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Abstract
This paper examines the relationship between investment in transportation infrastructure capital and the debt-to-gross domestic product (GDP) ratio. We analyse the effect of bringing forward investment originally planned for future years to be executed during times of economic crisis and also consider the possible advantages of carrying out such investments with private sector financing. This paper presents a model which shows how policy aimed to encourage investment in transportation infrastructure projects through private sector participation may help raise long-term GDP and thus lead to a lower debt-to-GDP ratio. The theoretical model is then applied to current empirical data from Israel.
Acknowledgements
We wish to thank the Israeli Ministry of Transport and Road Safety for funding this research. In addition, we would like to thank Dr. Ran Shahrabani of the Bank of Israel, Ofer Elishar and Dafna Ein Dor of the Israeli Ministry of Transport and Road Safety, Edward Farquharson of the UK Department for Transport, Azzaddin Agbareia, Ayelet Minster and Michael Ritov of Pareto Group and Avi Hefetz Ltd, for their help in carrying out this study.
Notes
The production function F is assumed to have standard properties: defined for non-negative inputs, twice continuously differentiable, a positive marginal product for inputs and concave.
I t here is the net investment while investment against capital depreciation is represented by the maintenance expenditure.
Shahrabani (Citation2008) used a flexible translog cost function for the estimation. The infrastructure capital data analysed in the study include mainly roads, railways, sea and air ports, as well as communication infrastructure. The output elasticities were found positive and differ from industry to industry. These results are consistent with those described by studies carried out in the USA, Canada and Australia.
This tax rate represents the average ratio of total taxes to total output in Israel over the last decade (Source: Israeli Central Bureau of Statistics, Citation2010). The 7% interest rate similarly represents the average real interest rate over the last decade; it is derived from index-linked government bonds (Source: Bank of Israel, Citation2011).
Data on per capita GDP are taken from the Israeli Central Bureau of Statistics (Citation2010).