karnit flug : infrastructure development plan for israel remarks by dr karnit flug, governor of the bank of israel, at the cabinet meeting on the multiyear infrastructure development plan, tel aviv, 3 september 2017. * * * i attribute tremendous importance to the establishment of an interministerial team to advance, coordinate and monitor infrastructure investment projects, set standards and criteria for using ppp in infrastructure projects, and evaluate the adequateness of projects to be executed by ppp. the level of infrastructure in israel is insufficient, particularly in the area of public transportation, and mainly in the major cities, but also in the electricity delivery system and in communication infrastructure. the volume of annual investment is low by international comparison, and we are therefore not closing the gap in the level of infrastructure compared to other advanced economies, which weighs down productivity and the growth potential of the economy. we need to define needs with a forward - looking view, in close cooperation with the ministries, and to plan years, or, in fact, decades, in advance. one of the main barriers is the long project planning duration. in view of the many needs, it is important to set priorities and to plan and execute according to them. it is important that an informed estimation of the costs be made, and that the budgetary sources be defined, in order to avoid stopping projects and sharp cutbacks in projects as has happened in the past at times of budgetary stress. the use of ppp enables the costs of the project to be spread out over time. it is important to monitor the budgetary ramifications of all projects over time. ppp can be an important tool, if the projects executed through this method are chosen wisely. the selection must be made according to criteria that rely on israeli and international experience, as we showed in the bank of israel annual report for 2016. the large advantage of the ppp method is that the developer does not only build the project, but also plans, maintains and operates the asset over time, so that the project can benefit from the operator ’ s expertise and experience, and the developer has an incentive to make the investment in a way that will minimize the operating and maintenance costs over time. the main disadvantage is that the private developer ’ s capital cost is higher than that of the government. it is important that a government unit be established that will specialize in the management and monitoring of ppp tenders and contracts. it will require specific know - how and

while employment in the business sector has been at a standstill for a long time. another shadow is the standstill in exports. looking at a somewhat longer period, we see that exports have not grown for two years, and have recently even contracted. this is connected first of all to moderating global demand, and also to problems specific to large companies, but exports, as we know, are also affected by the exchange rate of the shekel, which has strengthened in the past year. i should note that the aggregate sensitivity of exports to the exchange rate is not high. the estimate of exports ’ sensitivity to the exchange rate is just 0. 2. while the profitability of high technology companies is affected by the exchange rate, the sensitivity of low technology industries to the exchange rate is much higher. while the share of low technology and mixed - low technology manufacturing in exports is just 20 percent, these industries comprise about 60 percent of manufacturing employment. we take this fact into account as well when considering monetary policy decisions. monetary policy is faced with a number of challenges. as we know, the shekel strengthened in the past year. there are real forces strengthening the shekel, including mainly the fact that the israeli market is growing faster than other economies. but the forces for appreciation are also derived from the global monetary environment. obviously, the production of natural gas in and of itself is good news – it improves the energy situation in the economy and bis central bankers ’ speeches contributes to the balance of payments. but it also obviously has an effect on the exchange rate. as i noted, interest rates in the major economies are very low. the interest rate in europe was recently lowered to just 0. 25 percent, and the major central banks are continuing to pursue quantitative easing policies. this situation has led us to the low current interest rate of 1 percent. the low interest rate environments – both domestic and global – obviously have an effect on asset prices, including home prices. the lack of investment alternatives increases the demand for homes for investment purposes, while the housing market is also affected by the low level of supply. the government is making efforts to increase the supply of homes, but in the meantime, these efforts are not leading to a moderation of prices. monetary policy focuses on meeting the bank of israel ’ s goals : maintaining price stability, supporting economic activity, and strengthening and maintaining financial stability. for this purpose the bank of israel uses a number of tools. the main tool is, of course, the interest