Examining The Figures Claimed

With the spring budget looming and questions over whether fiscal targets can be met, Garth Gascoigne, Chartered Accountant and Treasurer of Chiswick Against the Third Runway, asks if the risks outweigh the benefits for the taxpayer?

Garth Gascoigne -The report published by the Airports Commission in July 2015 suggested that the benefits of a third runway at Heathrow could be “up to £147 billion” (for the UK as a whole spread over sixty years). On closer inspection the report goes on to state that the present net benefit (the overall benefit valued in today’s money), after taking account of the related costs, was a much more modest figure of £11.8 billion (Table 7.1 Page 147). The equivalent figure for Gatwick was £10.8 billion.

For me these figures ring alarm bells. One of the main reasons for the difference between the total benefits figure (£147 billion) and the present net benefit (£11.8 billion) is the substantial costs. This is a situation where there are large benefits and large costs offsetting one another to produce a relatively small net figure. Thus having the right economic model and using realistic assumptions becomes even more critical, otherwise the risk of arriving at the wrong number is increased substantially.

Economists Mackie and Pearce, were appointed as part of the work of the Commission to evaluate the methodology. They pointed out that the model used to estimate the benefits originates with HMRC where it has been used to assess the impact of tax changes on the UK economy. They make the point that using the model to assess the impact of a change in one sector of the economy (airport capacity) on other sectors is a very new departure, and therefore results should be treated with great caution. In their words “a change in the rate of VAT is far easier to represent in a model than a change in accessibility caused by an increase in airport capacity”.

Subsequent to publication further questions have been raised in relation to the assumptions used in the model. For example, Gatwick in their response to the Airports Commission report, criticise its traffic forecasts. They argue that “Gatwick traffic has been understated, and capacity and traffic at Heathrow overstated”. They also point out that the benefits from a competition perspective of expanding Gatwick rather than Heathrow have been ignored altogether in the model.

So doubts have been raised concerning the model and assumptions used to estimate benefits, but what about costs? Our experience tells us that with large infrastructure projects cost estimates are often exceeded. The uncertainties relating to the potential costs at Heathrow are accentuated by the greater legal, planning, and environmental challenges.

All of the above leaves a significant amount of doubt in my mind as to whether the figures in the Commission’s report can be relied upon not just to evaluate the quantum of the present net benefit but the reliability of the comparisons between different alternatives. However, if we consider how the risks and rewards are shared between Heathrow and the taxpayer there is even further cause for concern.

From Heathrow’s perspective the additional revenues appear to be reasonably predictable. Capacity will be increased by approximately 50%. This will result in a proportionate increase in landing fees, rental income from shops and restaurants in the new terminals, and additional car parking charges. The Commission estimates Heathrow’s costs to be £251 million for the new runway, £799 million for car parks, £4.8 billion for terminal buildings and £4 billion for land. Heathrow have offered a further £1.1 billion towards infrastructure costs. In many ways this looks about as low risk as building a large shopping centre in a prime location. Hence, for the largely overseas owners of Heathrow, this represents a relatively safe and attractive proposition.

From the perspective of the taxpayer the deal looks altogether different. The benefits which accrue to Heathrow are predominantly direct benefits which are by their nature more predictable. The benefits left for the taxpayer are in large part indirect. Remember these are the ones in respect of which the HMRC model (the one more usually used to predict the impact of VAT changes) is being relied upon. Not only has the suitability of this model been questioned but the outcome is very sensitive to small changes in the assumptions incorporated in it. An example of a key assumption which has been made is an annual economic growth rate of 2.75%. I will leave you to be the judge of how realistic you believe this to be, but a small error in this figure will result in a very different outcome.

It is not only in respect of benefits where the taxpayer is taking most of the risk. In the case of infrastructure costs the Commission estimates these to be just over £5 billion, but Transport for London (TfL) thinks that they may be as high as £20 billion. So what is the likely number? The answer is we do not know, but what we do know is that Heathrow have capped their contribution at £1.1 billion which means for the taxpayer it could be anything between £3.9 billion and £18.9 billion depending on who is right. If you thought that this type of cost was unpredictable consider, for example, air pollution and related future healthcare costs. Research supporting the seriousness of this issue is building and the WHO recently emphasised the significant financial implications for governments.

So what would my advice be to the taxpayer? I would strongly caution against making a decision based purely on the estimated present net benefit of Heathrow of £11.8 billion (compared to £10.8 billion for Gatwick). We know that the benefits and costs that are netted against each other to arrive at this figure are very significantly higher for Heathrow. The magnitude of these numbers, the associated risk and the burdening of the tax payer with the lion’s share of that risk makes Heathrow look like a poor deal for the taxpayer.

Garth Gascoigne is a Chartered Accountant who works in the financial services sector.

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