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60
Martello Court 1 Nov
2005 Dear Minister Cowen Following my letter to you of 21 October on behalf of UPROAR I am writing to you concerning the reply of the Ombudsman to UPROAR's complaint that no study that conforms to the Department of Finance Guidelines has been carried out on the proposal by the Dublin Airport Authority (DAA) to build a new parallel runway at Dublin Airport, in spite of Minister Cullen's claim in the Dáil of 22 June 2005(1). I attach a copy of the Ombudsman's reply dated 26 October 2005 which gives the results of her investigation and wish to draw your attention to some aspects of it as they concern UPROAR's position. You may note that the Ombudsman suggests we raise our concerns about the DAA and the Guidelines(2) with you. The Ombudsman asked the Department of Transport for a report on the matter and she sets out its findings in her reply to us. (A copy of the report was not provided to UPROAR.) According to the report, the Department of Transport believes the DAA has a cost benefit analysis of the new runway proposal, as required by the Finance Guidelines. However, we are told nothing about it because "the Department does not propose to seek the DAA's Cost Benefit Analysis in respect of the proposed runway project." We therefore do not know if the Department's belief that the study exists is based on any solid evidence or is a deduction based on the report of the Chairman of the DAA to the Minister in 2004 that the DAA's appraisal methods are in conformity with the Finance Guidelines. Once the Chairman of the Board of the DAA makes such a statement, it seems the Department of Transport has little choice but to accept that a cost benefit analysis has been carried out as required by the Guidelines(3). We were somewhat surprised by the extent to which the Department of Transport seems to distance itself from any oversight responsibility for the DAA's runway project even though the Department's website says: "In respect of aviation policy, the Department is responsible for ensuring that aviation practices and procedures comply with best international standards; promoting the development of a vibrant, competitive and progressively regulated aviation sector and the provision of adequate airport infrastructure and competitive airport services." According to the Department of Transport's report, the DAA decides its own investment needs, does its own appraisal and satisfies itself as to the results. However, the Department has not seen a copy of this appraisal. The Department's failure to ask to see the DAA's reported cost benefit analysis seems to show an extraordinary lack of interest in the affairs of the agency of the Department most heavily involved in aviation infrastructure, the provision of which is the Department responsibility. This distancing is further reflected in Minister Cullen's same Dáil reply of 22 June where he says that subject to planning permission the DAA will proceed with the building of the runway. This seems to contradict what his predecessor Minister Brennan said on more than one occasion in the Dáil. E.g. on 4 May 2004 he said: "The proposed new runway will of course be subject to planning permission being obtained from Fingal County Council. In due course I will also consider this runway proposal from the aviation policy and shareholder perspective." Minister Cullen now seems to be saying that there will be no consideration of the proposal from an aviation policy or shareholder point of view. Is this a position the Government, and the Minister for Finance as principal shareholder, agree with? Of considerable interest to UPROAR are the following two paragraphs: "The Report also states by way of background that the plans for the proposed second parallel runway at Dublin Airport are not new and they pre-date the Department of Finance 1994 Guidelines by over 20 years. The former Aer Rianta began acquiring the lands necessary for the runway in the late 1960s and as far back as 1972, the then Dublin County Council included the proposed new runway in the County Development Plan. Over the past 40 years, the planning authorities have had regard to the plans for the new runway and have ensured that little development has taken place within close proximity to the airport. "The Report further states that while the DAA is, of course, expected to comply with the Department of Finance Guidelines, they must also have regard to the long history of planning and preparation for this particular project and apply the Guidelines in a sensible and pragmatic manner. The Report says it would be totally incorrect to suggest that the airport authority was starting with a 'blank sheet' in the years immediately prior to submission of its planning application for the new runway." The qualifications introduced in the two paragraphs above are of considerable interest in understanding the thinking of the Department of Transport and the DAA. There is, for example, the absurd suggestion that a lengthy planning history is somehow relevant to the analysis of a project which is being proposed under present and expected future conditions. It is suggested that historical decisions should somehow qualify the standard cost benefit analysis methodology, so allowing the Guidelines to be applied "in a sensible and pragmatic manner". On the contrary, as Lipsey put it: "'Bygones are bygones' and they should have no influence on deciding what is currently the most profitable thing to do(4)." In our opinion, this "sensible and pragmatic" language is disingenuous and is being used in a rather lame attempt to justify an analysis which falls a long way short of the Finance Guidelines. We can only read these paragraphs to mean that irrelevant considerations have been allowed to override the obligation to follow the Finance Guidelines and that the required cost benefit analysis has not actually been done. That conclusion would correspond to the view of UPROAR which has failed in all attempts to find any trace of such a cost benefit analysis. Of course, it might seem there could be a debate about what exactly a cost benefit analysis is. But the Guidelines (old and new) define in an almost "cook-book" style what is required and there is little room for debate about it: it is essentially a standard textbook methodology. UPROAR uses a simple rule-of-thumb: any cost benefit analysis, even a badly done one, would contain a summary table listing a number of options for achieving the project's objective and for each of these options would provide at least, Total Costs, Total Benefits, Benefit-Cost Ratios and Internal Rates of Return. If such a table exists and claims to demonstrate that the new runway proposal is the best economic option, why has that not been published in defence of the DAA's position? UPROAR asked the DAA for a copy of the appraisal which lay behind Minister Cullen's claim to the Dáil that the Finance Guidelines had been followed. A number of references were provided, none of which was a cost benefit analysis. When I asked for confirmation that these were all the studies underlying the claim, I received an evasive reply(5). We have once again a repetition of the "existing assets" fallacy whereby the true value of the bank of land built up at the Dublin Airport site over the years can be ignored and not considered as part of the capital costs of this project(6). It was indeed a truly remarkable achievement by a number of people in Government and Aer Rianta over the years in acquiring such an extremely valuable land-bank for what by today's standards would be very modest sums of money. There are perhaps some 1000 acres concerned, which, according to UPROAR's research are worth at least €1 and maybe €2 million an acre(7). That is an asset base worth one, or possibly two billion euros today. But it is a publicly-owned asset and, while those responsible for its creation deserve the taxpayers' fullest praise, it is inconceivable that such a hugely valuable public asset could now be thrown away. The conclusion of UPROAR's analysis is precisely that(8). Our cost benefit analysis shows that this project will waste some €3 billion, most of the waste being land-related. Together with other assets, most of the huge land-bank of which the DAA is so proud will be sacrificed if this project proceeds because there is no conceivable way the land and other capital to be invested can be remunerated by the revenue that could be generated and credited to the new runway by the extra passengers projected by the DAA to use it in the future(9). UPROAR believes that our rough cost benefit analysis estimates are both robust and conservative and are very likely to be replicated by any competent analyst who carried out a cost benefit analysis of the DAA proposal. If it were true that the DAA had a technically competent cost benefit analysis, there would only be one possible conclusion: the Board of the DAA has approved a project which involves a massive economic loss to the nation, and also to the DAA itself. It presumably also has suppressed this study such that no trace of it can be found. That is such an extreme deduction that we can only conclude that no cost benefit analysis exists which conforms to the Guidelines. In our opinion, that is what those two peculiar paragraphs are signaling(10). Whatever about the detached position adopted by the Department of Transport in its report to the Ombudsman, surely the Minister for Finance, with his overall responsibility for national economic policy and welfare, can intervene to ensure that an economic loss of some €3 billion does not happen through departmental or agency incompetence. Surely as principal shareholder the Minister has the power to ask the DAA for a copy of the cost benefit analysis which the Department of Transport says exists and should satisfy himself that it adequately meets the Finance Guidelines. If it does not exist or is inadequate, for example in ignoring an evaluation of realistic alternatives such as a new airport for the Dublin Region, he should insist that a full scale cost benefit analysis be done competently and transparently(11). It has been reported recently that, in practical terms, Department of Finance approval is required in respect of all infrastructure projects, inter alia, because the new multi-annual capital envelope agreements between the Department of Finance and the spending Departments require adherence to the appraisal guidelines(12). The Ombudsman's letter also states that: "In determining airport charge caps, the C.A.R. [Commission for Aviation Regulation] subjects D.A.A.'s projects revenues and costs, including proposed capital expenditure, to rigorous analysis and scrutiny." However, on page 3 of the CAR's latest determination(13) it says: "Unavoidably, the Commission has not had the time to analyse the revised DAA capex programme against the statutory objective of economic efficiency." The CAR states that it expects to do so when time permits (page 59). However, while the CAR lays much emphasis on economic efficiency as a principle of the regulation of airport charges, it is not at all clear that the CAR's analysis of the new runway investment (whenever that analysis is carried out(14) ) will adopt a cost benefit analysis methodology or indeed follow the Finance Guidelines. For example, the CAR does not include the opportunity cost of land in its estimate of the value of assets at Dublin Airport (the Regulatory Asset Base) to be remunerated by charges. Consistency with economic efficiency principles would require that it did. On behalf of the people of Portmarnock, UPROAR respectfully asks the Minister to take his own initiative to avoid a huge waste of public and private assets and the imposition of other unjustified direct and indirect costs such as those due to extra road traffic congestion, noise and pollution. Surely such a step would be consistent with his important announcement (on 20 October last at the Dublin Chamber of Commerce) of the introduction of new "Value for Money" measures which underline and strengthen the same Finance Guidelines(15). Sincerely yours on behalf of UPROAR _____________ (1)In the Dáil on 22 June 2005, in reply to questions regarding the new runway at Dublin Airport, Minister Cullen said: "I have no proposal to commission any study of alternative options for the provision of airport capacity to serve the greater Dublin Area. Subject to planning permission, it is envisaged that the Dublin Airport Authority will provide such capacity through the expansion of existing facilities and infrastructure at Dublin Airport. "I am informed by the Dublin Airport Authority that all capital projects are subjected to rigorous appraisal procedures and ultimately board approval, in compliance with the guidelines issued by the Department of Finance." (2)As
the letter points out, the Guidelines which would have applied if the
appraisal had been done prior to the application for planning permission
in December 2004 (as it should have been) would have been the 1994 Guidelines.
These were reissued in February 2005. It is without question that, under
the old Guidelines the new runway proposal should also have been subjected
to a full cost benefit analysis, given its scale. (4)Richard D Lipsey, An Introduction to Positive Economics", 3rd edition, 1974, page 211. (5)See attached correspondence with Robert Hilliard of July 2005. (6)On 13 April 2005 at the Joint Oireachtas Committee on Transport, Mr. Gary McGann, DAA chairman said: "Why would any company agree to the assessment of an alternative that would cost hundreds of millions of euro when it had in place an asset base capable of dealing with the task? That would not make sense and would require the Dublin Airport Authority to replicate everything." Speaking in December 2002, John Burke, former Aer Rianta Chief Executive, said: "Fortunately, the airport has a vast land bank - more than 1,000 hectares - all of which was purchased about 40 years ago under the visionary former Irish Taoiseach (Prime Minister) Sean Lemass." See: http://www.aci-europe.org/upload/aci%20nov_dec%202002%20burke.pdf (7)See: The Value of Land at Dublin Airport" at www.norunway.com (8)See "Cost Benefit Analysis" at www.norunway.com (9)Revenue
is essentially based on the per passenger charge determined by the Commission
for Aviation Regulation (CAR). The CAR does not include DAA land, at
least not at full opportunity cost, in its valuation of the assets that
have to be remunerated by airport charges, and CAR ignores land not
owned by the DAA which is devalued by the new flight-path. Consequently
the charge could never be large enough to remunerate the true value
of the land absorbed or devalued by the new runway and its flight-path.
If the CAR did include the true value of such land in its determination,
the charge would probably be so large as to be commercially non-viable
for the airlines. In effect, this is just another manifestation of UPROAR's
cost benefit analysis findings that this new runway proposal is economically
unsound. See: "The Value of Land at Dublin Airport." at www.norunway.com. (11)The Finance Guidelines place considerable emphasis on the need for realistic alternatives to be seriously and objectively considered. See "Options" on page 33 of 2005 Guidelines. (12)Page 11 of the A & L Goodbody report, Ireland's Strategic Infrastructure Investment 2020, September 2005, says: "The envelope for each Ministerial Vote Group is underpinned by a formal agreement between the Department of Finance and individual line Departments. Each agreement incorporates a number of conditions, including specific details regarding the amount of the envelope for each year, project level details, contractual commitments, carryover of savings, adherence to guidelines on appraisal, and formal arrangements for monitoring and reporting on progress." In practical terms, this means that Department of Finance approval is required in respect of all infrastructure projects." See: http://www.algoodbody.ie/consulting/32013%20infastructure%20report.pdf See also: General Conditions of Sanction for Multi Annual Capital Envelopes, Appendix 3 of the 2005 Guidelines. (13)Determination on Maximum Levels of Airport Charges, Commission Paper CP3/2005, Commission for Aviation Regulation, 29 September 2005. (14)The DAA's revised capex programme has pushed the construction of the new runway past the time frame of the current charge determination (2006-2009). Consequently the new runway investment was not considered in the current determination. If the new runway is analysed by the CAR, that might not be until close to the next period of charge determination starting in 2010. (15)I take the liberty of quoting some elements of his address back to the Minister: "Value
for money is also not simply an item to be ticked in project appraisal.
Rather it is the outcome of a carefully considered appraisal system
and culture that takes into account, as objectively as possible, the
overall benefits and costs of a given project and seek to make sure
that budget estimates are met." I believe it is appropriate to reduce the project value level to €30 million. This approach will include identification and carefully quantified analysis of all the relevant project costs and benefits, including indirect costs as well as the identification of any risks of cost escalation. The principle of cost-benefit analysis is that a project is only desirable if the benefits exceed the corresponding costs." |
