Is the Tel Aviv Metro worth it?
3 November 2020 - globes
The Ministry of Finance thinks so. But overshooting budgets and deadlines may erode the returns on the investment. "Globes" crunches the numbers.
Israel's Ministry of Finance is prepared to support the NIS 150 billion Tel Aviv Metro project on the assumption that the investment would be returned within a short period. This is the big difference between the metro project and other grandiose and expensive schemes like the fast rail link to Eilat or Kiryat Shmona, which Minister of Transport Miri Regev told the "Globes" Real Estate Conference last week would be money better spent.
One question though is whether the cost estimate of NIS 150 billion is realistic. It was the French engineering and consulting group Systra that came to the conclusion that the planned three Gush Dan - Greater Tel Aviv Metro lines will cost NIS 150 billion ($44 billion).
Just to get matters in proportion, the fast rail link between Tel Aviv and Jerusalem cost NIS 7 billion and the Cross Israel Highway Road 6 from north to south cost NIS 6.5 billion. The three lines of the Tel Aviv light rail will cost NIS 47 billion and the Jerusalem light rail network will 'only' cost NIS 26 billion.
The Tel Aviv Metro project is expensive by international standards too. The Hong Kong Metro cost $23 billion and the new Crossrail 117 kilometer underground east-west London line is costing $20 billion. The project to add new lines to the Paris Metro is costing $43 billion.
Even though the Tel Aviv Metro is already very expensive, costs could potentially balloon. For example moving the infrastructures along the 74 kilometer M1 line will cost an estimated NIS 2.5 billion, an amount not much more than it cost to move the infrastructures along the 13.4 kilometers of the Jerusalem light rail's Red Line.
All this is before getting to the big money of the actual metro lines. The M1 line, the central spine of the planned network, will extend from Ra'anana and Kfar Saba in the north to Rehovot and Ramla in the south. According to Systra, the line will cost NIS 82 billion.
The most expensive component in building the underground lines are the stations - each metro station will cost on average $100 million. Thus building 55 underground stations on the M1 line will cost $5.5 billion or NIS 19 billion.
Another major expense is the tunneling between the stations (NIS 13 billion), the electrification systems, signals, tracks and doors on the station platforms (NIS 5 billion), procurement of 464 metro carriages (NIS 2.5 billion). NIS 20 billion has been allocated for unforeseen expenses and NIS 12 billion for VAT.
Minister of Finance Israel Katz has been shown figures that demonstrate that 90% of such mega-projects around the world in recent years have significantly overshot their budgets. Moreover, every year delay in starting the project will push up costs by 4.6%.
Research by Prof. Yoram Shiftan of the Technion Israel Institute of Technology in Haifa and Dr. Nir Sharav found that it will cost about NIS 3 billion annually to operate the Tel Aviv Metro.
The fact that the Ministry of Finance is so deeply involved in promoting and supporting the project makes it easier to obtain budgets. NIS 500 million has been allocated for the initial planning of the metro and NIS 300 million of that has already been used. The Ministry of Finance says it has so far had excellent cooperation with the Ministry of Interior and Ministry of Transport on the planning.
But there is still a long way to go until the first bulldozer starts clearing land so that digging beneath Tel Aviv can begin. It is estimated that it will be mid-2021 until statutory procedures are completed so that the cabinet can approve the project. After that the Knesset will need to enact the Metro Law, which will grant the government unprecedented draconian powers on land matters in pushing the project forward.
The Metro Law draws from previous experiences and will prevent local authorities, utilities, infrastructure companies, the police and fire and rescue services from delaying the project by withholding approvals and the coordination of work. In certain situations even if the authority delays an approval the metro supervisor can issue its own approval. The government will try to push the Metro Law through as part of the Economic Arrangements Bill (the annual budget), so the metro could be held up by Israel's political stalemate.
But the Metro also offers enormous economic potential. The assumption is that it will enhance real estate values. The Chinese city of Wuhan (currently famous for other reasons) built 237 kilometers of metro lines and 166 stations in 2004, which pushed up real estate prices in the city by 8%-17%. Katz expects the metro in Israel to push up real estate prices in Gush Dan by 18%-34%.
Overall the research by Shiftan and Sharav, which was audited by Prof. Haim Aviram and the Louis Berger Engineering Group, found that the Tel Aviv Metro will be worth NIS 550 billion to Israel, or NIS 23-34 billion annually from 2040. Put another way, every shekel invested in the metro will return NIS 2.5 to 3.5, according to Shiftan and Sharav. This is an interim scenario, the researchers say, and the economic returns could be much higher.
The main savings that the metro will bring is in journey times. They estimate that the hours lost when people are otherwise sitting in traffic jams will amount to NIS 7 -12 billion annually. In addition to savings in transporting goods, allocating land for parking, fewer accidents, and reducing air pollution, the metro will also stimulate real estate development and construction along routes and especially near stations.
Independent research conducted by Sani Ziv and Oren Shapir the Aaron Institute of Economic Policy at the Tiomkin School of Economics IDC Herzliya found even greater benefits in building the Tel Aviv Metro for the Israeli economy. They see between 1% and 4.5% added to Israel's annual GDP from 2040 - or NIS 27 to 110 billion annually in today's terms. In addition to savings in journey times, lower air pollution etc. they see added economic activity stimulated by the metro in the Gush Dan area.
But not everybody looks so positively on the metro project. Dr. Michael Sarel, the former Ministry of Finance chief economist warned long ago against approving such a huge expenditure without adequate discussion on the project or analysis of alternative plans. He also believes the project should be reassessed in light of the Covid-19 pandemic and its repercussions for urban behavior including working from home, avoiding crowds etc.
Veteran transport economist Shuki Cohen sees defective calculations in the methodology about the project's financial returns. He does not think 2035 is a realistic date for completing the project and that worldwide such mega-projects have considerably overshot deadlines and budgets.
Cohen warns that if the project is delayed by five years and costs run 20% over budget then the cost-returns ratio on every shekel invested will fall to 0.90 and if the delay is ten years, it will fall to 0.70.