. More generally, it will be important to evaluate and check the projects’ ex post results in the light of the ex ante targets set, including budgetary targets. As in other countries, problems engendered by poor management, or even corruption, in the implementation of major infrastructure projects are not uncommon (Megiddo, 2016; Bob, 2015). It is essential to introduce mechanisms to ensure the continuous transparency of project management if such difficulties are to be prevented.

Infrastructure regulation reform is taking too long

Increased investment, particularly by the public sector, is no substitute for regulatory reform. Reform has a major role to play in promoting the more efficient use of existing infrastructure, especially by intensifying competition in some sectors. Attempts by the authorities to improve the regulation and efficiency of network industries have, however, often met with difficulties in recent years.

Electricity sector reform is long overdue

Israel’s electricity market is more strictly regulated than those of many other OECD countries, and it is one of the few economies in which electricity is still largely controlled by a vertically integrated public enterprise: the Israel Electricity Company (IEC). Not only does IEC control 75% of production, 100% of transmission infrastructure and most of the distribution to end users, it also operates the grid. The changes necessary to improve efficiency in the electricity sector – namely, separating the production, transmission and distribution of electricity – were identified as early as 1996 by the electricity sector law. Repeated attempts to reform the sector and introduce these changes, however, including one in 2013-14, failed because of opposition from IEC workers and their capacity for obstruction, despite the fact that competition from independent private producers (IPPs) has been authorised since 1996 (OECD, 2016a).

Infrastructure management in the electricity sector is faced with the twin challenges of continuing to meet the economy’s electric energy needs on the one hand, while helping to cut carbon dioxide emissions on the other. The current generating capacity is largely sufficient, with production reserves amounting to 30% of peak demand. They will have to be increased, however, to cover the replacement of 25% of coal-fired power stations, in line with the government’s plan for 2030, and to satisfy increasing needs, although the rise is expected to be modest in the coming years (BoI, 2016). Investments amounting to an estimated NIS 38 billion (3.1% of GDP) are also needed to increase the share of electricity generated by renewable sources from 2% in 2015 to 17% in 2030. To achieve these targets, the authorities want to promote the construction of gas-fired and solar power stations by IPPs, because IEC has not been authorised to build power stations since 2009 in order the enhance competition. By 2020 almost 40% of installed electricity production capacity will be provided by IPPs, compared to 25% today. The increased use of natural gas, which is used to fuel 60% of the power stations in 2015, will nevertheless require additional infrastructure for the transport of gas produced offshore. It will also be necessary to extend and improve the grid and transmission systems, especially in remote areas (PUA, 2016a). Insufficient investment in the network would restrict the IPPs’ ability to develop conventional power stations and, more significantly, photovoltaic installations in the south of the country, where a large number are planned.

The cost-efficient development of infrastructure calls for reform of the electricity market in general and state-owned IEC in particular. The latter’s poor efficiency is shown by its high labour costs due to overstaffing and elevated wage levels, which reflect the weak competitive forces to which the firm has been exposed. The workforce is bloated, with a surplus generally reckoned to be around 20% and highly unionised staff paid more than in the average in other SOEs and enjoying generous pension provisions and other benefits, such as free electricity (OECD, 2016a). With regulated electricity tariffs set at a relatively low level by international standards, IEC is weak financially, with a high level of indebtedness (7% of GDP in 2016), which reduces its profitability. The firm is also faced with the steady but inevitable emergence of IPPs with the growth of the renewable energy sector.

Reforms could be introduced gradually, beginning with the correction of transparency failings in IEC management (PUA, 2016a; Navigant, 2015), followed by the separation of its production activities and grid management, creating an independent operator for the national network and a wholesale electricity market (OECD, 2016a). Turning IEC into a holding company with several subsidiaries that have separate activities would allow the regulator to assess the profitability and costs of these activities more accurately and to detect cross-subsidisation, which is illegal and distorts competition in the sector. In this respect, the recent reform proposal currently being discussed between the authorities, IEC and its unions, which is expected to reduce IEC overstaffing and stimulate competition in electricity production, is a welcome move and should be implemented (Gorodeisky, 2017a). In addition to the proposed change, the creation of a wholesale market would also enhance efficiency by enabling exchanges between IPPs, whose production plans are currently based on bilateral contracts with consumers. To work properly, wholesale electricity markets need a sufficient number of electricity producers, none of which enjoys a dominant position. IEC would thus probably have to divest some power stations, as is considered in the reform proposal. If properly organised, such a market would also provide useful information about the sector’s needs for increased capacity, unlike the system of production quotas currently allocated by the regulator to meet the expected increase in power demand.

Efforts to lift the barriers to the use of natural gas in the economy must be pursued

It would also be useful to introduce measures to remove certain obstacles to the use of natural gas in the economy. These obstacles involve the terms and costs of the long-term contracts that are typically used on the gas market. They have take-or-pay clauses that oblige customers to buy large quantities of gas and pay in full for those volumes, even if they are not completely used. These clauses represent a financial obstacle to the development of IPPs to the advantage of IEC and can generate extra costs for consumers. To remove this obstacle, a secondary market could be created to allow electricity producers to sell gas bought on the primary market and not used (PUA, 2016a; OECD, 2016a).

Israel also has insufficient infrastructure for the distribution of natural gas, and this restricts its uptake in the economy. The investment required to develop a gas distribution network for major consumers (SMEs, hospitals, shopping centres, etc.) is estimated by the authorities to amount to around NIS 1.3 billion (0.1% of GDP). Less than 10% of this investment was realised in 2016, however, and just 11% of consumers eligible for connection to the current network have already been connected. The increased use of natural gas by firms, households and transport (in the form of compressed natural gas, CNG) would, however, be good for the environment and reduce Israel’s dependence on oil and gas imports.

Nevertheless, current economic conditions have reduced the incentive for eligible consumers to replace oil with gas as the energy source for their installations. Low oil prices and the high cost of land in high-density areas are reducing the profitability of the investments required for connecting to the gas network and adapting consumers’ installations to this alternative energy source. Accordingly, the main reason for the slow expansion of gas distribution networks seems to be a lack of demand. In 2016 the authorities adopted several measures improving the framework for developing the distribution network and removing the obstacles and simplifying the administrative procedures (regulatory uncertainties, problems with obtaining building permits, etc.) that had previously hindered the conversion of industrial facilities to natural gas (OECD, 2016a). Efforts to promote CNG in transport need to be continued, in line with the government’s strategy to reduce the proportion of refined oil products used in transport from 96% at the start of 2013 to 70% in 2020 and 40% in 2025 and, more generally, to lower the use of gasoline and coal in the economy (Rosner, 2013; Gorodeisky, 2017b). The construction of service stations offering this kind of fuel is, for instance, to be encouraged.

The implementation of reforms in the telecommunications sector needs to be improved

There are also problems in the telecoms sector, especially with wireline communications. While Israel’s performance in this sector is above or around the OECD average in terms of prices and high speed broadband Internet connections, for example (Figure 2.18), these services are still used only by a relatively small proportion of the population in comparison to other countries (Figure 2.3, above). In addition, the existence of the duopoly consisting of Bezeq, the legacy operator privatised in 2005, with 68% of the market, and Hot, which owns a national cable network, weakens competition and prevents consumers from receiving the best value for money for these services. The deployment of a third, fibre-optic network is planned. It would be faster than Bezeq’s and Hot’s hybrid fibre and copper networks, but this project has had no impact on competition and is now uncertain to go ahead because the company managing it, IBC, is in financial difficulty. Some recent financial indicators, although partial and incomplete, suggest that Bezeq and Hot, with their dominant positions, are able to generate higher profit margins than other domestic telecom firms and similar enterprises abroad (Figure 2.19). Bezeq also has a dominant position in fixed telephony, controlling 55% of that market’s subscriptions and 65% of revenues.

Since 2015, in a bid to stimulate competition, the authorities have adopted several provisions opening Bezeq’s and Hot’s networks to other operators. First, a wholesale market providing access to Bezeq’s infrastructures at a regulated price was created for Internet service providers (ISPs). Whereas previously two separate subscriptions were required for access to broadband wireline Internet – one for the infrastructure network and the other for the ISP – consumers can now obtain a bundled offer from other companies than Bezeq and Hot. Second, Bezeq has been forced to give its competitors direct access to its passive infrastructure (conduits, pylons, technical installations, etc.) and landline infrastructure for a reasonable price in order to boost the development of the fibre-optic network and increase competition in the landline segment. Third, a new rule stipulated that Bezeq’s various businesses (ISP, mobile operator and activities in landline and broadband Internet networks) were to be separated into subsidiaries within a single holding company so as to prevent cross-subsidisation between the said activities and to facilitate the oversight work of the sector regulator. Lastly, since mid-2017 and after lengthy negotiations, Hot has also had to allow third parties wishing to use its network under similar conditions to Bezeq’s.

To date, the results of these changes have been rather mixed. There has been a slight increase in competition in the broadband wireline market. At the start of 2017, over 15% of households were subscribed to bundles of Internet services. The price of these services, which was already relatively low, has fallen in the last two years (Figure 2.20), but Bezeq has made it difficult for its competitors to access its landline infrastructures directly, citing technical issues, and an alternative solution involving the resale of indirect access rights to its infrastructure was implemented in mid-2017. Bezeq has also made it difficult for its competitors to access to its passive infrastructures, yet again citing technical causes and problems with the cost of work. This has prevented the incumbent’s competitors from being able to roll out new network infrastructure at a reasonable price.

Figure 2.20. Internet package prices per download speed

Before and after the wholesale market reform

The overall impression is that the resistance of the two main market operators to implementing regulatory changes has limited the expected benefits thereof. The reforms adopted are nevertheless a step in the right direction and need to be pursued. International experience suggests that increasing competition by boosting the number of actors in these markets through opening access to existing infrastructure, including passive infrastructure, at properly regulated prices is a way of both stimulating investment and preventing the creation of monopoly rents (OECD, 2008 and 2011b). Nevertheless, as is the case in the other network industries, the benefits of these reforms become truly apparent when there is an independent regulator to ensure their application (OECD, 2014b). Recent experience shows that the Israeli Ministry of Communication, which is both the regulatory authority and the body responsible for developing regulations for the telecoms sector, is torn between its duty to enforce the application of reforms and its assignment of carrying out further adjustments to regulations, as a result of intense pressure from the main market actors. Bezeq, for example, continues to lobby for a reconsideration of the functional separation of its activities imposed upon its organisational structure on the grounds that this restricts its ability to generate economies of scale and optimise its tax bill.

This situation is a potential source of regulatory uncertainty. Nor is it conducive to market transparency or investment. The Israeli telecoms regulator does not produce an annual report and publishes relatively little information on its activities and the functioning of the market. For instance, the reasons for the relatively low subscription rate to fixed broadband Internet services, which do not seem to be related to insufficient network coverage or excessive prices, have not been analysed. Moreover, the regulator is not obliged to justify its decisions, and the only authority to which it reports is the government, to which it belongs. A clear distinction would be useful between the role of developing regulations, under the supervision of the Ministry, and the function of implementing the said regulations, which should be entrusted to an independent and transparent entity (OECD, 2014b). This independent regulator needs to have enough authority to deter efforts to impede the enforcement of regulations. It is also important that the general managers of these regulatory authorities be recruited by independent selection committees on non-renewable contracts, thereby reducing any temptation to curry favour with the authorities in a bid to secure a second term.

Water management can be further enhanced

Although Israeli water management is remarkable in many respects (Annex A.2.1), it can be further improved. Despite a substantial reduction in the use of natural sources, there remains a persistent problem of overexploitation due to the decline in their natural replenishment as a result of the droughts of recent years. In 2017 natural sources accounted for merely 50% of the economy’s water consumption, compared to 90% in 2005, and the water levels in Israel’s three main fresh water reserves (Lake Kinneret and the coastal and western mountain aquifers) remain well below optimum levels (Figure 2.21). In addition, most of these resources lie close to saline water bodies that could infiltrate them in the event of over-pumping (Weinberger et al., 2012). In order to guarantee their sustainable management, it would be advisable to set clear objectives for the minimum acceptable water quality in these natural reserves and to set appropriate upper limits on their exploitation (OECD, 2017c) by increasing the production of desalinated or reclaimed water if necessary. To ensure compliance, they could be written into law, as for Lake Kinneret.

Figure 2.21. Hydrogeological situation of the main natural water sources

Total volume of water above the red lines for three main water sourcesref refid="fn-00103" format="note"/>

It is also important to recognise that most of Israel’s natural water resources are shared with its neighbours. Agreements have been signed with Jordan and the Palestinian Authority for the management of these resources, and Israel transfers 130-135 million m³ of water there every year (WA, 2015). In July 2017, a trilateral agreement was also signed between Israel, Jordan and the Palestinian Authority to construct a pipeline transferring water from the Red Sea to the dwindling Dead Sea, to build a desalination plant in Aqaba using the electricity generated by the water going down to the Dead Sea (the lowest body of water on earth), and to transfer 32 million m³ of water per year to the Palestinian Authority (10 million to Gaza and 22 million to the West Bank) (Ahren and Lidman, 2017; Siegel, 2017). Although this project will only marginally contribute to meeting Gaza’s need for drinking water and slowing the drying-up of the Dead Sea, it highlights the benefits of co-operation between the region’s stakeholders to address common problems. Nevertheless, increased regional co-operation in water management will be required if environmental problems are to be avoided and social and if economic development in the region is to materialise, which is particularly urgent in the case of Gaza (Siegel, 2015), even if the geopolitical context makes this difficult.

The operation of water supply infrastructure could improve still further if the water subsidies for the farming sector were completely abolished and the large number (55) of local water companies were reduced, thereby generating economies of scale and lower management and administration costs (Globes, 2017b). The authorities could also encourage farmers to trade water quotas to encourage the optimal allocation of these resources (OECD, 2015b).

A reform of airport management is indispensable

Because of its geopolitical situation, Israel depends heavily on air transport for movements into and out of the country. The policies towards air transport liberalisation adopted in recent years, which led to the privatisation of El Al in 2005 and the Open Skies agreements with the United States in 2010 and the European Union in 2013, have helped to bring down the price of transport services and increase demand (OECD, 2016a). Airport management failings, however, prevent the country from reaping the full benefits of these reforms. International benchmarks of connectivity indicators, which summarise passenger movement statistics, airline prices, travel time and available destinations, reveal that Israel’s performance lags significantly behind that of comparable countries (Figure 2.22), a situation that undermines the attractiveness of Israel’s economy in terms of investment, human capital and tourism (PwC, 2015).

Figure 2.22. Air transport connectivity index, 2015ref refid="fn-00104" format="note"/>

The problems affecting airport management in Israel are caused by a mix of factors related to the monopolistic position of Ben Gurion international airport and the sector’s regulatory failings. Over 99% of international passenger traffic transits through Ben Gurion (there is one other small civil airport, in the south of the country near Eilat). Air transport is organised by a public enterprise, the Israel Airport Authority, or IAA, which directly manages almost all of the sector’s value chain. The IAA provides all of the country’s civil air navigation services and is directly responsible for the commercial management of airports–runways, emergency services, luggage handling, freight terminal unloading, air security and even gardening. The almost complete lack of sub-contractor bidding for management of these services is quite exceptional among OECD countries (Table 2.2).

	Boarding, check in, lost & found	Baggage handling	Cargo terminal	Ramp services
Israel	3	1	2	1
Austria	8	21	6	21
Denmark	3	3	3	3
Finland	3	21	51	31
Ireland	7	5	6	5
Sweden	4	5	3	4
Portugal	81	21	21	21
Belgium	5	2	5	2
Greece	4	3	3	3
Italy	4	21	21	21
United Kingdom	5	5	5	5

1. One of the providers is the airport operator.

Source: Air Transport Research Society database.

The operation of this public monopoly damages the efficiency of airport management. Revenue per air unit at Ben Gurion airport ranks among the highest in the world because of the high fees paid by businesses and air carriers – costs which are largely passed on to their customers (Figure 2.23, Panel A). Management costs are higher than in most other countries (Panel B), largely because of relatively high wages (Panel C), which are also above those of other Israeli public enterprises (Knesset, 2017). Furthermore, the quality of services provided to carriers is poor, as shown by the lengthy aircraft turnaround times between landing and take-off (Panel D), which is a serious concern for low-cost airlines.

Figure 2.23. Airport management indicatorsref refid="fn-00106" format="note"/>

The authorities have announced measures to correct these failings. In 2011 the government pledged to create a new international airport to support Ben Gurion and in 2014 took the decision to have the airport built and managed by private firms under a PPP agreement. According to the PPP management committee, this airport, which should be located in the north of the country and handle short- and long-haul flights, is expected to open between 2025 and 2030 (State of Israel, 2017).

These are welcome measures that need to be implemented immediately. A new airport built and managed by private companies will challenge Ben Gurion’s monopoly. Nevertheless, it is also important to review sector regulation if fair and effective competition is to be guaranteed: responsibility for air traffic control management needs to be handed to a body independent of the IAA; the various activities carried out by the IAA, which could itself be transformed into a holding company, should be organised into separate, distinct subsidiaries to ensure greater management transparency and prevent competition-distorting cross-subsidisation. Lastly, it would also be helpful to enforce the opening-up of ground services at Ben Gurion airport to private companies, in line with best practices such as EU directives on access to these services. Many signatory countries of the EU’s Open Skies agreement have adopted European directive 96/67/EC, which requires that at least one supplier of ground services should be independent of both the managing body of the airport and the dominant carrier.

A better match between supply and demand in mobility services is needed

Information and communications technology has led to the emergence of the sharing economy in the road transport sector, with a better use of the road network through the development of ride-hailing services, such as those offered by Uber. Several recent empirical studies carried out in the United States have highlighted the benefits of this new type of service, which leverages previously underused supply-side capacities. By increasing the number of persons per vehicle, ride-hailing reduces the number of cars on the road along with the associated problems of congestion and urban pollution (Li et al., 2016). These new services improve the well-being of their users and reduce the need to purchase a car and build new road capacity (Cohen et al., 2016; American Public Transportation Association, 2016). They increase options for urban mobility by meeting unsatisfied demand for trips in urban areas by the young population, including in areas poorly served by public transport and taxis (Rayle et al., 2014). Using estimates carried out in large American cities, Cramer and Kruger (2016) show that ride-hailing services are also 30-50% more efficient than traditional taxis based on time spent or distances travelled with passengers. These services also offer better quality and shorter customer wait times. This situation reflects both the better technology used by ride-hailing firms for adapting to demand, their ability to create larger networks of drivers than taxi companies and their more flexible service offering through variable pricing that adjusts to demand fluctuations in real time.

A change in the regulations opening up access to the Israeli taxi market to these ride-hailing firms would also most likely have a positive impact on consumers and on the efficiency of road network use, as stressed by the Israeli Antitrust Authority (Ben-Gedalyahu, 2016). Nevertheless, this type of reform, which is currently opposed by the authorities, would be hard to implement, mainly due to the problems that the traditional taxi companies, subject to stringent charges and regulations, would have in absorbing such an abrupt change in the functioning of the market and dealing with the competition from ride-hailing firms. The issue also arises of a possible restructuring of employment in the sector, with salaried workers replaced by the self-employed. Technological changes, however, raise the question of the need to modernise the regulation and organisation of the traditional taxi companies. In the long term this course of action seems inevitable, and it would be better to deal it with it now (Roger, 2015; Fritz, 2014). Consideration could be, for instance, given to allowing taxi drivers to also work for ride-hailing firms as in the United States (Uberkit, 2017). A discussion of these issues would be welcome, notably with the inclusion of possible accompanying measures for helping the traditional taxi companies and their employees come to terms with these structural changes.

Access to infrastructure in disadvantaged areas, especially Arab cities, needs to be improved

The local financing system should be fairer with poor municipalities

Ensuring that all people have adequate access to economic and social infrastructure is important to ensure equitable opportunity for all citizens and to promote inclusive growth. In Israel this equality of access to many infrastructure services is hampered by differences in financial situations between municipalities that are related to their ability to raise tax revenues. As mentioned above, the Israeli property tax system (Arnona), which is the main tax base of local governments, is unbalanced, with much higher levies on non-residential buildings than housing. Tax rates on commercial or industrial properties can be up to four times higher than for dwellings, and revenues from the latter are often lower than the costs of managing the infrastructure required by residents (Eckstein et al., 2014; OECD, 2017a). This system of financing is thus regressive, because it increases the difficulties of the poorest municipalities, which are not attractive to companies, to improve their supply of public services (Fitoussi et al., 2016).

Steps have been taken to address this problem, which also hampers the government’s policy of increasing housing supply (Chapter 1). The State has developed special agreements to finance the infrastructure required for the construction of residential projects in some municipalities, especially for large projects. However, this temporary mechanism applies only to new construction and is based on an ad hoc and not very transparent approach (Fitoussi et al., 2016). It does not meet the need to improve infrastructure services in certain existing residential areas, for example in peripheral regions or Arab cities. To correct the financial imbalances between local authorities in 2017 the authorities therefore created an Arnona fund. Instead of Arnona being paid by central government to municipalities where facilities are located, they will be centralised in this new fund and redistributed equally across all municipalities (Iataskforce, 2016b). This reform is welcome, but questions arise as to the magnitude of the additional resources transferred to the weakest municipalities. If these transfers remain too limited, a new rebalancing of the financing of these local authorities should be envisaged to ensure that poor municipalities would be provided with adequate resource for financing their needs for local infrastructure services.

Existing plans to improve infrastructure in Arab towns are welcome and need to be fully implemented

Over the past few years the authorities have also made increasing efforts to improve the financial situation of Arab municipalities and to help them to catch up with the cities with Jewish and mixed populations in terms of infrastructure. These communities lack not only financial resources but also skilled personnel. The challenge of reforms in this area is therefore not only to increase their financial resources but also to improve their management capacity to enable them to develop autonomously in the long term and to increase their attractiveness for commercial and industrial activities through better infrastructure. Government Resolution 922, adopted in December 2015 after consultation with the leaders of the Arab communities, aims to achieve this dual objective. As mentioned previously, a five-year NIS 15 billion plan will increase the financial resources of local Arab communities through special budgetary allocations in many sectors. This plan also aims to strengthen the administrative capacities of these communities with, in the first instance, the support of qualified external professionals to ensure effective short-term management of new planned programmes (Iataskforce, 2016a and 2016b). In addition, recruitment measures and training of Arab municipal staff have been undertaken to develop their technical skills and ability to “navigate” in central government agencies and offices, while the latter will also strengthen their knowledge and capacities to work with local Arab administrations. A more highly trained municipal staff and better interaction with the central government are essential for the development of infrastructure but also for improving the management of Arab municipalities, including by increasing their relatively low tax collection rates and updating the tax base of properties on their territory (Belikoff and Agbaria, 2014).

To succeed, this ambitious plan must be implemented with care, and welcome provisions have been made in this direction by the authorities. A steering committee, including representatives of the central government and the mayors of the Arab municipalities, ensures the follow-up of the different programmes through regular conferences and updated information on a centralised website (Iataskforce, 2017). From the financial perspective, for example, available information indicates that more than NIS 2.9 billion was spent on Arab communities in 2016, the first year of implementation of this five-year program. The continuation of this programme evaluation process is critical, both to ensure that the targeted improvement of infrastructure services, for example in public transport, is met, and that the administrative capacity of municipalities is strengthened as planned, such as for the collection of taxes. Much of the progress of the plan depends on trust between the Arab municipalities and the central government, but also between the Arab communities and their elected officials (Brender, 2007). A rigorous monitoring and evaluation of the results of the reform in terms of improving the efficiency, professionalism and transparency of the administrative management of municipalities will have a key role in enhancing this trust.

Developing infrastructure in Arab cities also requires addressing the lack of public land problem

Another thorny issue to address for improving public services in Arab municipalities is the lack of public land available to develop the required infrastructures. This requires solving problems of urban planning, cadastre and illegal housing construction in these municipalities where most of the land is private. Moreover, Arab families have traditionally been unwilling to sell their land, preferring to bequeath it to their children. Because of this longstanding practise, land needed for public use (notably roads) is extremely difficult to acquire. A working group established in December 2014 proposed various remedies, including: i) a limitation on financial penalties for the regularisation of illegal construction and past property tax debts with a means-testing mechanism to incentivise lower-income households to register their land; ii) measures to decentralise and strengthen the transparency of land-planning in Arab cities. These proposals are steps in the right direction. Improving infrastructure in such a context requires appropriate and innovative tools, with flexible procedures to sort out illegal buildings that respect a minimum number of rules, for example in terms of space needed for infrastructure development and faster processing for granting building permits. Given the reluctance of local authorities to resort to land expropriation in difficult cases of areas with high concentrations of illegal construction, the use of private land for the development of infrastructure benefiting all residents could be based on experimental land-planning frameworks relying on consultations and agreements of residents. Public incentives, including the provision of additional land by the State in areas where this is possible, could also be useful, as in the city of Umm al-Fahm (OECD, 2017a).

Recommendations for promoting suitable and well-functioning infrastructure

(Key recommendations included in the Executive Summary are in bold italics)

Improve infrastructure sector governance

Entrust responsibility for conducting the cost-benefit analyses of projects to an independent agency, which would become a reference centre on infrastructure development and research.
Introduce systematic publication of cost-benefit analyses of projects with mandatory justification of policy-makers’ choices.
Enhance co-ordination between different ministries and local government in order to ensure the coherence of investment projects. Improve public consultation at the early stages of project development.
Implement the centralisation of public-sector expertise and management of public-private partnerships within a single public agency. Provide adequate resources for the planning of infrastructure projects managed by PPPs. Involve the private firms selected for these projects in this planning stage.
Reduce the number of local water companies. Set clear objectives for the minimum acceptable water quality in natural reserves, and set appropriate upper limits on their exploitation.

Expand infrastructure in key economic and social sectors

Raise budgetary resources for infrastructure. Use public-private partnership agreements, especially in public transport, following a careful and clear allocation of their risks. Further expand childcare facilities in disadvantaged areas. Increase hospitals’ acute-bed capacity.

Diversify infrastructure funding sources, and boost incentives for cost-effective capital investment

Promote road tolls and electricity smart meters to foster user funding of infrastructure.
Shift car taxes substantially from ownership to vehicle use.

Promote a more efficient use of infrastructure by enhancing infrastructure regulation

Introduce in particular competition in airport management:
- Turn the Israel Airport Authority into a holding company with distinct subsidiaries for different activities.
- Create a separate air traffic control operator managed by an independent body.
- Enforce the opening-up of ground services at Ben Gurion airport to private companies.
- Ensure that the planned new airport is managed by private companies.
Turn the Israel Electricity Company (IEC) into a holding company with distinct subsidiaries for different activities, and create a separate infrastructure operator. Create a wholesale electricity market with a number of producers, making sure that none has a dominant position. Sell or privatise IEC power plants if necessary.
Pursue reforms in wireline telecommunication to develop wholesale market and third-party access to passive and active infrastructure in this sector. Create an independent regulator with adequate powers.
Open the taxi market to ride-hailing firms.

Enlarge access to infrastructure services in disadvantaged areas

Ensure that adequate resources are provided for municipalities to finance local infrastructure services needed in new residential areas.
Better coordinate large and cheaper residential developments in peripheral areas with public transport to where jobs are located.
Implement rigorously and transparently the five-year NIS 15 billion plan (government resolution 922) to increase Arab cities’ financial resources and administrative capacities and enhance their infrastructure.
Address the issues of the lack of public land in Arab cities for infrastructure development. To this end, improve the accuracy of the cadastre, and tackle the illegal construction problem:
- Adopt flexible procedures for sorting out illegal buildings that respect a minimum number of rules, for example in terms of space. Limit financial penalties when putting illegal construction in order.
- Decentralise and promote transparency of urban planning in Arab cities. Experiment with land-planning frameworks relying on consultations with and agreements of residents. This could be helped by incentives such as providing additional public land in cities where possible.

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Annex A.2.1. The Management of Infrastructure for water supply in Israel

Ever since the creation of the State of Israel, ensuring the security of the country’s water supply has been a constant concern for the authorities (Siegel, 2015). With just 40 to 50 days of rain a year in coastal regions and 4 to 5 days of rain in arid areas, natural resources are limited. These resources are subject to strong and growing pressure. The quantity of fresh water available, which amounts to around 1.2 billion m³ per year, has fallen in recent decades and should fall further – by around 15% by 2050, because of reduced precipitation linked to climate change (WA, 2012). The need for water, conversely, has grown steadily: the population has risen tenfold since 1948, reaching 8.8 million in 2017, and is forecast to reach over 15.6 million in 2050 (CBS, 2017). The total demand from the agricultural, urban and industrial sectors, which came to 2.2 billion m³ in 2015, was 45% higher than natural resources and is set to rise to 3.6 billion m³ in 2050 (WA, 2012). The rate of utilisation of natural freshwater resources, which is already very high by international standards, is expected to increase further still (Figure A.2.1).

Figure A.2.1. Intensity of freshwater useref refid="fn-00109" format="note"/>

2015 or latest year available

It is thus essential for Israel to possess robust infrastructure and institutions to meet its water needs, while managing the available natural resources in a sustainable way. Appropriate regulations must prevent the overexploitation of these resources and limit the associated environmental problems, especially the risk of irreversible damage to water reserves in the event, say, of an increase in their salinity. It is also important to create the right conditions for the development of alternative water resources (desalinated water or recycled wastewater) to meet the country’s needs and encourage sufficient distribution throughout the country and between all users (households, farmers and businesses). Public intervention is also needed to regulate the natural monopolies involved in the management and distribution of water at national and local levels.

The State has wide-ranging control over water management in Israel

To achieve these objectives, Israel’s water policy, which has been enshrined in law since 1959, relies on extensive State control (Kislev, 2011). The State owns all the country’s water resources, whatever their nature: surface water and groundwater, water found on private land, wastewater and runoff. The authorities have also built a national network of pipelines (the National Water Carrier, NWC) to transport water from the north of the country, where it is found in relative abundance, to the densely populated regions in the centre and the more arid areas in the south. This pipeline network has been operational since 1964 and is the biggest ever built in Israel, reflecting the importance attached to this sector by the authorities. Developed by Mekorot, a public enterprise that continues to manage it, the NWC supplies 80% of drinking water and 70% of all water used in the country1 (Mekorot, 2017).

To meet growing demand, alternative water resources have been developed

With surging demand for water in the last few decades, Israel has developed alternative sources to supplement its natural resources. Since 2005 five desalination plants have been built along the Mediterranean coast to cater to the growing need for drinking water. Most of these production units, which rank among the most energy-efficient in the world (WA, 2015a), were developed by private firms under public-private partnerships (PPPs). Downstream in the cycle, capacity for the recovery and treatment of wastewater has been increased to meet the need for agricultural irrigation. Furthermore, the NWC has been extended and modernised by Mekorot to connect the desalination plants to the rest of the pipeline and allow water to circulate not only from north to south but also from the west coast in every other direction, upstream or downstream, which is unique in OECD countries (OECD, 2011; Mekorot, 2017).

Governance and water management have been modernised

The development and modernisation of this infrastructure has been facilitated by major reforms in water-sector governance. In 2006, the authorities amended the law of 1959 to transfer responsibility for implementing water policy to an independent, apolitical regulatory institution, the Israel Water Authority (Kislev, 2011). This investment in a single authority that was previously divided between various different ministries was designed to make government action more coherent. Another significant reform adopted in 2004 was the removal of the local management of water services and sewage systems from municipal authorities and its subsequent transfer to local public enterprises dedicated to that purpose. Since this change, all revenues derived from water management have been devoted to the water sector and the maintenance of its infrastructure, instead of being channelled into municipal budgets to finance other local services (WA, 2015b).

In order to implement its water policy the Water Authority took action in several areas. First, it adjusted water tariffs to take account of its full production cost in order to promote the efficient use of the resource and to generate sufficient revenue to maintain and add to the infrastructure in this sector (WA, 2015c). This pricing policy has driven prices up since 2006 (Figure A.2.2, Panel A). Prices paid by households, for example, which include sewage services and reflect the higher production costs of desalination plants, increased by around 40% in the mid-2000s. Prices are applied at the same rate throughout the country and take account of users’ ability to pay through a system of block tariffs, which are low if consumption per head falls below a pre-set threshold (WA, 2016). According to the international data available, the price of water for domestic use is no higher in Israel than the OECD average (Panel B). For farmers, water prices vary according to quality (drinking water, reprocessed wastewater or brackish water) and still benefit from some residual subsidies, mostly provided by non-agricultural users, although the authorities plan to abolish all subsidies by 2019.

Conservation has been encouraged

To promote water conservation the Water Authority also launches regular media campaigns to encourage people to use water more sparingly. In addition, the regulator is pursuing the efforts undertaken over recent years to stimulate water-saving innovations, especially by municipal water companies, which are particularly encouraged to combat leaks in the piping system (Siegel, 2015). To this end, it began promoting the systematic use of smart meters, which provide regular information on water consumption and thereby also warn of unexpected surges that may signal leaks. These efforts by the authorities to promote innovation in the water sector have led to Israel’s carving out a pioneering role for itself in the efficient use of water, with such ideas as drip irrigation for agriculture and the development of advanced wastewater processing and filtration technologies (OECD, 2015; Siegel, 2015).

In line with water policy objectives, another of the Water Authority’s missions is to guarantee the sustainable exploitation of natural resources and to monitor and react to pollution. To achieve this the regulator uses a quota system to share out the country’s limited natural freshwater resources. During periods of severe drought, these quotas are reduced for the farming sector, which must then reduce its consumption or increase its use of recycled effluent or brackish water (Kislev, 2011). Water restrictions for the watering of parks or gardens in urban areas may also be introduced, but households retain access to desalinated water. The regulator can also monitor the use of natural resources, the exploitation of which requires official authorisation, since all users are equipped with meters. The Water Authority also has special hydrological units dedicated to the surveillance of water quality in all the natural reservoirs. Every year it returns an allocated amount of water to the environment; in 2010 this came to 60 million m³, which should rise to 95 million m³ by 2020 (WA, 2012). The law also imposes limits on abstraction from the country’s main reservoir, Lake Kinneret, in order to reduce environmental risks. The other reservoirs are monitored, but their use is not capped by law, and various sources agree that in many cases the quality of these resources is deteriorating as a result of their overexploitation (Fanack, 2017; OECD, 2011).

The management of water infrastructure in Israel has yielded remarkable results

Robust regulation and a good governance system have helped the authorities create the right conditions to secure the water supply of a booming population and economy in a part of the world poor in natural resources, by developing alternatives, which should also meet the country’s future needs (Figure A.2.3, Panel A). Between 2005 and 2015, the annual production capacity for desalinated water grew by some 605 million m³, which represents 75% of the urban demand for drinking water (Mekorot, 2017). Furthermore, 85% of urban wastewater is treated and recycled in farming, which is a very high figure by international standards (Panel B). This source of water, which covers 38% of farming needs and reduces the use of freshwater by the agricultural sector, has two advantages, illustrated by the example of the Tel Aviv agglomeration: first, these resources allow the arid zones in the south of Israel to be irrigated, supporting the farming sector; second, the processing and treatment of this wastewater improve the quality of water at beaches, reducing the health risks that led to epidemics of cholera in 1970 and polio in 1988 (Kislev, 2012). The efficiency of water utilisation has also improved dramatically, as can be seen in the falling rate of consumption per capita (Panel C). Many major world cities waste 40% or more of their water in pipe leaks, but that figure was only around 10% in Israel in 2015 (Siegel, 2015). Since 1990, average freshwater consumption per capita has also fallen more sharply in Israel than in most other OECD countries, mainly because of its decreased use in farming, despite the strong growth in agricultural output. These efficiency gains and falling energy prices helped cut consumers’ water tariffs by 15% in 2015-16 and a further 14.5% in June 2017. Tariffs charged to farmers were cut by 20% in July 2017.

Figure A.2.3. Water by source and consumption

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Note

← 1. The other suppliers are administrations or local farming associations and private firms operating in rural areas that are not covered by Mekorot.

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