The strange economic assessment of the proposed extension to Wellington Airport’s runway reduces to a plea for subsidies from tax and ratepayers.

I am sometimes asked to assist voluntary groups with a critique of a commissioned economic assessment of a development project. I decline because of the high standard required from me – one which would stand up as evidence to a tribunal. That means a huge effort and a lot of resources – especially my time – requiring a fee with a good number of zeros between the dollar sign and the decimal point.

What I am about to write then, is not a critique of a report on the proposed extension to Wellington Airports runway but a look at a strange aspect of it. It involves a fallacy which was common in the evaluation of the Major Projects in the late 1970s and early 1980s. It would be dreadful to go there again.

Briefly the proposal is to spend about $300m to extend the runway at Rongotai by a further 354 metres, which would enable larger planes with longer ranges to land there. There are environmental issues which I shall not comment on. Nor am I here evaluating the claim of the consultants (Sapere) that the nation's coffers will be $2b to the good, 60 years after the longer runway is up and running.

The problem  is illustrated by the report’s discussion on the funding of the extension. The report hesitates to recommend that the investment should be funded by the users of the extension. Obviously they should be paying something for the advantages of the longer runway. Why not the whole lot? Instead, the report points to ratepayers and taxpayers making a substantial contribution.

The report’s argument is a bit tortuous even to an economist, but essentially it seems to be that if the required ‘increase in fees were paid by existing users of Wellington Airport, it would necessarily mean a charge which exceeds the economic cost of supplying those services ...’

I think the report means ‘existing and new users’ for it would be astonishing if the new users who are central to the benefits from the extension made no contribution. What it seems to be saying is that were the users to have to pay for the improved service, they would not use it. In which case the extension would be not be commercially viable. Therefore, the report says, it should be largely funded by ratepayers and taxpayers.

That argument applies in lots of other cases implying, for instance, that food should be subsidised by the taxpayers too. Economic policy is increasingly chary of subsidising anything, for the good reason that such arguments used could be applied to subsidising everything. That does not mean there should never be public subsidies but that their justification requires a far greater degree of rigour than that provided in this report.

Isn’t the logic that if it is not commercially viable the investment should not go ahead? The report seems to argue that the main benefits from the extension would be elsewhere – say, those who sell services to the extra tourists. That was a well-known racket when evaluating the Think Big (and other) projects which did not cut the mustard in their own right. Typically any added benefits were frequently over-optimistically estimated. At this point sloppy thinking starts demanding subsidies from taxpayers. Given the experience of the Major Projects/Think Big that is an instant flag that the project does not stack up.

Another trick in the Major Projects evaluation was to ignore the distributional impact. Very often the locality and the company were better off but the rest of the country was worse. This resulted in an interesting political conflict with the putative beneficiaries of a subsidy shouting loudly ‘GIVE ME’ and the rest of the country asking ‘Who us?’

My superficial reading suggests there are all sorts of technical problems with the report as well as the analysis being opaque. The report does not even say who commissioned it, a standard part of the discipline of a proper evaluation. This is not to say that such reports are inevitably in the interests of the paying client. But a reader is entitled to have any potential conflicts of interest identified.

Dont ask me to sort the muddle out for nothing. Instead, demand the agencies being asked to provide the subsidies (the local authorities and the Treasury) commission another group of consultants to go through the report in rigorous detail. That will take resources – a good number of zeros between the dollar sign and the decimal point. But. as like as not, it will save economic waste far in excess of the cost of a good critique.

The Treasury has tried to set out standards for such evaluations (called cost-benefit analyses). I am struck by the ingenuity of consultants getting around them. The only defence against poor work is a detailed critique done by top rate economists and contested in a tribunal. Wellington region rate payers and New Zealand taxpayers deserve no less.

Comments (8)

by Rich on December 07, 2015
Rich

The only defence against poor work is a detailed critique done by top rate economists and contested in a tribunal

Indeed, although this may not happen. There are two decisions to be made here - the planning decision to allow a runway to be built at all and the (political) decision to subsidise it. The first would go through the RMA process which is (even in its truncated form) reasonably rigorous (at least if the Basin Flyover decision is anything to go by).

The second political process is likely to be a lot more tenuous and influenced by politicians wanting to "do something for Wellington" and vocal stakeholders (mostly property developers with an interest in driving up land prices).

I'd suggest a common flaw in most justifications for public subsidy involves mis-modeling the economic impact of the proposed project. The assumption is usually that any new economic activity will be new, rather than displacing other work. But Wellington has relatively low unemployment and the highest income levels in the country (depending on how you cut the geography) - how does the creation of more (relatively low paid) tourism jobs grow the regional economy? 

by Fentex on December 07, 2015
Fentex

Do you really need "...a detailed critique done by top rate economists..." to critique what seems a very weak argument?

Isn't the onus on those seeking investment to make a stronger case rather than taxpayers to defend against a bad one?

by Viv Kerr on December 07, 2015
Viv Kerr

When the deputy Mayor of Wellington was interviewed about this proposed runway extension on Morning Report a week or so ago, he seemed to say that the project's viability depended on there being an increase in long haul flights into Wellington. I'm not sure if CO2 emissions are one of the 'environmental issues' which you are not commenting on, but how realistic is an assumption that there will be an increase in airline passengers in the coming decades?

 The tourism industry seems to be virtually ignoring the urgent global need to reduce CO2 emissions in their planning. They are expecting visitor numbers to continue to increase over the next 10 years (using something called “sustainable air connectivity” ).    http://www.tourism2025.org.nz/assets/Documents/Tourism-2025-Summary.pdf

 Surely any economic forecasting that ignores the impact of the need to take action on climate change in the coming decades is, at best naive and at worst  wilfully negligent.

by mudfish on December 07, 2015
mudfish

"That does not mean there should never be public subsidies but that their justification requires a far greater degree of rigour than that provided in this report."

I'd be interested to know what things receive subsidies that have this rigorous justification and how that's kept up to date. Not being a big reader of Treasury reports, and excluding a whole heap of things govt gets involved in for social good, in terms of infrastructure, I guess that includes roads (road user charges and taxes used to build roads, but do those charges cover the health costs as well?) , railways (on and off). Ports seem to have been paying their way, those that have survived. Buses, to keep road costs down. Lots more going into cycleways now, but with road, health, social benefits - was the need for quantifiable justification the roadblock for a long time? 

One that always puzzled me (and I admit I don't know the specifics) was the buying of trains from overseas as opposed to keeping the Dunedin railyards open for similar (slightly higher?) cost - was there not some justification for subsidy if the alternative was loss of jobs - i.e. would the social and benefit costs of not subsidising the work to stay in NZ have been worth a subsidy?

Many things have external benefits - dairy farmers argue the rest of the economy benefits from their profitability so the government has seen fit to facilitate/seed new schemes while some of their costs are externalised (clean up funds) - but these are difficult to recognise equally in every sphere. Flood control had the government pin pulled around 1990 but different regions recognise the wider benefits very differently (e.g. Otago about 3%, Canterbury more like 30%) and some works benefit the centrally funded roads - so is there some national benefit?

These things go ahead if those holding the purse strings can be persuaded of their benefit and value - yes there is bound to be some benefit to Wellington businesses from an extended runway, but is it worth it and is the ratepayer share fair?

Oh and how are all these proposed conference centres justified simultaneously? Are they all so different they are competing in different markets or are they about to steal each others projected profits?  

 

by mudfish on December 07, 2015
mudfish

Oh and Murray will tell me off for not pointing out the folly of investing in air travel when we really need a massive carbon tax that'll change all the projections completely.

by Ian MacKay on December 08, 2015
Ian MacKay

When taxpayers money is gifted to say the challenge for the America's cup there is much talk of the benefits to the country. The cafes on the waterfront benefit but at the expense of the more distant cafes. Similar sort of argument in the case of the runway benefits. Hard to quantify the benefits or even if there are any. Market rules only sometimes.

by Murray Grimwood on December 09, 2015
Murray Grimwood

No aeroplane will ever shuttle passengers using renewable energy.

So the only valid question is how long the demand for Wellington airport - any airport - will continue.

by Brian Easton on December 16, 2015
Brian Easton

Readers may find this more elaborate assessment by Keith Johnson helpful. B. 

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