Note on UPROAR's Runway Cost Benefit Analysis.1

Q: Has UPROAR done a full cost benefit analysis?

A: No. Such a study is required by Department of Finance Guidelines for investments by public bodies.2 UPROAR does not have the resources to carry out such a study that should have been carried out by the Dublin Airport Authority (DAA), or failing them, by the Department of Transport. UPROAR set out to do an "illustrative" or "back-of-the-envelope" job in order to show that there was, irrespective of the statutory requirement, an overwhelming a priori case for such a study based on the huge economic losses that even such a rough analysis shows clearly. Two assessments were made by UPROAR. One of the new runway as proposed for Dublin Airport and an alternative investment in a second airport for the Greater Dublin Area. The new runway produces a net loss of €3 billion while the new airport gives a good economic rate of return when operating at a passenger charge similar to the current charge at Dublin Airport. UPROAR believes that this should be sufficient to show the authorities that failure to do the full study has very serious implications for national welfare.

Q: Did UPROAR measure all benefits and costs?

A: No. UPROAR did not measure the "spin-off" benefits, nor all possible consumer benefits. Some costs were not included.

Q: What are spin-off benefits and why were they not measured by UPROAR?

A: "Spin-off" benefits are the so-called multiplier effects that result from any, especially large-scale, investment programme, public or private. New economic activity generates further economic activity. New jobs create more jobs. The measurement of these benefits is complicated, but estimates of them can be made. The DAA attempted this in its Environmental Impact Statement by estimating all the indirect jobs and income that would be generated by the new parallel runway investment. UPROAR has demonstrated that these estimates are wrong.3

UPROAR further claimed that any such benefits are unlikely to accrue significantly to the parallel runway option because of infrastructural impediments in the Fingal area. North Dublin is already severely congested, land and other property prices are very high and near-full employment already exists. If anything, the parallel runway with its extra 10 million passengers could make conditions more difficult for existing and new businesses in the area.

UPROAR contends that such benefits would accrue more fully to alternative locations for runway development, such as at the regional airports or, particularly, if a new airport serving the Greater Dublin Area was built. If properly selected, a new green-field site for a new airport would allow a new town to develop adjacent to it with lots of additional economic activity and extra jobs where they are actually needed. So, whatever the real spin-off benefits such an investment might generate, they would be much greater at an alternative site than for the proposed development at Dublin Airport. Further, if properly planned, such a development would not have nearly as many of the additional costs to communities of noise, air pollution and traffic congestion.

These spin-off benefits were not measured by UPROAR for the new airport scenario. These would be reflected in the effect of a new airport on local land values. The anticipation of the arrival of a new airport would greatly increase the value of land available for development in the vicinity of that new airport site. Whether this is public or private land, its increased value is a benefit to be counted in favour of the new airport. If current land values near Dublin Airport are any guide, land prices of around €1 million an acre could be anticipated near a new airport. In UPROAR's opinion, this added-value will not take place around Dublin Airport if the new runway was built there, because it already has occurred, and the infrastructural weaknesses around Dublin Airport severely limit any additional spin-off development. Further, it is highly unlikely that these benefits from the second airport would be reduced by any fall in land prices near Dublin Airport as a consequence of the building of a new airport 50 - 100 kms away to the west or south-west, because Dublin Airport would continue to prosper.

It should be of interest to the state authorities that huge gains could be had for the taxpayer if state-owned land was involved, as proposed by Bord na Móna.4 A new state-of-the-art airport could be built, partly funded by the sale of surrounding land for development. And a new town would also develop on land of little current value. If an estimate of such benefits had been included, the cost benefit results for the new airport would have been even more compelling.

Q: What other benefits were not measured by UPROAR?

A: Not all consumer benefits were measured.5 Only the per passenger charge likely to be allowed by the CAR on present practice was credited to the new runway . This is a complex area but we can proceed as follows. Consumer benefits from an investment are, in theory, to be measured by "Consumer Surplus". That, quite simply, is the difference between what consumers have to pay, and what they would be willing to pay for the goods or services flowing from the project. Estimates can be made of that if we know the price they would have to pay and the shape of the demand curve for those goods and services. UPROAR has not attempted this.

Its measurement is complicated in this case because of the huge subsidy to existing Dublin Airport users that arises because they do not have to pay for the use of the land at Dublin Airport. The maximum passenger charge determined by the Commission for Aviation Regulation (CAR) only values all the land at Dublin Airport at some €20 million, when it is really worth €1 - €2 million an acre, or €2.5 - €5 billion in total. There is also other private land affected by flight paths whose loss of value should also be included in the charge. Taking the lower figure of €2.5 billion for airport land, the maximum charge per passenger to pay for it would need to be over €15 per passenger, rather than the current €6.14. (There are currently nearly 20 million passengers per year).

That subsidy is part of the Consumer Surplus of today's passengers but as there is no reliable estimate of how many are using the airport because of that subsidy, the benefit to them is hard to estimate. In addition, that is the subsidy situation affecting current users of the airport and not the new users that would pass through Dublin Airport because of the new runway. According to the DAA, these are expected to be 10 million by 2025. It is their benefits that are mainly relevant to an analysis of the new runway proposal. Again, estimates could be attempted of the benefits to those extra passengers, but there are many unknowns, including the maximum charge that the CAR will actually set if the new runway is built. The CAR may even decide that, in future, charges at Dublin Airport should reflect the true value of airport land. In that case, the unsubsidised charges would have to apply to all airport passengers, making the number of extra passengers likely to use the new runway, and the benefits to them, very uncertain. Indeed, if the subsidy were abolished, it is very likely there would be insufficient passenger demand for a new runway at Dublin Airport.

This subsidy comes from the taxpayers who own the land that is not being charged for. Therefore, whatever the benefits likely to accrue to passengers because of a continuing subsidy, they are, at best, offset by the loss to taxpayers. But, subsidies that are not justified to correct some market failure also create economic distortions which translate into net welfare losses. So, while consumers gain and taxpayers lose, there is also a net welfare loss to society. This arises from an inefficient use of resources. In this case it means land that has a much higher value than is allowed for in the current Dublin Airport charge, is being used to provide airport services which would be much more efficiently provided elsewhere where the land is much cheaper. This would in turn allow the land at Dublin Airport to be put to its best alternative economic use.

There is a further welfare-related issue involved in this subsidy that UPROAR has not directly addressed. That is the regressive distributional impact of this subsidy paid by taxpayers to relatively high-income air travellers. Even further, as many of these travellers are not resident in Ireland, it is questionable if benefits accruing to them, especially Irish-taxpayer-subsidised ones, should even be counted in the first place, in an analysis that looks at the national interest.

As in the case of spin-offs, the "alternatives" argument allows UPROAR to reach a valid conclusion, even without measuring all the consumer benefits from the new runway and the net welfare loss resulting from the subsidy.6 UPROAR has estimated that a new airport serving the Greater Dublin Area and assumed to be well located on land of low alternative use value,7 could operate profitably at a charge of €6-7 per passenger, comparable to the maximum charge currently allowed at Dublin Airport. It follows that users of that new airport would gain all the consumer benefits (consumer surplus) they would get from the subsidised new runway at Dublin airport, but without the transfer from taxpayers and without the net welfare losses, because the land at the new airport would be put to its best use. It is also very likely that such a new airport would grow much faster than the projected growth of new passengers at Dublin Airport due to the new runway. It would take some business away from Dublin Airport. This would undoubtedly be the case if users of Dublin Airport had to pay for the use of its land, and charges had to rise accordingly. It follows that more passengers would benefit from such a new airport without the cost of wasted assets.

Q: What costs did UPROAR not include?

A: The largest is probably the costs to other communities. Only estimates for the costs to Portmarnock's 10,000 residents due to increased noise and air pollution, increased danger, flooding, etc., were estimated by proxy at €200 million, assuming a loss of 15% of residential property values as a result of these factors. Many other people in Malahide, Kinsaley and Swords will also be negatively affected (possibly 100,000) by 2025. No estimate was included for the costs to these communities. Neither did UPROAR include the estimated €200 million cost of the improved roadway network needed to make the new runway work, according to Fingal County Council. Nor has any allowance been made for the costs of the proposed Swords Metro that is also, in part, needed to relieve airport congestion. (In UPROAR's opinion the new runway-generated traffic problems are insoluble.)

Q: What is UPROAR's "bottom line"?

A: UPROAR has estimated that the economic loss due to this parallel runway proposal is of the order of €3 billion. It is possible that some consumer benefits are understated in arriving at this net figure, as consumer surplus was not measured. However, the vast bulk of that loss arises from the misuse of the land resource to which is added an estimate of congestion costs and welfare losses to Portmarnock through pollution, etc. These costs have been conservatively measured because the land has been valued at the lower end of valuers' estimates and the losses to many thousands of other affected residents have not be included. As these costs would not arise at an alternative location, they must represent a minimum estimate of the net loss resulting from this new runway proposal.8 The real net cost could be billions more. UPROAR believes that a very strong a priori case has been made for a full-scale independent cost benefit analysis, as Minister Cowen requires, and is confident that UPROAR's conclusions would be confirmed.

Matt Harley
Portmarnock
20 May 2006

Endnotes
.1 See: http://norunway.com/cba/ This version was submitted with UPROAR's appeal to An Bord Pleanála on 9th May 2006.

.2 See: "Guidelines for the Appraisal and Management of Capital Expenditure Proposals in the Public Sector" at http://www.finance.gov.ie/documents/publications/other/capappguide05.pdf

.3 See UPROAR's, "Flawed Methodologies in Airport Expansion Studies" and "Economic Case as Put by the DAA" in UPROAR's appeal to An Bord Pleanála at http://norunway.com/economics.doc, "The Economics of the Proposed Runway."

.4 See: "Another Airport in a Bog? Why Bord na Mona's Boss Says the Idea Isn't Just a Flyer", by Willie Dillon, Irish Independent, Sat 30 July 2005.

.5 When benefits cannot be easily quantified, the analysis is called a Cost Effectiveness Analysis rather than a Cost Benefit Analysis. Valid cost-benefit conclusions can still be reached if the benefits of alternatives under consideration can be compared and ranked, even if not estimated. The example given by the Finance Guidelines is the building of schools. Benefits are difficult to measure, but can be assumed to be similar for all options, if schools are built to required standards. The issue then comes down to one of cost, and the least costly option will be preferred.

.6 A simulation of a more economic charge was also made, but huge net economic losses persisted.

.7 UPROAR assumed agricultural value, however, land such as the former bog available for airport construction according to Bord na Móna, would be even cheaper.

.8 Assume, ridiculously, that the "missing" consumer benefits are €4 billion so that on balance, the parallel runway proposal actually gives an unlikely net benefit result of €1 billion. As the alternative would not have that €3 billion loss, it would have net benefits of at least €4 billion, and therefore be €3 billion more beneficial. Consequently, the new runway proposal gives a net loss of at least €3 billion.