Care to donate $109 towards someone
else's next overseas holiday or interstate business trip ? Planners
of Sydney's Second Airport are asking Australians for just that in
the December 22nd, 1997 Draft EIS for Sydney's Second Airport.
When tourism and business chiefs clamour for a Second Airport,
their talking about spending someone else's money - YOURS!!!
The summary of the Draft EIS shows the Second Airport costs will
be huge. Air travellers will be in for a rude shock if they have to
pay for this. Will the shock be so big a new airport won't be
needed ? Wouldn't that be a victory for the environment !
The independent auditor has highlighted the fact that the Draft
EIS's analysis of the airport economics is not adequate for a
project of this scale. It provides no cost benefit analysis, and no
account of how the funds for the project will be raised and
recovered. Let's do some analysis of our own to fill this
gap…
The economics was addressed somewhat better in
the
Final EIS, released 19 months
later on 7th July, 1999. But the discussion here remains
applicable.
Table 1 shows the levy (or toll) airport
users should be charged if they were to pay just the construction
costs of airport expansion. Various interest
rate and investment term arrangements are
shown (see below for Calculating the
Cost):
Term of Finance (years) |
10.00 |
10.00 |
10.00 |
20.00 |
20.00 |
20.00 |
Rate of Return Expected |
20% |
15% |
10% |
20% |
15% |
10% |
Levy Per Passenger
Movement
|
$ 27 |
$ 22 |
$ 18 |
$ 26 |
$ 17 |
$ 12 |
Levy Per Terminal Gate
Entry/Exit
|
$ 41 |
$ 34 |
$ 27 |
$ 39 |
$ 25 |
$ 18 |
Return Ticket Levy + KSA Expansion
|
$ 109 |
$ 90 |
$ 72 |
$ 104 |
$ 66 |
$ 47 |
Aircraft Landing Levy |
$ 6,034 |
$ 4,964 |
$ 3,988 |
$ 5,772 |
$ 3,662 |
$ 2,586 |
In Transit Passenger Proportion |
33% |
(% passengers not
embarking/disembarking @ Sydney) |
Table 1 - User Charges for Airport Construction
Cost Recovery
All travellers have to pay an extra $109 per return trip out of Sydney if users are to
pay for the airport expansion.
Figure 1 - Cash Flow Diagram (20% / 10 year
scenario)
This toll has to be levied on every passenger using either the
existing KSA or the future Second Airport, right now in
order to encourage more efficient allocation of airport resources.
Delaying the charge will only make it higher.
But can you imagine the outcry from air travellers if this levy
were imposed tomorrow ? Short-range air travel would be priced to
extinction (e.g. Goulburn, Orange, Newcastle, Wagga). Interstate
and overseas travel would also take nasty hits. The EIS predictions of airport growth begin to
look pretty sick, and even higher charges would be needed.
If an aircraft movement levy is struck instead of a
passenger-based levy, it becomes clear that smaller aircraft (say
40 or fewer seats) are unlikely to be viable. Where will they go ?
What environmental and financial impacts will they take with them
?
Is the real plan to expand Bankstown and other general aviation
airports to leave more room at KSA for the big stuff ? Are plans
for more traffic at Bankstown Airport during the Olympics going to
become Sydney's permanent solution to it's airport problems ?
Calculating the Cost
Capital
The Second Airport Summary EIS lists the Badgerys Creek option C as costing from $4.4 billion to $5.8
billion, in 1997 dollars. What user levy is needed to fund
(amortize) this ?
The EIS figure is the estimated cost of constructing the
2016-scale airport in 1997 (PPK communication 11/9/97). It is not
based on a properly constructed cash flow analysis, showing when
funds need to be committed.
To correct this, assume the airport will be built in two stages.
The second stage will be built 10 years after the first (and might
comprise the second runway etc.,.). Also estimate that the
predicted expansion of KSA by 10 million passengers p.a. will cost
approximately 1/3 of the 30 million passenger p.a. airport planned
for Badgerys Creek.
The user charge will have to repay the debt and equity borrowing
which finance the building works. To calculate the charge,
estimates have to be made of the term for the investments, and the
appropriate interest rates to use.
Interest Rate Selection
For government projects, interest rates close to actual
commercial loan rates are used. Currently the NSW treasury requires
a discount rate of 10% to be applied to capital works.
For a privately owned/operated project, higher rates are needed
to induce investors to risk their money. Private equity holders
will require a profit, often much higher than the 10% cost of
funds. These are needed firstly to attract their funds away from
other profitable investments. A private sector company will also
have to pay company tax. Then, premiums have to be added for the
risks due to uncertainties with oil supplies and possible competing
forms of transport in the future. Inflation and risks due to
political changes have also to be accounted for.
Estimating these premiums is difficult - most businessmen regard
information on these as commercial-in-confidence stuff -
secret businessmen's code for "you're not grazing in my
paddock".
Many business investors look for rates of return in the vicinity
of 20 to 30 % and higher (it's not hard finding portfolio's
offering 25% rates currently). The correct discount rate may lie
between 10 and 30 %. Let's consider a conservative range of
discount rates from 10% to 20%.
Investment Term
The term of the investment is also difficult to estimate. It's
hard to prepare reliable business plans extending beyond 10 years -
even the Summary EIS makes little attempt to estimate beyond 20
years (2016). Longer terms need higher risk premiums, and incur
additional refinancing costs, which offset the benefit of otherwise
lower repayments. To cover these uncertainties, consider two terms:
10 years, and 20 years (remember, jumbo's haven't been around 30
years, and probably won't be around in another 30 years).
Repayment
For each interest/term pair of values, an annual repayment can
be calculated. A user-pays levy can be arrived at in various
ways:
A user charge is shown in Table 1 for each
of these cases. The table assumes that users of both KSA and the
Second Airport will be tolled (to equalize the burden), and the
toll will be fixed in real terms. It is expressed in 1997 dollar
terms, so keep in mind it will rise in line with inflation as the
years roll by.
The EIS's prediction of passenger numbers is used to calculate
the toll. Passenger numbers are multiplied by the toll, and paid
off annually against the loan, so that the balance reaches zero at
the end of the required term (see the cash flow diagram).
The terminal gate entry exit levy is arrived at by assuming a
fixed proportion of passengers do not embark or disembark at
Sydney.
As most passengers fly on return tickets, the terminal gate
entry/exit levy in Table 1 is scaled into the Return Ticket Levy.
An adjustment to also include the KSA expansion costs is included
in the figure shown (other figures do not include KSA expansion
costs).
Other Costs & Simplifications
The analysis here is illustrative, and not intended to represent
all the costs and benefits of an airport project. It is
incremental, showing the impact of new construction works on
airport finances.
Even if we accept claims that current airport operations are
profitable, the cost of financing new construction works casts
considerable doubt that this will continue to be the case. Are they
profitable only in the sense that taxpayers accept lower rates of
return that private operators would ?
Some of the simplifications in the above analysis are:
-
Increased operational costs with a second airport aren't
accounted for.
-
The Draft EIS has excluded much of the infrastructure costs
associated with the airport, and hence they are not included
here.
-
No account is made for damage to the environment, public health,
education etc.,. The Draft EIS fails to quantify these.
-
Residual value of the construction works at the end of the term
has been excluded. In the case of build-own-operate infrastructure
projects, it has been usual for ownership to revert to the public
at the term end (so that other companies may compete for the
ongoing operation). Uncertainty with future oil supplies makes this
an especially prudent approach.
-
The cash flow from the existing publicly owned airport operation
is not included. Present airport charges indicate these are much
lower than what will be needed for the privately funded new
airport. The new construction costs are likely to dominate, even if
existing operations and capital costs are included.
-
No allowance has been made for the multi million-dollar a year
executive and consultancy fees that will be drawn by the private
airport administration and management.
Worst-Case Financing ?
If you think the choice of a 10 year / 20 % financing
arrangement is extreme, how much money have you got to lend me at
the lower rates you think are fair ?
If you happen to be a wealthy banker or rich oil sheik, and
you'd be happy to invest $3 billion in an airport for just 15% over
20 years, contact me urgently. Don't worry too much about what
happens to your 15% return if inflation takes off towards 10% some
time in the next 20 years !
Taxpayer's Role
Why has the airport debate avoided the basic questions of who
pays and how much ? Will government secretly commit taxpayer's to
pouring giga-dollar subsidies into the aviation and tourism
industries ?
Australia has only 9 million people in employment (with
miserable prospects for growth). This is under half the number of
passengers the airport cost is spread over in the above analysis.
Each worker would have to contribute around $250 per annum in
taxes.
Can such use of taxpayer's money be justified ? Could every air
traveller generate so much business that other taxes they pay
offset the airport costs ? Tourism Council statistics (hardly an
unbiased source) claim each overseas tourist spends $2,200. How
much of this does the taxman capture, how much other infrastructure
must it support, and what about the business and local tourist who
make up 80% of travellers ? Proposals for a 10% GST clearly won't
be enough (10% of $2,200 is $220, leaving a $30 shortfall ! )
Does an airport offer the best possible return on taxpayer's
dollars ? Or would it be better spent on health, education, export
creation schemes or other worthy projects ?
To date, the EIS process gives no answer to these questions.
There is no basic answer to the question of whether this airport is
necessary, affordable or desirable.
If the government can't answer this in the EIS, maybe it's time
to leave it to the marketplace to sort things out.
Tell the tourism and aviation folks to NAFF-OFF and spend their own money on the airport,
if it's such a great idea.
First published June 1998.
Last revised
Last Change: vdeck mod
Visitor
since Sat 21-Feb-2004.