McKinsey: State can't afford Tel Aviv metro

Tel Aviv traffic jam  photo: Eyal Izhar

Consultants McKinsey recommend the value-capture method for financing the project, meaning that those who benefit pay.

The Tel Aviv metro project will require participation from the business sector, local authorities, and of course support from politicians and Knesset lawmakers, according to a consultative study prepared by the McKinsey & Co. consultation firm presented to the Ministry of Finance and Ministry of Transport last week. According to the submitted assessment, the project will take 20 years and cost NIS 100-150 billion. Sources inform "Globes" that the Ministry of Finance is inclined to adopt the main recommendations. A budget department team is already working on the possible ways to implement the plan.

McKinsey senior partner Munich and mega-transportation project expert Gernot Strube visited Israel last week to impart insights from similar projects around the world to the budget department and senior officials in the Ministry of Transport. Among other things, McKinsey focused on the financing, regulatory, and technology challenges of the Tel Aviv project, which it called "one of the largest projects in the world" in metro infrastructure.

The target date set for beginning operation of the metro, 2030, is extremely ambitious, given the project's size - 10 times as large as the Tel Aviv light railway Red Line project.

Can this target be met?

The Ministry of Finance and the Ministry of Transport regard the metro as the ultimate solution for congestion in the greater Tel Aviv metropolitan area, and are making it a supreme priority. A special team on the matter in the budget department has been working on developing the project's concept in recent months. In early 2019, a detailed proposal will be submitted to the cabinet setting forth the timetable, division of responsibility and authority, budget sources, and methods for the project. Specific legislative proposals for the project may also be submitted.

Will residents' property taxes be used to finance the project?

The study submitted by McKinsey last week assesses the viability of the project with respect to financing, technology, and infrastructure. McKinsey cited a number of major challenges, headed by budgeting and financing. The NIS 100-150 billion cost that the state must raise is unprecedented, and furthermore comes on top of the NIS 45 billion to which the state is committed for the three light railway lines in the greater Tel Aviv metropolitan region and tens of billions of shekels more for the Jerusalem light railway. As a government source put it, however, "Light railways are important and nice to have, but only the metro can be a real solution to the congestion problem in Tel Aviv."

The bottom line of McKinsey's recommendation to the Ministry of Finance for budgeting the project is unequivocal: it is too big. The state budget will be responsible for no more than 50% of the project's cost. The rest will come from two main sources: future operating revenue (ticket sales and business development, for example) and value capture - sharing in financing by all the parties for whom the project will generate economic value. Fees, special taxes, and sale of the state's share in the budget will exceed 50% of the project's cost, as is the case with similar projects around the world.

The first case in which the value capture idea was applied was the Crossrail1 project - a new metro line in greater London. The £15 billion budget for the project was divided between the central government, which provided half of the money; the metro developers, who raised financing on the basis of future revenue from ticket sales (20% of the budget); and value capture, which included hundreds of large and medium-sized businesses assessed for 2% of the added value for them to be generated by the project. The total amount collected by this method was £4.1 billion. £600 million more was raised through infrastructure fees paid by developers for additional construction rights granted along the railway route. £500 million was raised from sales of generous construction rights in towers and shopping centers above the stations.

In the follow-up Crossrail2 project, the UK authorities plan to develop and expand the value capture idea. The boundaries of the urban area for which the project is designed to generate value have been defined in advance: a one-kilometer radius from all of the metro stations.

While the Ministry of Finance likes the principles of the recommendations, ministry sources emphasize that the cases of Paris and London are different from Israel; the new lines in Paris and London are extensions of existing lines and addition of lines to an old existing metro network, while the project will be Tel Aviv's first metro. The Ministry of Finance admits that the metro project will require a change in attitude on the part of decision-makers and the various authorities; otherwise, Tel Aviv will never have a metro.

Bureaucracy: Planning with 25 authorities

The decision-makers have defined the Tel Aviv metro as a nationally important project. In addition to relieving the heavy traffic load in the greater Tel Aviv metropolitan area, projected to worsen in the coming years, the project will provide a solution for entire neighborhoods in the central regions built in recent years with no access to public transportation.

NTA Metropolitan Mass Transit System Ltd., which is responsible for planning this grandiose project, published the second tender for it four months ago - statutory planning of three metro lines. Planning of three lines totaling 130 kilometers will be divided among the four Israeli winners of the tender. Publication of the tender results is scheduled by year-end, with the statutory planning stage slated to begin in early 2019. NTA says that the initial planning, including a feasibility check, is close to completion.

Statutory planning, one of the project's most difficult stages, which will take two years according to optimistic estimates, involves no fewer than 25 authorities. The Ministry of Transport will finance the cost from its budget, and has already transferred NIS 500 million for the planning and management stages.

After the planning stages are completed, implementation of the project, scheduled to take 7-8 years, can begin.

Metro trains are physically larger and travel faster than light railway trains. They are suitable for greater demand and longer distances, while light railways provide more accessible service for shorter distances. The planned length of the metro lines is 130 kilometers, with 100 stations.

Published by Globes, Israel business news - en.globes.co.il - on November 12, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Tel Aviv traffic jam  photo: Eyal Izhar
Tel Aviv traffic jam photo: Eyal Izhar
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