Recovering Construction Costs from Users

Table 1 shows the levy (or toll) airport users should be charged if they were to pay just the construction costs of airport expansion. Various interest rate and investment term arrangements are shown (see below for Calculating the Cost):

This toll has to be levied on every passenger using either the existing KSA or the future Second Airport, right now in order to encourage more efficient allocation of airport resources. Delaying the charge will only make it higher.

But can you imagine the outcry from air travellers if this levy were imposed tomorrow ? Short-range air travel would be priced to extinction (e.g. Goulburn, Orange, Newcastle, Wagga). Interstate and overseas travel would also take nasty hits. The EIS predictions of airport growth begin to look pretty sick, and even higher charges would be needed.

If an aircraft movement levy is struck instead of a passenger-based levy, it becomes clear that smaller aircraft (say 40 or fewer seats) are unlikely to be viable. Where will they go ? What environmental and financial impacts will they take with them ?

Is the real plan to expand Bankstown and other general aviation airports to leave more room at KSA for the big stuff ? Are plans for more traffic at Bankstown Airport during the Olympics going to become Sydney's permanent solution to it's airport problems ?

Calculating the Cost

Capital

The Second Airport Summary EIS lists the Badgerys Creek option C as costing from $4.4 billion to $5.8 billion, in 1997 dollars. What user levy is needed to fund (amortize) this ?

The EIS figure is the estimated cost of constructing the 2016-scale airport in 1997 (PPK communication 11/9/97). It is not based on a properly constructed cash flow analysis, showing when funds need to be committed.

To correct this, assume the airport will be built in two stages. The second stage will be built 10 years after the first (and might comprise the second runway etc.,.). Also estimate that the predicted expansion of KSA by 10 million passengers p.a. will cost approximately 1/3 of the 30 million passenger p.a. airport planned for Badgerys Creek.

The user charge will have to repay the debt and equity borrowing which finance the building works. To calculate the charge, estimates have to be made of the term for the investments, and the appropriate interest rates to use.

Interest Rate Selection

For government projects, interest rates close to actual commercial loan rates are used. Currently the NSW treasury requires a discount rate of 10% to be applied to capital works.

For a privately owned/operated project, higher rates are needed to induce investors to risk their money. Private equity holders will require a profit, often much higher than the 10% cost of funds. These are needed firstly to attract their funds away from other profitable investments. A private sector company will also have to pay company tax. Then, premiums have to be added for the risks due to uncertainties with oil supplies and possible competing forms of transport in the future. Inflation and risks due to political changes have also to be accounted for.

Estimating these premiums is difficult - most businessmen regard information on these as commercial-in-confidence stuff - secret businessmen's code for "you're not grazing in my paddock".

Many business investors look for rates of return in the vicinity of 20 to 30 % and higher (it's not hard finding portfolio's offering 25% rates currently). The correct discount rate may lie between 10 and 30 %. Let's consider a conservative range of discount rates from 10% to 20%.

Investment Term

The term of the investment is also difficult to estimate. It's hard to prepare reliable business plans extending beyond 10 years - even the Summary EIS makes little attempt to estimate beyond 20 years (2016). Longer terms need higher risk premiums, and incur additional refinancing costs, which offset the benefit of otherwise lower repayments. To cover these uncertainties, consider two terms: 10 years, and 20 years (remember, jumbo's haven't been around 30 years, and probably won't be around in another 30 years).

Repayment

For each interest/term pair of values, an annual repayment can be calculated. A user-pays levy can be arrived at in various ways:

• Levy Per Passenger Movement

  Each passenger moving in or out of the airport pays a toll. Passenger's in transit who don't stopover are included in this. This method has the advantage that the Federal Airports Corporation already compiles statistics on movements (and of course, the airlines wouldn't be trying to fudge them upward, would they !).

• Levy Per Terminal Gate Entry/Exit

  Only passenger's leaving or entering the airport terminal are charged a toll. Passenger's in transit aren't charged, and hopefully can't bypass the charge by starting their journey at a nearby regional airport.

• Landing Charge

  Each aircraft moving in or out of the airport is charged a toll. This is more efficient at encouraging a good allocation of scarce runway and terminal capacity resources. It also captures cargo aircraft, and can be distributed by the airlines to account for the cargo carried on passenger services. Both passenger based charges allow cargo to escape carrying its fair share.

A user charge is shown in Table 1 for each of these cases. The table assumes that users of both KSA and the Second Airport will be tolled (to equalize the burden), and the toll will be fixed in real terms. It is expressed in 1997 dollar terms, so keep in mind it will rise in line with inflation as the years roll by.

The EIS's prediction of passenger numbers is used to calculate the toll. Passenger numbers are multiplied by the toll, and paid off annually against the loan, so that the balance reaches zero at the end of the required term (see the cash flow diagram).

The terminal gate entry exit levy is arrived at by assuming a fixed proportion of passengers do not embark or disembark at Sydney.

As most passengers fly on return tickets, the terminal gate entry/exit levy in Table 1 is scaled into the Return Ticket Levy. An adjustment to also include the KSA expansion costs is included in the figure shown (other figures do not include KSA expansion costs).

Other Costs & Simplifications

The analysis here is illustrative, and not intended to represent all the costs and benefits of an airport project. It is incremental, showing the impact of new construction works on airport finances.

Even if we accept claims that current airport operations are profitable, the cost of financing new construction works casts considerable doubt that this will continue to be the case. Are they profitable only in the sense that taxpayers accept lower rates of return that private operators would ?

Some of the simplifications in the above analysis are:

• Increased operational costs with a second airport aren't accounted for.

• The Draft EIS has excluded much of the infrastructure costs associated with the airport, and hence they are not included here.

• No account is made for damage to the environment, public health, education etc.,. The Draft EIS fails to quantify these.

• Residual value of the construction works at the end of the term has been excluded. In the case of build-own-operate infrastructure projects, it has been usual for ownership to revert to the public at the term end (so that other companies may compete for the ongoing operation). Uncertainty with future oil supplies makes this an especially prudent approach.

• The cash flow from the existing publicly owned airport operation is not included. Present airport charges indicate these are much lower than what will be needed for the privately funded new airport. The new construction costs are likely to dominate, even if existing operations and capital costs are included.

• No allowance has been made for the multi million-dollar a year executive and consultancy fees that will be drawn by the private airport administration and management.

Worst-Case Financing ?

If you think the choice of a 10 year / 20 % financing arrangement is extreme, how much money have you got to lend me at the lower rates you think are fair ?

If you happen to be a wealthy banker or rich oil sheik, and you'd be happy to invest $3 billion in an airport for just 15% over 20 years, contact me urgently. Don't worry too much about what happens to your 15% return if inflation takes off towards 10% some time in the next 20 years !

Taxpayer's Role

Why has the airport debate avoided the basic questions of who pays and how much ? Will government secretly commit taxpayer's to pouring giga-dollar subsidies into the aviation and tourism industries ?

Australia has only 9 million people in employment (with miserable prospects for growth). This is under half the number of passengers the airport cost is spread over in the above analysis. Each worker would have to contribute around $250 per annum in taxes.

Can such use of taxpayer's money be justified ? Could every air traveller generate so much business that other taxes they pay offset the airport costs ? Tourism Council statistics (hardly an unbiased source) claim each overseas tourist spends $2,200. How much of this does the taxman capture, how much other infrastructure must it support, and what about the business and local tourist who make up 80% of travellers ? Proposals for a 10% GST clearly won't be enough (10% of $2,200 is $220, leaving a $30 shortfall ! )

Does an airport offer the best possible return on taxpayer's dollars ? Or would it be better spent on health, education, export creation schemes or other worthy projects ?

To date, the EIS process gives no answer to these questions. There is no basic answer to the question of whether this airport is necessary, affordable or desirable.

If the government can't answer this in the EIS, maybe it's time to leave it to the marketplace to sort things out.