For immediate release 6 March 2017

Residents’ and ratepayers’ group the Guardians of the Bays have today welcomed news that Wellington International Airport has requested an interim adjournment of proceedings from the Environment Court. The request from the Airport comes in response to the Court of Appeal ruling that the Civil Aviation Authority must reconsider its decision on the length of the proposed runway safety area.

Guardians of the Bays’ Co-Chair Richard Randerson said the request showed that WIAL has not considered all the issues in enough depth. “We are pleased that the Airport is reconsidering its position. The runway extension proposal continues to face hurdles because it has not been well considered or evaluated. This serious concern around safety is just one of many examples where the numbers don’t stack up. There is already evidence that the proposal is likely to cost more than the $350m originally suggested. An extension to the runway safety area would push costs well over the half a billion dollars it is currently expected to reach and would put the project well outside the parameters of the current Environment Court application.”

Co-Chair Dr. Sea Rotmann said the burden to ratepayers and taxpayers of the proposed extension continued to be unacceptable – particularly as the suggested benefits are anything but guaranteed. “No airline has committed to flying into an extended airport and the one airline currently flying (via Canberra) is getting very low loadings, according to an independent monitor of routes around the world. The Airport has specified the limit for its own investment in the extension at $100m now. Anything above this must come from Wellington ratepayers and New Zealand taxpayers. The business case for the runway still hasn’t gone through the Treasury’s Better Business Case process to prove if it is even eligible for public funding.”

In a meeting with the Guardians last month, Mayor Justin Lester said that the extension was not likely to happen anytime soon and that Wellington City Council would not commit to providing more than $90m. “It was heartening to hear our Mayor show he is sensitive to the issues at play and that he has put a limit on more public funding to support the Airport’s case – we expect him to stand by that,” said Dr Rotmann. “The Council already gave the Airport $3m of ratepayer’s precious money to fund the creation of its reports, which are consistently being shown to be little more than ‘spin’ to support the Airport’s slant on the proposal.”

“It would be best for the Airport to withdraw its application completely, rather than further burden the hard-working individuals who are raising their own funds to be able to participate in the Environment Court Process.”
ENDS

Media contacts: Dr Sea Rotmann 021 246 9438 and Richard Randerson 04 976 6050/ 021 159 6734

By Michael Reddell

Link

At about 3pm, the first Singapore Airlines flight to Wellington, via Canberra of all places, lands at Wellington Airport.  Wellington-boosters, well represented on the Council and the Chamber of Commerce, talk up the first “long-haul” flight to and from Wellington.  All of which would be more impressive if it were not for the ratepayers’ money being (secretly – no information on the amounts or terms of these sweetheart deals, no robust cost-benefit analysis etc) used to make it all possible.    Were the flights financially self-supporting that would be the best evidence of them being “a good thing”.  But they aren’t.  That means (a) a presumption against them being “a good thing”, and (b) a likelihood that they won’t survive for long, at least without some permanent subsidy from the long-suffering ratepayers of Wellington. It probably isn’t a subsidy to the giant Singapore Airlines –  they’ll probably just manage a normal return on capital –  but by quite which canons of social justice ratepayers should be subsidizing government departments (probably the main purchasers of tickets on the Wellington-Canberra leg, and one of the larger sources of international passengers from Wellington) is beyond me.

But at least these sorts of subsidy deals can usually be terminated with not too much notice.  Other cities have tried this sort of thing, and the arrangements have typically fallen over before too long.  There isn’t much irreversibility about them.  The same can’t be said for the proposed Wellington Airport runway extension.  If it goes ahead, very large amounts of money will be irreversibly lost.

There was a very nice, accessible, article out a few weeks ago in City Journal by leading US economist Ed Glaeser.  In “If you build it…..” Glaeser tackles some of the “myths and realities about America’s infrastructure spending”.  There is a lot enthusiasm around, especially in centre-left circles, for more – much more –  infrastructure spending, to “take advantage” of the current very low global interest rates.  Enthusiasts, of course, rarely stop to ask why interest rates are so low, and expected to remain low, but set that caveat to one side for now.   Glaeser reports on a variety of studies on just how underwhelming most government-led infrastructure actually is: too often in regions that are declining rather than ones that are growing, all too often with low payoffs (and massive cost over-runs) at the best of times, and so on.  There are plenty of specific differences between the US situation and our own – we don’t have the Senate, steering funds to lightly-populated states, but then we have by-election promises to build bridges to anywhere –  but I don’t think we have anything to be complacent about.  His penultimate paragraph is relevant pretty much anywhere

Economics teaches two basic truths: people make wise choices when they are forced to weigh benefits against costs; and competition produces good results. Large-scale federal involvement in transportation means that the people who benefit aren’t the people who pay the costs. The result is too many white-elephant projects and too little innovation and maintenance.

Just last week we heard of the latest large cost-escalation in the hugely-expensive questionable Auckland inner-city rail loop.  “Who cares” seems to be the reaction of central (National) and local government (Labour) politicians –  ratepayers and taxpayers will pay.   In Wellington the largest regional roading projects for generations (probably ever) is underway at Transmission Gully.  The economics of the project are simply shocking, but that doesn’t seem to bother our National or Labour politicians.

And then there is the airport extension proposal.  Now, on paper, it might look like a project that might pass some of Glaeser’s tests.  After all, Wellington Airport isn’t owned by central or local government –  although Wellington City has a minority stake –  but by a company majority-owned by some fairly hard-headed infrastructure investors/operators, Infratil.

There are plenty of people around –  including commenters here on previous airport posts –  who will attack Infratil.  I’m not one of them.  Infratil is a private sector business, no doubt pursuing (as it should) the best interests of its shareholders.  And Infratil has been quite unambiguiously clear that the airport extension project simply does not stack up on commercial grounds.  In a comment on this blog six months ago, the chairman of the airport company Tim Brown put it this way:

The Airport extension is forecast to cost $300m. If airport users who get no value from it (people on smaller aircraft, people buying coffee, parking cars, etc) don’t pay anything towards it, then the estimated present value to the airport company from those who do benefit from the extension and do help pay for it may be about $100m. So on purely commercial grounds and avoiding cross subsidies the shareholders are expected to contribute that sum.
Clearly that makes it a dead duck on a purely commercial basis. Who would hand over $300m for something “worth” $100m?

Since Infratil owns 66 per cent of the airport company (WIAL) that would involve them putting up around $66m and the minority shareholder putting up $34 million.

So when people attack the idea of council or government handing over (lots of) additional money to get the project going (in addition to the millions the Council has already spent) as “corporate welfare”, they are simply wrong, at least as regards Infratil.   This project seems to be driven by the Council “boosters”, presumably why they’ve been so ready to spending large amounts of ratepayers’ money on it already.  If some branch(es) of government in fact do stump up hundreds of millions of dollars beyond what is commercially justifiable, some of it will certainly benefit some local businesses, but most of it will simply be money down the drain; spent on real resources to build an extension that simply has almost no economic value.  Other than the exercise commissioned by the airport company itself –  funded by the Council –  no one who has taken a hard look at the numbers regards the claims of large scale economic benefits as stacking up.  Of course, there are plenty of “boosters”, and others who think of (real) long-haul flights from Wellington as a nice idea, but the numbers simply don’t stack up.

Fortunately, it is local body election time.  If it weren’t, I fear the project might be rammed through with as little serious scrutiny as the cosy subsidy deal to fund a movie museum/convention centre in Wellington recently was.  (The movie industry, of course, surviving on large scale taxpayer subsidies).  At present, WIAL has a resource consent application underway.  (Of course, if the project can’t get a resource consent, the economics is irrelevant.)  Somewhat curiously, WIAL recently temporarily put the resource application on ice. This was, ostensibly, to allow them to take account of points raised in the numerous public submissions. I’m a bit skeptical of that story –  surely the submissions can’t have been much of a surprise –  and wonder if it isn’t a convenient way to minimize coverage of the issue during the local body election season.  Perhaps not, but the timing is certainly convenient.

A year ago, I assumed that the Wellington City Council – which hardly ever turns down an opportunity to waste money, and which is in the thrall of an “economic development” mindset –  would simply write the cheque, shifting large amount of ratepayers’ money into a project which  –  while fundamentally uneconomic –  it would not even secure a much-increased ownership interest in.

But as the election season has gone on, I’ve begun to be a little more hopeful that perhaps hard-headed analysis might actually play some role in the eventual decision on Council funding (or indeed, central government funding, where there is little sign of much greater discipline around capital spending).   Our mayoral race is hotly contested, and so there have been plenty of surveys asking candidates for their views on the airport extension.  Here I’m drawing mostly from a survey done by my local residents’ association.

Somewhat encouragingly, of the eight mayoral candidates not one is now unambiguously in support of spending lots of ratepayers’ money on the runway extension.

One of the mainstream candidates –  centre-right councillor Nicola Young –  is outright opposed

 Opposed. Initially I thought it should funded in line with its ownership (Infratil 66%, WCC 34%) but now I believe it would be a $300million folly. Subsidising international airlines is very costly, as Christchurch Airport discovered when it paid Air Asia X millions to get direct flights to Asia; the flights were cancelled after nine months

Another sitting councillor, this time from the left, Helene Ritchie, is also opposed

I have repeatedly opposed it and any funding towards it-including Council using rates to support an application by the Company for a  resource consent.

She further offends the elites by suggesting that voters should get to make the final decision on such an expensive proposal

The Environment Court should throw it out. If it is not thrown out, then as mayor I will call for a referendum/poll of the people, on this proposed rates funded $350 million (probably likely $500million) Airport Extension, asking residents, “Do you want to pay for the proposed airport extension? Should rates be spent on “corporate welfare”-an unnecessary airport extension?”

Another candidate –  left-wing economist Keith Johnson, campaigning (I suspect) against waste rather than to be elected –  is also clearly opposed

I am opposed to the project and have submitted a substantial paper detailing my objections to the Environment Court, covering safety, environmental, budgetary and business-case concerns.
I am absolutely opposed to the allocation of $90 million from Wellington City Council to the project, as the proposal essentially constitutes corporate welfare funded from the pockets of ratepayers.

A final minor candidate is also clearly opposed.

Unfortunately, most of the more likely candidates are somewhat more positive.

Sitting councilor Andy Foster probably isn’t going to be mayor, but despite being a typical “booster” most times when it comes to council spending, on this one he has clearly been having second thoughts.

It will depend on whether it can get over some very tough hurdles: consent, demonstrated airline commitment, robust economic case and obtain funding.  If it can, I will support it. If it doesn’t I won’t.  I suspect it won’t.

The election seems set to come down to a race between the current Labour Deputy Mayor (endorsed by the Greens) Justin Lester, the current Labour mayor of Porirua Nick Leggett, and the centrist councillor Jo Coughlan.  All three have a track record of supporting spending (lots of) public money on “economic development” projects, but I am mildly encouraged by how cautious they now seem to have become.

Here is Coughlan

I support the runway extension subject to it getting a resource consent, a business case that stacks up and appropriate funding. If the city does contribute, it should be reflected in our ownership skate. It should not be a donation

On that basis, the Council would end up owning a very large share of WIAL.  It is a middle of the road line, but it is important for Wellington voters to remember that the project is fundamentally uneconomic, and whether any money was contributed as an equity stake or as a “donation” doesn’t change that.  Central government had lots of equity stakes in Think Big projects in the 1980s.  They were all financial and economic disasters.

Here is Leggett, current mayor of Porirua

I support the idea of the runway extension. Wellington has to open itself outwards and create better connections internationally to grow jobs and investment.   I don’t support the council funding the extension beyond its 33% shareholding and if the Resource Consent is not successful – or the Government refuses to offer funding – then the project won’t proceed.

Ah yes, the “idea” sounds good.  But if it were such a good idea, users would pay for it.  That is the market test, usually a pretty sound one.  One gets the impression he doesn’t actually think the project will pass a proper cost-benefit analysis for the Council –  and $200m is a lot of money.  Leggett seems to be looking to central government –  and as he must drive past the Transmission Gully works each day on the way to the office, perhaps that is no wonder.  Wasteful capex is just par for the course –  especially when it could be dressed up in current fashionable rhetoric about advancing (with subsidies) export education and tourism.

And what of the Labour (and Greens –  even though as a party they ostensibly oppose the runway extension) candidate, Justin Lester?  He has been a strong advocate of the project, and was apparently the key figure in securing subsidies for the Singapore Airlines flights to Canberra. But now….

I have committed to seeking the resource consent for the airport extension project. It’s too early to say whether the project will proceed because the following three caveats will need to be satisfied before it proceeds: 1. Resource consent approval 2. Financial support from Central Government 3. Commitment from airlines to fly direct routes to Asia.
This is a 50 year project and needs careful consideration before any decision is made.

So even for Lester this is too big for the Council.  It can only proceed with central government funding.

Perhaps the most encouraging bit is his final sentence.  It is a long-lived project, and the option to delay must be a real one.  Perhaps in five or ten years time we will have a more secure feel for, for example, the viability of the new Singapore flights.  And –  for those more environmentally inclined than I am –  there is always the question of sea-level rise to consider, for a very low-lying airport.  Perhaps we could have another look in 20 years time?  Who knows, by then the benefits might be so overwhelming the users might even pay for the project?

In our council system, even mayors have only one vote.  Whichever of these candidates gets elected the project might still get significant additional council funding, or not.  And as central government has a terrible record of pouring money down sinkholes –  Transmission Gully, KiwiRail, probably the Auckland CRL etc – it might get funding from there even if the Council isn’t willing to stump up much.  But it is at least slightly encouraging that the mayoral candidates, reading the tea leaves of voter attitudes, have all either come out opposed to the Council paying for the project, or hedging support around with some tests that will be very hard to pass.

I’m not usually a single issue voter –  and the debacle of the Island Bay cycleway still concentrates the mind in other directions at times –  but this time I am.  There is simply too much money at stake, to allow boosters with the public cheque book to pursue their field of dreams vision for Wellington airport.

Original article on scoop.co.nz

By Pattrick Smellie

Aug. 15 (BusinessDesk) – Wellington’s airport runway extension initiative fails on the grounds that lower North Island and South Island travellers are already flying to long-haul destinations through Auckland or Christchurch and the region is not a magnet for tourists, who are more likely to favour Auckland and Queenstown as an arrival point.

That’s the conclusion of a study commissioned by the lobby group for international airlines, including Air New Zealand, lodged in opposition to Wellington International Airport’s application for a resource consent to lengthen the capital city’s runway by 350 metres.

The new study, by Australian-based Ailevon Pacific Aviation Consultants for the Board of Airline Representatives in New Zealand, said the likelihood of airlines establishing new long-haul services to the capital is “extremely remote, implausible at best”.

It contests the findings of a study by rival aviation industry consultants, InterVistas, which APAC said has over-estimated demand for long-haul services to and from Wellington, which it said has not benefitted from the boom in international tourism that has boosted arrivals, particularly to Auckland and Queenstown, in recent years.

“Visitor demand growth from long-haul markets to Wellington has lagged not only the New Zealand average but also other airports in New Zealand without long haul international services,” said the APAC report.

Using Australian Bureau of Statistics and International Air Travel Association (IATA) data, APAC concluded that Wellington’s strongest growth has been in short-haul traffic between the capital and Australian cities and the Pacific Islands, where most of the growth in new routes to Welllington has been in recent years.

“Presently, Wellington has no markets with sufficient origin-destination demand beyond New Zealand, Australia or the Pacific Islands that could support non-stop services with adequate frequency.”

The report makes almost no mention of improved export freight-forwarding opportunities that might arise from a longer runway – the main benefit cited by Wellington Chamber of Commerce head John Milford, who called for support from local businesses ahead of last Friday’s deadline for submissions to the Wellington Regional Council on WIAL’s application for a resource consent to undertake the $350 million project.

WIAL is seeking to make Wellington an alternative long-haul destination to Auckland, the country’s dominant airline gateway, the existing second gateway Christchurch, and Queenstown, which is increasingly connected by direct flights from Australia.

WIAL is owned 66 percent by Infratil, the NZX-listed infrastructure company, and 33 percent by Wellington City Council. It is seeking the majority of the runway extension cost from central government and Wellington ratepayers, arguing the benefits would accrue more to the country and the region rather than the airport owner, which cannot justify the expansion on purely commercial grounds.

APAC disclosed in its submission that it has undertaken work for key opponents of the Wellington plan, Air New Zealand, Auckland International Airport, and Queenstown airport, in which AIA has a shareholding, but says its analysis is independent.

“The simple fact is that Wellington International Airport’s catchment region is too small and too slow-growing to warrant non-stop long-haul services,” said APAC, which makes serious accusations about the quality of the InterVistas analysis undertaken for WIAL.

“InterVistas .. have either failed to accurately reflect the nature of demand at Wellington International Airport when benchmarked against neutral and industry-accepted data sources, including data sources InterVistas purports to rely on, or appear to have reinterpreted the data to support a case for long-haul demand,” the APAC report said.

In a submission on the runway extension application, the New Zealand Air Line Pilots Association said there was increased risk of a serious accident or incident, especially from larger planes using Wellington Airport, unless an adequate Runway End Safety Area (RESA) of 240 metres or a recognised equivalent solution is used.

NZALPA president Tim Robinson said despite his members having the most to gain from the runway extension, they were opposed to it unless it included the RESA. He suggested an alternative though known as Engineered Material Arresting System in use globally, which is a crushable material installed on an existing RESA to declerate an aircraft in an emergency.

Earlier this month, the association filed an appeal against the High Court’s decision to turn down a review of the runaway’s 90-metre safety area.

(BusinessDesk)

“Wellington City Council has no Plan B to protect Wellington’s ratepayers if the Wellington Airport Extension doesn’t deliver,” according to business, recreational, community and environmental groups who are calling for more rigour around the proposal.

The Guardians of the Bays, a citizen-led umbrella organisation representing a growing number of groups of businesses and individuals who are concerned the runway extension will not deliver the benefits being promised by Wellington International Airport Limited and some City Councillors.

Co-chairs Dr Sea Rotmann and Richard Randerson said the airport is being presented to the public as Wellington’s main economic growth option.

“We are all keen on a progressive and successful Wellington. But the numbers being put up for this proposal simply don’t stack up.

“The Council has promised $90 million of ratepayer money, on top of $3 million already handed over to the airport, for a runway extension that has no business case. The Airport has refused to put its numbers under the scrutiny of the Government’s own Better Business Case process, which is required for getting Central Government funding.”

“Economically, the runway extension has the potential to lump Wellington ratepayers with a wasteful and unnecessary White Elephant requiring significant ratepayer subsidies and hindering economic growth for decades. Ratepayers throughout the region will be faced with higher rates and debt and there is no guarantee that any benefits will flow through to Wellingtonians.

“The only one who really wins from this extreme version of corporate welfare is Infratil” said Mr Randerson.

Dr Rotmann said the Airport has been over-exaggerating the tourism and visitor benefits.

“There is no evidence that if ‘you build it they will come’. The Singapore Airlines ‘win’ to fly to Singapore via Canberra comes at the cost of millions of ratepayer subsidies to the airline and is of no more benefit to Wellingtonians than already-available international flights through Auckland, Sydney or Melbourne,” she said. Singapore Airlines itself said it would not be able to fly this route without the additional passenger numbers from Canberra.

“If the airport extension is such a good idea then why is Infratil not paying for it, rather than relying on corporate welfare from ratepayers and taxpayers?

“We call on all mayoral and council candidates to demonstrate a deeper vision of what growing our city could look like, rather than just pinning it all on an airport extension.

“So far only a handful have said the airport extension needs closer scrutiny and questioned whether ratepayers should provide corporate welfare to Infratil to build it. It should be noted that some of those same mayoral candidates now asking more searching questions, voted for ratepayers to pay half of the airport’s resource consent application costs, even though the City only owns a third of the shares. We need a mayor and councillors that act in the best interests of all Wellingtonians, not just big business.”

Dr Rotmann said there will be many environmental and recreational impacts. The proposal would affect surfers, recreational fishers and other users of Lyall Bay. It will also harm sensitive ecological and environmental treasures, including little blue penguins, reef herons, giant kelp forests and other marine life that would suffer enormously from millions of tonnes of rubble being dumped into the South Coast. 11ha of ocean would need to be reclaimed without having a single airline lining up to fly here long-haul.

The proposal would also cause major traffic disruptions to Wellingtonians during the four-year construction period, as up to one truck every two minutes transfers material to and from the site, via SH1, the two tunnels, the Basin reserve and through the airport gates.

“This is a Wellington-wide issue. The Greater Wellington Regional Council and Wellington City Council officers who are currently checking the airport’s resource consent application have found many significant errors and gaps in the airport’s supporting evidence,” Dr Rotmann said.

“Wellingtonians have the right to know how their money is being spent. By refusing to properly answer the questions the Regional Council has asked on behalf of everyone, the Airport is failing to respect this right. The airport is either being highly disrespectful of the process or simply doesn’t have the answers,” she said.

The Guardians are encouraging Wellingtonians to have their say about the extension by making submissions to the Greater Wellington Regional Council and Wellington International Airport. The submission period runs until Friday 12 August.

A simple guideline for how to submit and where to send submissions can be found below.

“This is such an important decision for Wellington that we need to capture as broad a range of perspectives and views as possible,” said Dr Rotmann.

Submission guide:

[gview file=”https://guardiansofthebays341400583.files.wordpress.com/2021/06/628df-final-gotb-submissions-guide-5-july.pdf”%5D

 

Opposition to the proposed runway extension is growing if attendance at the recent Guardians of the Bays information evening is anything to go by. A diverse range of groups, from business, community, recreational and environmental organisations are asking questions to peel away the public relations spin around the ill-conceived, expensive airport extension proposal.

Groups as diverse as Forest & Bird; various Residents’ Associations; Wellington businesses; Save the Basin; the Surfbreak Protection Society; Hue te Taka Society; OraTaiao: The NZ Climate & Health Council; the Wellington Underwater Club; 350.org and the Green Party, to name a few, were represented at last week’s meeting. It quickly became clear that everyone present was deeply concerned at the spin being put out by the airport company, and the potential cost it will have to ratepayers and taxpayers, and of course to the beautiful Wellington south coast.

The meeting was MCed by Bishop Richard Randerson, who has national standing for his work in faith-based and place-based communities. He made it clear that an airport extension does not make Wellington more progressive, particularly when the ratepayers and taxpayers are being asked to subsidise one of New Zealand’s wealthiest companies.

Dr Sea Rotmann, co-Chair of the Guardians of The Bays, outlined the group’s main areas of opposition in her presentation [gview file=”https://guardiansofthebays341400583.files.wordpress.com/2021/06/b54e9-gotb-info-evening-presentation.pdf”%5D where she blew away a few airport myths like:

  • There will be little impact on marine ecology – but their ‘experts’ didn’t even know that Moa Point was a breeding habitat for the critically-endangered reef heron, nor do they know what the infill material will contain.
  • There will be little impact on recreational activities – but they haven’t really done a great job at collecting the data to support this statement. Council officers have not yet referred the application to the Environment Court because there were so many inconsistencies and information gaps resulting in 46 questions and a further resource consent needed.
  • The extension will result in fewer greenhouse gas emissions – yeah right, especially seeing it is meant to increase long-haul passenger numbers by 16.1 million versus business as usual!
  • The extension will withstand rising sea levels and 8m waves – yet all you need to do is visit Lyall Bay in winter and you’ll see 10m+ waves on a regular basis, not to mention the issues around sea level rise and storm surges affecting all access roads to the airport.
  • Trust the airport and their ‘experts’, they know what they’re doing – this from an organisation that wasn’t even able to collect a full set of data because of the bad weather in Cook Strait, who have little idea what the infill material will be (but it may be contaminated dredge spoil from CentrePort), who wanted to hide construction noise under BAU aircraft activities, who didn’t know they needed a resource consent for stormwater discharge and who have commissioned 4 economic reports claiming bigger and bigger benefits, despite their methodology continually being savaged by an army of independent economists…

Tim Jones, who brings to the group valuable experience from the campaign against a proposed Basin Reserve flyover, ran over a few traffic facts – did you know that if the project goes ahead, 1.5 million m3 of fill will be transported from Horokiwi and Kiwi Point quarries by truck through central Wellington, along SH1 through both tunnels to the airport, often every 2 minutes and all during the night? And that the revised route through Vivian Street, Karo Drive, Wellington Road, Lyall Parade, Onepu Road, Rongotai Road, Evans Bay Parade may actually pose serious safety hazards?

Rob le Petit from the Surfbreak Protection Society reiterated the support of the surfing fraternity who love their surf and whose members include leading experts in planning, oceanography and the environment. Did you know that Lyall Bay is one of the birthplaces of NZ surfing, yet the airport are proving particularly sneaky by trying to make deals with the surfers promising them an untested ‘wave focusing device’ while on the other hand the airport is aggressively attacking the legal obligations that protect the Lyall Bay surf?

Keith Johnson is standing for Mayor because he is sickened by the lack of commitment by the current crop of would-be Mayoral contenders to fairness, accountability, economics and good governance. He is especially appalled by Wellington City Council’s championing of the runway extension. Dr Johnson is a transport economist and told the meeting that the cost-benefit-analysis ratio the airport has conjured up of 1.7 (now 2.3!) is nonsense and should more realistically be less than 1.

What’s more, not only do we not know how much it’s really going to cost, the benefits the airport wizards have created keep going up, up, up – like the length of the extension (or Pinocchio’s nose!) which has grown from 300m to 363m – yet the costs, we’re told, remain the same! We should be afraid, very afraid, about putting our trust into a project of this magnitude which carries so many uncertainties and risks.

Infratil lier plane

Wellington City Councillor and former airport planner David Lee asked who is going to fund this Great Big White Elephant? The Government’s said NO, the other Councils in the region have said MAYBE to the tune of $60m, with Wellington City Council earmarking $90m (in addition to the $3m they already paid up front). As David said – this level of corporate welfare STINKS. The big winner is the airport who is only contributing about $50m! And this still leaves a $100-150 million shortfall which Mayoral candidate Justin Lester is on record as saying that if the government doesn’t step in ratepayers, or investors – whoever they might be – will have to pay.

These are some of the many, many reasons why this airport runway extension is simply madness, and why so many diverse groups will fight it to the end. But the biggest killer of the project, seeing this is the whole reason why the Council is pushing this so much, was delivered by John Beckett, the Executive Director of the Board of Airline Representatives (BARNZ). BARNZ represents all 24 airlines that are flying into New Zealand, including the five that fly into Wellington.

John made it very clear that no long-haul airlines flying to New Zealand support this project, and the reason is simple economics: the aviation sector is extremely competitive with high costs and thin margins. Long-haul aircraft need high load factors in order to operate a route profitably. It is unlikely that any airline in Asia or North America would fly non-stop long haul into Wellington because the market is too small. Their first choice would be Auckland, and then Christchurch, on the grounds of population and proximity to tourism highlights. Wellington comes a distant third. As John pointed out, the route projections and cost-benefit analysis provided by the airport’s economists are overly optimistic, and BARNZ’s economic experts, NZIER, will be on hand to dismantle the airport’s arguments in court. Without additional flights attracted by the extension, it is also likely that airport charges will rise on all other routes into Wellington in order to cover the costs and profits.

To summarise why we need to keep asking questions about the proposed runway extension:

  • There is no proven demand for it and no long-haul airlines will come here and stay the course.
  • The real cost is not known and likely to be much more than the current forecast of $300 million.
  • The benefits are unreal and over-inflated – simply conjured up by the Airport wizards…
  • Only Wellington City Council has made a commitment to fund some of the extension, leaving a huge funding shortfall.
  • Wellington City ratepayers will pay for this folly disproportionately – in terms of inter-generational debt; cost overruns; interest charges; environmental, health and recreational impacts; ensuing traffic chaos; and cost increases for every passenger and anyone using the airport, for example when parking a car.
  • Wellington Airport is in a highly risky location, both in terms of safety and impacts from climate change such as rising sea levels and other environmental catastrophes, which are already endangering access.
  • It will destroy so much of what people most love about Wellington: the Lyall Bay surf, the rugged south coast, the little blue penguin and reef heron nesting habitats, fishing, diving and the collection of kai moana, not to mention the joy it brings to everyone when we get orca visitors
  • Climate change (which threatens our economy, health & well-being) and the global agreement to move towards zero net climate-damaging emissions have been completely ignored in the airport’s cost-benefit ‘analysis’.
  • The cost-benefit analysis, when done properly, shows an actual return of investment of less than 1. That means that this is a financial loser where we are set to gain less than a dollar for every dollar spent!
  • It represents economic incompetence on the part of our politicians whose lazy thinking sees the runway extension as the answer to all our economic woes – when they are the last people we should rely on to ‘pick winners’. Justin Lester even used the Chair of Infratil, the majority shareholder of the airport and a multi-national company, in his election video. And when he got asked about this on his facebook site, he swiftly deleted the questions!
  • It provides a corporate handout to a large, very wealthy company with a billion dollars to spend which it is choosing not to invest in Wellington’s runway extension. Infratil is laughing all the way to the bank because it thinks it is getting away with taking your rates for their airport, which will end up being poured down Cook Strait.
  • This is nothing but the badly thought-out vanity project of some politicians who want to ‘leave their legacy’ by building a Great Big White Elephant on our South Coast.

We have developed a handy submission guide that can be used by every person and group wanting to join us in the Environment Court to fight this environmentally damaging case and colossal waste of ratepayers money.

If you want to join us, please subscribe to the Guardians of the Bays and help us ensure that Wellington does progress – but in the smartest, most sustainable and positive ways, not with out-dated ‘think big’ projects and corporate welfare.

 

pollyanna

For years now, Wellington International Airport and it’s pet monkey the Wellington City Council have been pushing for an airport extension. And for years now, it hasn’t stacked up. No small wonder when the New Zealand Institute of Economic Research (NZIER) and the Board of Airlines Representatives of New Zealand (BARNZ) slammed the business case that the Pollyanna Team had put together in support of the extension.

The WCC has poured millions after millions into this project paying for reports that have been slammed every time they are produced. This airport extension does not stack up, for anyone, other than Infratil.

Key Finding: the central scenario BCR of 1.7 is significantly over-stated.

The reason that it stacks up for Infratil is that they, being in a monopoly position, can take profit based on square meterage. This is governed by the Commerce Commission. The more land they have the more profit they can take. It is no small wonder then that attempting to secure thousands of extra square meters, with the public paying far more than their fair share, is attractive.

There are numerous gaps in the draft analysis.

But the Council continues to support the extension despite the evidence showing that it is not economically viable. Why?

The value of these benefits is overstated by $610 – 730 million through not properly accounting for the opportunity cost of labour, plant and machinery.

Having worked for Infratil (get the HR records out, boys) and knowing the WCC particularly well, both, in my opinion, suffer from the Pollyanna Principle and the Overconfidence effect.

People suffering from the Pollyanna Principle are simply not capable of seeing the bad. Generally, people focus consciously on the positive, while sub-consciously on the negative. Those suffering from Pollyannaism subconsciously focus on the positive.

The forecasts of additional passenger volumes (1.25 million) are too high by a factor that may be up to 5. More conservative, and we believe more reasonable, estimates would see around 250,000 additional passengers coming into Wellington.

The Overconfidence Effect is characterised by three symptoms. First, thinking that you are cleverer than everyone else. Second, overestimating your performance. Third, the excessive certainty that you are right.

Sound like two organisations we all know and love?

We are also only too well aware that Wellington Airport is free to set prices as it sees fit. Even if it complies with the Commerce Commission’s guidelines, it can set its total aeronautical revenue to provide a return of about 8.5% after tax on an investment in an extension of the runway. With little additional revenue from airlines needing the extension, the revenue would be obtained by lifting charges on all other services — narrow bodied international, domestic trunk and regional services.

“But what of the Councillors and Mayor?” you ask, “Surely they can see this is a gigantic lemon?”

Well, yes. But to date, only two of them have asked any hard questions on the extension: David Lee and Helene Ritchie. The fanboys number the Mayor, the Deputy Mayor, Jo Coughlan, and Simon Marsh. All who appear to be suffering from Pollyannaism.

BARNZ is therefore concerned that the airport could invest in a wasteful project, knowing that it can use its monopoly power to increase prices on all services into Wellington and derive profits from retailing, car-parking and taxis to make a handsome return on a socially uneconomic project. BARNZ therefore advises the airport that, with no known airline demand for a longer runway, the project is highly speculative and should not proceed.

Let’s get something else straight here. BARNZ represents twenty-two long-haul airlines and has said before, that even if the extension is built, they won’t use it. This is not about competition, Air New Zealand, Qantas, Singapore Airlines and Jetstar are all members.

It’s about BARNZ figuring out if this is a good deal for their members. If it was, then they would support it, if it wasn’t. Well. Read the report.

The NZIER is a well-respected company.

Are we saying that both have some conspiratorial end-game they are trying to push? Are the WIAL and WCC saying both are liars?

Neither is this about NIMBYs, unless you consider every ratepayer in Wellington to be one.

Hong Kong, which would not have enough connecting traffic to the west if there were already a direct long haul route to Singapore. Los Angeles, which the Inter VISTAS report says would only be viable for half the year, which would render it not viable. Dubai via Melbourne, which does not need an extension of the runway because Melbourne is already reached by narrow bodied aircraft from Wellington. Kuala Lumpur, which would not be viable if there is already a direct long haul route established to Singapore. It would be unlikely that there would be sufficient traffic for both hubs. Bangkok, which would not be viable for the same reason as Kuala Lumpur. Adelaide, which can already be reached without the runway extension.

It is clearly time that the Mayor and Councillors walked away from this shambles. We have poured millions into this project and the answer is really simple.

It doesn’t stack up.

BARNZ is calling on the airport’s shareholders to stop pursuing public subsidies and instead concentrate on providing efficient airport services for Wellington, enabling the city to be well connected at a reasonable cost to travellers.

The airport and fanboys have displayed a total unwillingness to answer any of these questions nor any of the previous ones. The rap sheet against the extension is now pages long.

The only question in my mind is if that Pollyannaism and Overconfidence Effect is going to cause the ratepayers to stump up hundreds of millions for a private company on a white elephant.

It’s possible. Look at the Island Bay cycleway.

These two organisations aren’t exactly rocket scientists are they? Why would we trust them with hundreds of millions of our cash?

If this was such a fantastic idea, why don’t Infratil stump up with the cash themselves?

Because it doesn’t stack up. And it never will.

Sources: 

BARNZ Submission to Wellington Airport

NZIER: Stretching Runway Numbers

BARNZ Press Release

jimjones

News this week that Singapore Airlines will be flying “direct” from Wellington to Singapore via Canberra single-handedly proving that we don’t need a $300m plus runway extension to access Asia and saving the ratepayers the $90m that was looking earmarked for the project.

Rejoice Wellington.

In a Powerpoint Presentation written by what appears to be a PR Company engaged by the Wellington City Council, (WCC Presentation), the platitudes run thick and fast. Sadly, as usual, the propaganda is flowing in some places.

“It proves that direct flights to Asia will be feasible.”

Well, no, it proves that flights to Singapore via Canberra will be feasible right up until the point other competition enters the same market. Because right now Singapore Air gets the march on consumers wanting to fly to Asia, but once another airline starts the same route, the economics are likely to be stuffed proper. And Singapore Airlines are getting subsidised by the ratepayers it seems.

In terms of direct flights to Asia, it really doesn’t prove anything. In fact, so far, the WCC and WIAL have single-handedly failed to explain how it will be economically viable. We already know that twenty airlines have said they wouldn’t use it, even if built, including Air New Zealand. We know that the airport’s business case has overstated the benefits.

Anyway, we don’t need that long airport now and the massive burden on ratepayers, because, we can fly direct to Asia with a small break in Canberra. This is good news. Because those of you who do fly up there know that you end up with a good three hours most times transiting Auckland.

Would I use the route? Yup. Definitely. If it is a similar price.

But it’s not.

A quick look at airline prices shows that Singapore is quoting $1,800 for it’s new route but I can get that same route for hundreds less if I don’t mind going via Auckland.

The entire airport extension debate now is boiled down to spending $90m or more to save 90 minutes of travel time. Assuming that the airport extension stacked to start with, which it doesn’t.

It also means that any airline that was considering long-haul out of Wellington would have to think again. Reason being that if I could pay less to transit through Canberra or the Australian East Coast from New Zealand than a direct flight, I’d take it.

Tiredly, the presentation utilises Intervista statistics on the number of people who are likely to travel to Canberra and beyond. Apparently 90,000 people will use it a year. By my calculation, with four flights a week, that is a plane with 432 passengers on board. Roughly the maximum load for a 777.

Are we really going to fill a 777 for every single flight?

It was interesting to see how the Canberra press reported this remarkable achievement.

Canberra Airport wins back ‘international’ title after patchy history

Wellington puts through 5.5 million passengers a year, Canberra barely does 3 million. It has a poor reputation in the international stakes, WIAL looks positively golden by comparison.

I wonder what deals were done to make this miracle occur?

Well, we are subsidising it according to GOTB.

What this article curiously omits, however, is the important question around subsidies. Who subsidises the airline, to what extent and for how long? We can safely assume that both Canberra and Wellington Airports have offered a sweetener to seal the deal – like waving the landing charges? Who pays for that? Surely not the airports, so is it other travellers who are not using this route? We also learned that the Wellington City Council is subsidising this route by about $9 per passenger – for the next ten years! That adds up to over $8m based on the extra 90,000 passengers per year this new route is meant to attract. Apparently, this money will not be taken out of increased rates but ‘Destination Wellington’ marketing budget and no new budget is needed for it. What exactly is ‘Destination Wellington’ other than a ratepayer-funded slush fund with little oversight? Will every airline coming to Wellington be able to expect such a deal? Wouldn’t a lot of these passengers have come to Wellington anyway, but via other hubs? – Source

Tt’s still less than $90m.

But that is not stopping the Council from making these bullish statements:

  • The argument that direct flights will not be commercially viable is now redundant
  • It proves the runway business case has substance

It truly is amateur hour is it not?

This is not a direct flight, so by that count, the first statement appears idiotic.

The runway business case does have substance, as do other substances, brown ones. The runway business case is dubious at best in my opinion and the number of questions sent to WCC and WIAL that have gone unanswered is substantial, and telling.

The fantastic news is that we do have more choice to fly into Asia and hopefully that will open other routes up via the East Coast of Australia.

It also proves definitively that a $300m, corporate welfare, ratepayer subsidised runway extension is completely unnecessary.

So let’s spend that money on something that is going to give us a solid return. Not a chunk of concrete that will be underwater in a decade anyway.

Right now, a whole bunch of our decision makers really need to stop drinking the Kool Aid.

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.

EXPLANATIONS

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).

‘OPTIONS’

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].
MORE AT:

http://www.stuff.co.nz/travel/travel-troubles/74477271/Flights-cancelled-as-144kmh-winds-slam-Wellington

In my first post today, I posed some questions around the plausibility of the assumed increase in international travel into and out of New Zealand if the proposed Wellington airport runway extension was to proceed.

In this post, I want to focus mainly on how the consultants have calculated the net national benefits from the runway extension.

The Sapere cost-benefit analysis estimates net benefits to New Zealand from proceeding with the runway extension now of $2090 million (2015/16 dollars).  These results are summarised in Table 30 of the report.  Of these gains, just under half accrue to New Zealand users of the airport (in respect of both passenger and freight traffic) and just over half accrue to “other sections of the community”.

Even if the passenger number assumptions are correct, the benefits to New Zealand users appear to be somewhat overstated, and the benefits to the rest of the community are largely non-existent.

Take  the users first.    The main benefit to New Zealand users is the lower cost of travel.   Much of that is the cost of time.  The consultants have valued the time of New Zealand travellers using some standard values from an Australian Civil Aviation Safety Authority document, but don’t appear to have allowed for the fact that New Zealand earnings  (and hence the appropriate value of time) are materially lower than those in Australia.  In PPP terms, real GDP per hour worked in New Zealand is only around 75 per cent of that in Australia.  That suggests the consultants have overstated the value of the time savings, and that the actual number would be lower by perhaps 25 per cent.

Concepts of consumer and producer surplus are very important in evaluating the welfare implications of proposals such as this.   The basic idea is illustrated in this chart.

surpluses.png

Consumer surplus is the value from consuming a product or service over and above what the consumer had to pay for it.  For some consumers, the surplus will be large (think of the first refreshing drink on a very hot day), but for the last additional consumer (the marginal) consumer, that surplus should be zero.  People will purchase additional products or services up to the point where the marginal cost to them is just equal to the marginal value of that additional consumption.  We’ll come back to producer surplus shortly.

Sapere have allowed for an estimate of the consumer surplus  that arises from the additional use of air travel services by outbound New Zealand residents ($73 million of the benefits). I’m not totally clear how they derived that benefit estimate   But they consciously do not to attempt to put a value on the additional consumer surplus New Zealand residents gain from the additional goods and services consumed on their additional overseas holidays.  It is hard to estimate such a value, but (as they pointed out to me) this omission does somewhat understate the benefits to New Zealanders of a runway extension that leads to the sort of increased outbound New Zealand traffic the calculations are based on.  However, while this is an omission, the magnitude seems likely to be quite small.  Recall that these are the marginal travellers, for whom a holiday abroad is only attractive because of the option of travelling directly through Wellington.   It is also worth stressing that while these gains are real, they accrue directly to users of the airport, and provide an additional basis on which the airport could recoup the considerable cost of providing the longer runway.

The bigger questions arise around the estimates of the benefits to the rest of the community.

The first of these is the value of the additional GST on sales of goods and services to the 200000 more (by 2060) annual foreign visitors to New Zealand as a result of the runway extension.    That GST is mostly a net real gain to New Zealand (foreigners funding our government spending).    In the Sapere estimates, it would be worth a discounted present value of $184 million, so represents almost 10 per cent of the estimated total economic benefits.

But increased GST from foreigners spending in New Zealand is not the only GST effect likely from extending the runway.  Cheaper travel also works by encouraging more New Zealanders (especially those from around Wellington) to travel abroad.  When New Zealanders travel abroad they pay GST (or the equivalent) to foreign governments.  And the income they spend abroad can’t subsequently be spent at home.  Had they spent the same money in New Zealand, the GST would simply have been, in effect, a transfer from one set of New Zealanders to another.  But with an increase in foreign travel, it is now a transfer to foreign governments. Even on the InterVISTAS/Sapere numbers, around a third of the net increase in foreign travel results from New Zealanders going abroad.  If anything, I’ve suggested that long-haul flights to/from Wellington, if viable, might be more attractive to New Zealanders than to foreigners.  At best, the GST gain is likely to be no more than half the Sapere number.

But much the biggest issues relate to the possibility of benefits to New Zealand from additional foreign tourists buying real goods and services in New Zealand.  Sapere appear to have estimated a total for the likely increase in tourist spending in New Zealand and then subtracted an estimate for the cost of providing those services.  For that they have assumed that 45.5 per cent of the expenditure is domestic value-added (ie returns to labour and capital).  That approach doesn’t seem right and generates highly implausible estimates.

The producer surplus is the gain to the provider of a good or service over and above what he or she would have been willing to provide that service at (see the earlier chart).   The cost of providing the service includes the cost of intermediate inputs (materials etc) but also the cost of the labour and the cost of capital (a normal rate of return).  If the producer sells product at that cost, there is no producer surplus. In this context, there is no net economic benefits –  economiccosts have just been covered.

Over the long haul, in reasonably competitive markets, producer surpluses should be very small (in the limit zero).  For a hotel that budgeted on 80 per cent occupancy, a surprise influx of visitors for the weekend will generate a producer surplus –  the windfall arrivals add much more to revenue than they do to costs of supplying the service.  But over the long haul –  and the airport project is evaluated over the period out to 2060 –  it is fairly implausible that there will be any material producer surplus resulting from well-foreshadowed increases in visitor numbers.  Most of what tourists spend money on in New Zealand are items such as accommodation, domestic travel, and food and beverage.  In all those sectors, capacity is scalable.  One would expect new entrants just to the point where only normal costs of capital were covered.  In the long run, supply curves for most of these sorts of services/products should almost flat.

My proposition is that there are few or no producer surpluses likely to arise from a trend increase in foreign tourism as a result of extending Wellington airport.  But even if there were, any such gains would have to be offset against the loss of producer surplus for New Zealand producer (to foreign producers instead) from New Zealanders taking more holidays abroad.  It makes little difference to the hoteliers if I take my holiday in London instead of Queenstown, while at the some time someone in Manchester takes his in Queenstown instead of taking it in London.

Even if the consultants are right that there would be more additional inward visitors than outward, any producer surpluses from either set of numbers should be small.  And the net of two small offsetting numbers is even smaller.

The safest assumption, in evaluating the WIAL proposal, is to assume that the economic benefits of the proposal all accrue to users, and that there are no material net economic benefits (or costs) to the rest of the community.  Perhaps there is a small amount in the net GST flow, but it is hardly worth focusing on given the scale of the other uncertainties.

Perhaps this point will seem counterintuitive to lay readers and city councillors.  Surely “Wellington” or “New Zealand” is better off from having more foreign visitors (assuming the numbers outweigh the increased outflow of New Zealanders)?  And if so, shouldn’t we –  Councils, government –  be willing to spend money to get those benefits?   The short answer is no.    Good and services cost real resources to provide, and in a competitive market simply providing more goods and services won’t make the city or country better off –  you need to be able to sell stuff that generates more of a return than it costs to provide (including the cost of capital).  Vanilla products and services typically don’t do that.  After all, labour that is used to provide services to tourists is labour that can’t be used for something other activity.  And over a horizon of 45 years we can’t just assume there are spare resources sitting round unused.  Spending public money to generate this economic activity will come at a cost of some other economic activity being displaced (as well as the deadweight costs of taxation, which are allowed for in the cost-benefit analysis).

If, to a first approximation, there are no “net incremental economic benefits” for the “rest of the community” then even if the WIAL/Sapere passenger number estimates are totally robust, the net benefits of the project drop from $2090 million to $954 million.

In my earlier post, I noted that the cost-benefit analysis had been done using a 7 per cent real discount rate.

The authors defend it by reference to the Treasury’s guidance on evaluating infrastructure and single-use building projects (eg hospitals and prisons).

Frankly, I’m sceptical that that is an appropriate discount rate for this project.  And I would be astonished if Infratil –  the dominant shareholders in WIAL – treated their own marginal cost of capital for a project like this as being as low as 7 per cent real.  Perhaps a case might be made for something that low in respect of projects that depend simply on existing traffic (growth) patterns –  eg the current extension to the domestic terminal at Wellington –  but at the margin this runway extension has the feel of a much higher risk project.  After all, they could build it and no one might come.  I’ve written previously about government discount rates, and also linked to a recent Reserve Bank of Australia article suggesting that private sector firms are typically using hurdle rates of at least 10-13 per cent nominal (almost as many in the 13-16 per cent range).

I would reiterate the point here. For a project like this, a much higher discount rate should be being used.  Perhaps if it all goes wrong, WIAL itself might be able to recoup the costs from all airport users (I don’t know the Commerce Commission limitations on that), but even if so, this evaluation is being undertaken from a national benefit perspective.  The risk of all users being lumbered with higher charges to cover the cost of a project gone wrong has to be factored in to any evaluation as to whether public money should be used. A 10 per cent real discount rate seems a pretty reasonable commercial benchmark, and the sensitivity analysis (table 33) indicates that using a 10 per cent discount rate rather than a 7 per cent rate roughly halves the estimated net economic benefits of the project on the “most likely” scenario.

Using a higher discount rate and removing the producer surpluses (that are most unlikely to exist)  would reduce the estimated net national gains of the runway extension proposal –  advertised at in excess of $2 billion – by around three-quarters, even if the passenger number estimates were totally robust.

If one uses the low scenario instead (Table 33), net economic benefits are estimated at $802 million.  But $533 million of those benefits were estimated to accrue to the rest of the community –  and I’ve argued that those producer surpluses just don’t exist to any material extent.   And on that scenario, using a 10 per cent discount rate reduces the net economic benefits by 57 per cent relative to the estimate done using a 7 per cent discount rate.

Perhaps there is a viable proposition in all this for the airport company itself.  I rather doubt it.  I suspect that the additional landing and passenger charges that would have to be levied on the new wide-bodied/log haul services would undermine the additional demand to the extent where it was simply uneconomic to provide those services. Wellington doesn’t look like a natural place for economic long haul services. But that should be the airport company’s call, with their own money at stake

Councils –  and especially Wellington City Council –  should steer well clear of the temptation to put ratepayer money into this proposal.  It is not as if Infratil appears to be proposing to reduce its stake in the airport.  What is apparently proposed is a ratepayer/taxpayer capital subsidy, without the councils gaining any additional ownership interest.    If things go wrong, the airport company itself may well, over time, be able to recover its investment, since many people need to use Wellington airport.  Even if things go right, the Wellington City Council has little way of recouping the cost of its gift/investment.  And if things go wrong, it has no way at all.  Only the chimera of alleged “wider economic benefits” could lure otherwise intelligent people into a proposition with such a weirdly asymmetric payoff structure.

Shortly after the release of the cost-benefit analysis of the proposed Wellington airport runway extension, prepared by Sapere for Wellington International Airport Limited (WIAL) I wrote a post in which I posed the question “If they build it, what if no one comes?”

Since that post, I’ve been to one of the open day/public consultation meetings, have read and thought about the documents more thoroughly, and have read various pieces written by others, including the new one by Ian Harrison that I linked to yesterday.  I have also had some engagement with Sapere and WIAL, which has helped to sharpen my sense of what the issues really are.

The cost-benefit analysis is not a business case document.  It has been prepared in support of a resource consent application.  What I hadn’t known when I wrote earlier (and was advised of by Sapere) is that  under the RMA the applicants will need to be able to demonstrate national benefits to get permission to fill in some more of Lyall Bay, to extend the runway.

I’m sure that the cost-benefit analysis is not serving as a business case for Infratil, the major shareholder in WIAL.  But since this project is generally accepted to be viable only if there is significant public funding, and any such funding can only be defended if there would be material net public benefits , the Sapere cost-benefit analysis is by default serving as something of a business case at present.  If the numbers don’t stack up, neither the Wellington region councils nor central government should be putting any money into the project (beyond WIAL’s resources, and of course Wellington City Council is a 34 per cent shareholder in WIAL).

In this post, I will offer a few thoughts on the plausibility of the assumed increase in international passenger traffic to/from New Zealand as a result of the extension.

Extending the runway at Wellington airport could materially reduce the cost of some forms of international travel in and out of Wellington. If long-haul flights were offered,  lower costs could result by reducing the time taken (eg. by eliminating the one hour flight to Auckland and the stopover time in Auckland, it might reduce the total time for a trip to Singapore (and onward points) by perhaps 2.5 hours).  For those travelling anyway, those gains could be material –  time has an opportunity cost.  In addition, by allowing long-haul aircraft to fly into Wellington, the direct cost of international airfares in and out of Wellington could also be expected to fall –  quite materially, if the numbers Sapere quotes are correct.  Those gains apply not just to long haul routes themselves –  a Wellington-Singapore direct fare should be materially cheaper than the current options via Auckland, Christchurch or Sydney –  but also to trans-Tasman flights, as the longer runway would also facilitate used of wide-bodied aircraft on trans-Tasman routes (as for examples, the Emirates flights between Christchurch and Australia).

Of course, simply building the runway extension does not bring about any of these savings.  They depend on airlines finding it profitable to run additional services.  And although international air travel has increased enormously to and from New Zealand in recent decades, provincial New Zealand is littered with the dreams of local authorities (airport owners) with aspirations to have an international airport.  New Zealand has plenty of attractive places, but one main international airport.

Wellington, of course, has a significant business market, and business travel is typically much more profitable for airlines than leisure travel. And unlike the predominantly leisure travel into Christchurch, the Wellington business travel probably isn’t very seasonal.  So the idea the long haul flights into Wellington could be viable isn’t self-evidently absurd.  But, on the other hand, the economic cost of making such flights technically feasible – lengthening the runway –  is far higher than in many other places.  At $1m a metre, it is considerably more costly than putting some asphalt on some more grassy fields in Christchurch.  Wellington isn’t a natural place for a long-haul international airport.

The WIAL proposal uses modelling by international consultants to estimate likely growth in traffic and passenger numbers with and without the extension.  There are some questions about the baseline forecast, including for example around the potential future impact of climate change mitigation policies.  But my main interest is the difference between these two –  the increase in traffic that would result from the runway extension itself.

It is hard to pick one’s way through all the numbers, but the bottom line appears to be that the cost-benefit analysis is done on the basis that by 2060 there will be an additional 400000 foreign international passengers per annum arriving in Wellington, and an additional 200000 New Zealand international departures per annum through Wellington[1].  Many of these are people who would otherwise have travelled via Auckland or Christchurch, so that the net gain in international travel numbers to New Zealand is around 200000, with an additional 100000 or so New Zealanders travelling abroad.    Many of the gains are forecast to occur early in the period.  Thus, by 2035, the analysis assumes an annual net gain to New Zealand of around 125000 international visitors (relative to the no-extension baseline).

How plausible is this?    The various reports highlight the phenomenon of “market stimulation” –  putting on new air services tends to stimulate total passenger numbers.  That shouldn’t be surprising.  Not only do point-to-point services lower the cost of visiting a particular place, but marketing expenditure raises awareness of the destinations concerned.

On the other hand, one can’t just take for granted that such market stimulation will render long haul flights into and out of Wellington viable.  After all, there are plenty of cities around the world with few or no long haul flights.  Closer to home, Rotorua is an attractive tourist destination and can’t sustain direct flights even to Sydney.

What of Wellington?  The modelling exercise involves lowering the cost of foreigners visiting Wellington –  to some extent artificially, because the costs of providing the longer runway are not passed back in additional charges to those using long haul flights –  but not the cost of them visiting New Zealand (since Auckland and Christchurch fares would stay largely unchanged).   Any long-haul flights into Wellington will almost certainly be from cities that already have flights to Auckland (and possibly to Christchurch).  Is it really plausible that an additional 200000 people per annum (or even 125000 by 2035) will visit New Zealand simply because they can fly direct to Wellington, or (in respect of trans-Tasman traffic) fly into Wellington more cheaply than previously?

Perhaps I’m excessively negative on Wellington.    I reckon it is a nice place for a weekend, but not a destination that many long haul leisure travellers would choose.  What is there to do after the first two days?  And there is little or nothing else in the rest of the bottom of the North Island.   So it is plausible that lower fares resulting from additional competition would attract more weekend visitors from Australia. But no one is going to come for a weekend in Wellington all the way from China or Los Angeles.  And since the principal attractions of New Zealand are either in the upper North Island or the South Island, how many  more people are likely to come to New Zealand just because they can choose Wellington as the gateway for their New Zealand holiday?

And what of New Zealanders travelling abroad?  Since the costs of Wellingtonians (and others in the nearby areas) getting to desirable destinations abroad would be cheaper if there were direct flights from Wellington, it is credible that the total number of New Zealand overseas travellers would increase.  In fact, whereas the modelling suggests twice as many new foreign visitors as new New Zealand international travellers (and in total there are twice as many international visitors to New Zealand as travelling New Zealanders), in this case I wonder if the putative new  routes would not be more attractive to New Zealanders than to foreigners?  One can illustrate the point with a deliberately absurd example: put on long haul international flights to Palmerston North, and they would be quite attractive to people in Manawatu (much easier/cheaper to get to desirable places like New York or London) but not very attractive at all to foreigners (for whom Manawatu has few attractions).

But even if wide-bodied aircraft flights from Wellington did make overseas travel more attractive to New Zealanders, is the effect really large enough to be equivalent to one more trip every year for every 10 people in Wellington and its hinterland?  And would the effect still be remotely that large if passengers (users) had to cover the cost of providing the longer runway (which should really be the default option)?

Reasonable people can differ on these issues. In my discussions, a lot seems to turn on just how attractive people think Wellington is.  I’m pretty sceptical that long haul tourists will ever come to New Zealand to see cities.  Perhaps if one is thinking of visiting New Zealand cities, Wellington is more attractive than our other cities, but even if so Wellington still has the feel of being a logical gateway to nowhere much.  It isn’t an obvious starting point for a “whole of New Zealand” trip, or a North Island one (given that most of the attractions are further north), or a South Island one.   So I’m left (a) sceptical that the net addition to visitor numbers to New Zealand will be as large as the analysis assumes even if the users don’t bear the costs, and (b) suspecting that the boost to the demand for New Zealanders to travel abroad might be greater than the boost to the demand for foreigners to visit New Zealand.

On that latter point, the experts point out that they assume that the new long haul services will be provided by foreign airlines, and that the evidence of recent new air services to New Zealand provided  by foreign airlines is that they disproportionately boost the number of foreigners travelling.  I have no reason to doubt the numbers, but I still wonder if the same result would apply to routes into Wellington.  New flights into Auckland are often the first direct flights offered into New Zealand (as a whole) from that city or country.   My impression is that “New Zealand” is the destination marketed to long haul passengers.  But direct flights to/from Wellington do more to open up the world (more cheaply) to Wellingtonians than they do to open New Zealand to foreigners.   And if so, would the foreign airlines be keen to offer the Wellington services at all?

This post has been about the sort of increased passenger numbers that might be expected if the runway was extended.  In some sense, that should be largely an issue for WIAL.  If they can extend their capacity and attract sufficient users at a price that covers the cost of capital of WIAL and its shareholders, the rest of us might not care much (I’m not much bothered about environmental issues, although my family enjoys the waves at Lyall Bay beach).    But the cost-benefit analysis being used to lure ratepayers and taxpayers into funding much of the proposed expansion suggests that there are very large economic benefits to New Zealand which cannot be captured directly by airlines or airports.  I think they are wrong, and my next post will explain why.

[1] From tables 5.11 and 5.12 in the InterVISTAS report.