DOWN TO EARTH WITH A BUMP
Everyone is slowly getting back to normality after the Christmas Holidays here in the Antipodes. The holidays are taken very seriously [or should I say ‘unseriously’], resulting both in substantial brain-fade during their duration and the build up of a toxic aversion to a return work among most citizens.
Like many, I took work with me during my vacation and did virtually nothing.
I had loaded the SELENA Spreadsheet Model on my hard drive. This had been supplied under an Official Information Request to the consulting group Sapere, via Wellington City Council. These Rascals used the Model to generate the numbers for the Report which they prepared for Wellington International Airport Limited [WIAL]: ‘Cost Benefit Analysis of the Proposed Runway Extension at Wellington International Airport’ [by Kieran Murray, John Wallace, Preston Davies – you naughty boys].
Fortunately, when I tried to test the scenarios and unlock the coding behind the Model, I was met with the instruction:
‘The cell or chart you are trying to change is protected and read only. To modify … you may be prompted for a password’.
This allowed me to get back on the plonk and chill.
However, I subsequently realized that I don’t need to manipulate the Model to expose the real Business Case numbers. They are all there in the Sapere Report [Appendix 3] if you read between the lines.
I have spliced in my results below [these are based I believe on a 7% Discount Rate]:
The results show that, in business terms, commencing construction in 2017 for completion in 2020 will result in negative returns to both WIAL and the NZ Airport Sector under the Low and Likely traffic forecasts.
The results are similarly negative for the Low and Likely traffic forecasts if construction is delayed by ten years.
On the other hand, the project would be marginally viable in financial terms – if commenced in 2017 – assuming the High traffic forecasts. Other things being equal, this presents a possible opportunity for WIAL which does not require external funding contributions.
The viability of this option improves at the sector level – conditional on agreement being reached among NZ’s competing airports to offset benefit and cost items. This is clearly the way to go if Wellington International Airport Ltd wants to proceed.
Such an outcome would not require financial support from local and central government but would require faith by WIAL in the High forecast for traffic growth [and the foregoing of sector competition at the likely expense of travelers].
Incidentally, Option 3 is one of the most bizarre scenarios I have ever seen in a BCA, requiring as it does an extraordinary amount of crystal ball gazing and ‘what-if’ forecasting about public policy responses and the future state of the world in general and the Wellington and NZ economies in general.
Its results are therefore comparably rococo [but could be interpreted by those who are sceptical about the project as a ringing endorsement of the ‘Do Nothing’ scenario].
I’ll give you excerpts from the Sapere Report to help you reach your own conclusions.
TRAFFIC FORECASTS – HIGH/LIKELY/LOW
The major input in all of the options considered is a set of air traffic forecasts – that is, passengers and aircraft movements. These forecasts were specifically prepared for the project by InterVISTAS, a specialist aviation consultancy.
InterVISTAS produced information on passenger traffic, aircraft movements and resulting additional services (i.e., routes) for a “business as usual” or “base case” – that is, what would happen in the absence of the runway extension – and for what would happen with the runway extension.
Under the “base case”, the median or most likely forecast sees total passenger traffic at Wellington Airport grow at an annual average rate of 2.3% per annum to 2060, reaching 9.3 million passengers in 2035 and 15.4 million passengers in 2060. Passenger traffic this year is 5.5 million, and the annual average growth rate from 1997 – 2015 has been 2.5%.
The key difference between the ‘business as usual’ and runway extension case is the extent to which routes and markets are stimulated by the ability for airlines to introduce direct connections between Wellington and other cities.
By 2060, the most likely forecast of the runway extension scenario projects 1.16 million additional international passengers (total international passengers of 4.34 million with the runway extension and 3.18 million without the extension). There would be 460,000 fewer domestic passengers with the runway extension as some passengers that would otherwise fly via Auckland or Christchurch would fly direct from Wellington to an overseas destination (domestic numbers are 11.8 million with the runway extension and 12.2 million without the runway extension).
The forecasts produced by InterVISTAS included “low” (5th percentile) and “high” (95th percentile) scenarios derived using Monte Carlo simulation. The low scenario implies that there is less than a 5% chance that traffic at Wellington will drop below the low scenario forecast (or a 95% chance that realised traffic will be above the low scenario forecast).
Similarly, there is less than a 5% chance that actual future traffic will exceed the high scenario forecast (or a 95% chance that realised traffic will be less than the high scenario forecast).
Option 1: Build Now. This assumes that the project will commence in 2017 and be completed in 2020.
Option 2: Defer to 2027. By evaluating Option 2, and comparing the results of that analysis with those for Option 1, it is possible to identify the potential economic benefits from deferring the construction and operation of until mid-2027 and the operation of the extended runway until 1 April 2030.
Option 3: Don’t Build. This would not involve an extension of the runway at Wellington. Rather, Option 3 seeks to offset those problems by promoting the increased use of Wellington Airport as a tourist and airfreight hub.
To make Option 3 as comparable to Option 1 as possible in all other respects, it is assumed for the purposes of this report that the promotion of Wellington as a tourist and airfreight hub would:
- require the nation as a whole to commit the same amount of capital expenditure at the outset of the project as would occur under Option 1 (e.g., by setting up a fund that would be used each year to promote Wellington as a destination
- generate exactly the same increase in the level and pattern of demand for passenger travel as would the proposed runway extension
- achieve this forecast increase in demand through expenditure from the fund each year on the promotion of Wellington Airport as a tourist and airfreight hub.
By comparing the economic costs and benefits of Option 3 with Option 1, it is possible to illustrate the high additional costs that the nation as a whole would have to incur if the existing runway facilities and narrow bodied aircraft were used in an attempt to cater for the same increase in demand for airport and airline services that is forecast to occur (over the next 45 years).
[Comment: A 45 year appraisal period is abnormally long in project analysis and 7% is a relatively low discount rate for a project seeking public finance. Traffic is forecast to rise exponentially over the appraisal period and its relative value will be boosted by the assumption of 2.5% annual price inflation.
The lower the discount rate, the greater the present value of future benefits and costs – but there is no mention of reinvestment regardless of wear and tear, or damage related to climate change and natural disasters e.g. earthquakes/tsunamis.
The net result is that distant future benefits are given a highly positive spin].