List of Abbreviations
4 Airports
4.3 Terminal capacity expansion
could take various forms, including a 73 per cent grant on investment costs, or some combination of grants, tax rebates, and subsidies to operating costs.
None of this would change the economic returns of the project since it would constitute simply a transfer from the public sector to the private sector.
For the project to be worthwhile outsourcing to the private sector, the dif-ferences in efficiency of building and operating the project between the private sector and the public sector would have to be substantial. Otherwise the fi-nancial return to the private sector will just largely reflect the subsidy. Generally, under such circumstances, private sector involvement in the investment is not justified. Any private sector involvement would instead be through a man-agement contract to operate the airport, minimising or eliminating any upfront capital investment by the private sector and hence minimising transfers from the taxpayer.
This situation is most frequent. Small airports that charge standard levels of aeronautical charges are loss-making, but are economically justified because of non-monetised benefits and are left to the government to develop and operate.
There is a rationale for private sector investment in small airports in situations where incomes in the catchment area are very high, increasing user willingness to pay for saving time. In such situations the airport can command high aeronautical charges which, combined with the potential for higher non- aeronautical yields, may constitute investment opportunities with sound financial prospects.
construction no later than year 14. The project would consist of expanding terminal capacity by an additional 1.2 million passengers per year, bringing the total capacity of the airport to 2.4 million passengers. Construction would begin in year 14 and conclude in year 17. Total investment would be EUR100 million, incurred in equal shares across the four-year construction period. Note that this investment, needed to accommodate an additional 1.2 million passengers, is much smaller than the greenfield investment of EUR400 million that would also accommodate 1.2 million passengers. Much of the infrastructure capacity developed at greenfield stage, including the runway, apron, tower, and access roads, will be sufficient to operate the expanded terminal facility. Since the additional investment is smaller in the expansion stage than in the greenfield stage, but the amount of incremental traffic ac-commodated is the same in both stages, the returns on investment can ex-pected to be stronger in the expansion stage than in the greenfield stage. Such returns will reflect a mixture of economies of scale and density.
The results of the estimation of financial and economic viability are dis-played in Table 4.5. Traffic would reach design capacity of 2.4 million pas-sengers by year 26, some 9 years after opening the expanded facility.
Thereafter additional traffic would cause congestion, eventually leading to capacity rationing and deterred traffic by year 32, followed by traffic diversion by year 34, some 17 years after the expanded facility would be opened.
The new project would generate a positive financial return since, unlike at greenfield stage, the present value of the additional operating profits is higher than the investment cost of the project. For the operator the project has a net present value of EUR37.7 million (row 10) and a financial return of 7.1 per cent. The government will see additional tax revenues with a present value of EUR53.2 million (row 15). The combined financial value of the project to the operator and the government is 90.9 million (row 16), or a combined financial return of 9.6 per cent.
The economic return is calculated using the same procedure as in the greenfield case, adjusting the ‘without project’ scenario to include the existing airport capacity in town A and adding a measure of consumer surplus appro-priated by the airport from captive traffic (row 34). This is traffic that would have used airport A regardless of whether the project is carried out, that is, total traffic minus deterred and diverted traffic. Such captive traffic was obviously not present at greenfield stage. For ease of comparison with the greenfield case, surplus appropriated by the operator for diverted and deterred traffic is calculated taking as a baseline an airport passenger yield of EUR8, the same baseline as in the greenfield case. Since the passenger yield is EUR24, the initial capacity expansion scenario already displays surplus appropriation by the promoter. In the case of captive traffic, surplus appropriation is EUR0 because the yield of EUR24 also applies to the 'without project' scenario where there is no capacity expansion.
Costs associated with diverted traffic once more constitute a key determi-nant of the economic returns of the project (row 22). Note that the analysis
Table 4.5 Financial and economic returns of the terminal capacity expansion project PV\Year 14 15 16 17 18 25 30 35 42 FINANCIAL RETURNS Airport passenger capacity (1) with project (thousand) 1,200 1,200 1,200 1,200 2,400 2,400 2,400 2,400 2,400 (2) without project (thousand) 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 Passenger throughput (3) with project (thousand) 1,374 1,443 1,515 1,591 1,671 2,351 3,000 3,192 3,192 (4) without project (thousand) 1,374 1,443 1,515 1,591 1,596 1,596 1,596 1,596 1,596 Operating cashflows (after tax) (5) with project (EUR m) 430.0 16.6 17.8 19.0 20.2 17.4 28.3 39.1 42.7 42.7 (6) without project (EUR m) 303.7 16.6 17.8 19.0 20.2 20.6 20.6 20.6 20.6 20.6 (7) = (5) - (6) Net benefit (EUR m) 126.3 0.0 0.0 0.0 0.0 -3.2 7.7 18.5 22.1 22.1 (8) Capital investment (EUR m) 88.6 25.0 25.0 25.0 25.0 (9) Subsidy (EUR m) 0.0 0.0 0.0 0.0 0.0 (10) = (7) - (8) + (9) Net cash flow to operator (EUR m) 37.7 -25.0 -25.0 -25.0 -25.0 -3.2 7.7 18.5 22.1 22.1 (11) Operator FRR 7.1% (Continued)
Table 4.5 (Continued) PV\Year 14 15 16 17 18 25 30 35 42 (12) = (5) - (8) + (9) Private value of airport with project (EUR m) 341.4 -8.4 -7.2 -6.0 -4.8 17.4 28.3 39.1 42.7 42.7 Government financial flows (13) with project (EUR m) 179.1 10.4 10.7 11.0 11.3 8.5 11.4 14.1 14.9 14.9 (14) without project (EUR m) 125.9 10.4 10.7 11.0 11.3 7.5 7.5 7.5 7.5 7.5 (15) = (13) - (14) Net revenue (EUR m) 53.2 0.0 0.0 0.0 0.0 1.0 3.9 6.6 7.3 7.3 (16) = (10) + (15) Operator + government flows (EUR m) 90.9 -25.0 -25.0 -25.0 -25.0 -2.2 11.6 25.1 29.4 29.4 Private and Government FRR 9.6% ECONOMIC RETURNS Diverted passengers (17) with project (thousand) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 206.9 1,590.6 (18) without project (thousand) 0.0 0.0 0.0 0.0 0.0 490.6 1,067.1 1,802.9 3,186.6 Deterred passengers (19) with project (thousand) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 430.3 605.4 (20) without project (thousand) 0.0 0.0 0.0 0.0 74.6 264.1 337.1 430.3 605.4 Cost of diversion (21) = (17) × time cost time cost with project (EUR m) 92.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.2 81.4 (Continued)
Table 4.5 (Continued) PV\Year 14 15 16 17 18 25 30 35 42 (22) = (18) × time cost time cost without project (EUR m) 470.3 0.0 0.0 0.0 0.0 0.0 17.9 43.1 80.4 163.2 (23)= ((17) - (18)) × other costs op & safety costs of diverted pax (EUR m) 157.6 0.0 0.0 0.0 0.0 0.0 8.8 19.2 28.7 28.7 (24) approapriated by operator and gov. (EUR m) 140.1 0.0 0.0 0.0 0.0 0.0 7.8 17.1 25.5 25.5 (25) = - (21) + (22) + (23) - (24) Net benefit (EUR m) 237.3 0.0 0.0 0.0 0.0 0.0 18.9 45.2 74.3 84.9 Cost of deterrement (26) = 0.5 × (19) × time costs time cost with project (EUR m) 34.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.6 15.5 (27) = 0.5 × (20) × time costs time cost without project (EUR m) 73.1 0.0 0.0 0.0 0.0 1.2 4.8 6.8 9.6 15.5 (28) =0.5 × ((19) - (20)) × other costs op. & safety costs of deterred pax (EUR m) 18.8 0.0 0.0 0.0 0.0 0.7 2.4 3.0 0.0 0.0 (29) approapriated by operator (EUR m) 33.3 0.0 0.0 0.0 0.0 1.2 4.2 5.4 0.0 0.0 (30) = - (26) + (27) + (28) - (29) Net benefit (EUR m) 38.5 0.0 0.0 0.0 0.0 0.7 3.0 4.4 0.0 0.0 Cost of congestion (31) with project (EUR m) 124.2 5.2 5.5 5.9 6.3 0.0 0.0 15.4 18.1 20.8 (32) without project (EUR m) 111.8 5.2 5.5 5.9 6.3 6.5 7.4 8.2 9.1 10.4 (33) = - (31) + (32) Net benefit (EUR m) -12.3 0.0 0.0 0.0 0.0 6.5 7.4 -7.2 -9.1 -10.4 (34) Surplus appropriated from captive traffic (EUR m) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (35) Gross producer surplus airport B (EUR m) 17.5 0.0 0.0 0.0 0.0 0.0 1.0 2.1 3.2 3.2 (36) = (11) + (25) + (30) + (33) - (34) - (35) Economic flows (ex externalities) (EUR m) 479.9 -25.0 -25.0 -25.0 -25.0 4.9 39.9 65.4 91.5 100.8 ERR without externalities 19.6% (Continued)
Table 4.5 (Continued) PV\Year 14 15 16 17 18 25 30 35 42 Externalities From land transport diversion (37) = ((18) - (17)) × GHG cost greenhouse gas (EUR m) 470.6 0.0 0.0 0.0 0.0 0.0 20.5 51.8 89.8 110.5 (38) = ((18) - (17)) × noise cost noise (EUR m) 26.3 0.0 0.0 0.0 0.0 0.0 1.5 3.2 4.8 4.8 (39) = ((18) - (17)) × air pollution cost air pollution (EUR m) 17.5 0.0 0.0 0.0 0.0 0.0 1.0 2.1 3.2 3.2 (40) = ((18) - (17)) × safety cost safety cost (EUR m) 2.6 0.0 0.0 0.0 0.0 0.0 0.1 0.3 0.5 0.5 (41) = (37) + (38) + (39) + (40) Total (EUR m) 517.0 0.0 0.0 0.0 0.0 0.0 23.1 57.5 98.3 118.9 From generated air transport (42) = ((20) - (19)) × GHG cost greenhouse gas (EUR m) 88.9 0.0 0.0 0.0 0.0 2.5 11.1 16.4 0.0 0.0 (43) = ((20) - (19)) × noise cost noise (EUR m) 6.3 0.0 0.0 0.0 0.0 0.2 0.8 1.0 0.0 0.0 (44) = ((20) - (19)) × air pollution cost air pollution (EUR m) 4.2 0.0 0.0 0.0 0.0 0.1 0.5 0.7 0.0 0.0 (45) = ((20) - (19)) × safety cost safety cost (EUR m) 0.6 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 (46) = (42) + (43) + (44) + (45) Total (EUR m) 100.0 0.0 0.0 0.0 0.0 2.9 12.5 18.2 0.0 0.0 (47) = (41) - (46) Net external effect (EUR m) 417.0 0.0 0.0 0.0 0.0 -2.9 10.7 39.3 98.3 118.9 (48) = (36) + (47) Project net economic flows (EUR m) 896.9 -25.0 -25.0 -25.0 -25.0 2.0 50.6 104.7 189.8 219.7 Project ERR 22.2%
assumes that diverted traffic consists of traffic that is forced to make alternative travel arrangements, in this case travelling by car to the nearest alternative airport – the airport in town B, as in the greenfield case – and travelling by air through it. In practice there may be other alternatives, as discussed in Chapter 3, section 3.1. Some travellers may divert to an alternative transport mode to the final destination, although in the case of air transport this would be limited to short-haul traffic.
Likewise, traffic could be diverted to less busy travel times. In particular, once a terminal reaches capacity and airlines are not able to secure slots at preferred times, they may schedule additional capacity at less preferred times.
In such cases a demand analysis would have to establish whether this new, less convenient schedule is more attractive to the passenger than travelling through an alternative airport or transport mode. Surveys from passengers can help to shed light on the pattern of passenger behaviour at any airport. However, as far as the calculation of economic benefits is concerned, the additional generalised transport cost the passenger would incur by diverting to the alternative airport constitutes an upper limit to the generalised cost that the passenger would be willing to incur by alternative forms of diversion. That alternative cannot involve a higher generalised cost than travelling through airport B, or else the traveller would travel through airport B.
To the extent that the diverted traveller decides to wait and travel through the airport at a time different from the preferred time, the passenger would generate revenue and operating costs at the project airport. This means that, as far as the financial analysis is concerned, the difference in operating cash flows between the ‘with project’ and ‘without project’ scenarios would be smaller than if the passenger diverts to an alternative airport (or transport mode), reducing the financial return of the project. The extent to which the eco-nomic (as opposed to financial) return would be affected would depend on the producer surplus assumed in the alternative airport (row 35).14
The project generates a strong return of 19.6 per cent before externalities, much higher than in the greenfield case, reflecting the cost efficiencies enjoyed by more efficient use of the airside. Including externalities, the economic return improves even more. This is because the negative external effects created by generated traffic (row 46) are far outweighed by the additional external costs created by land transport used by diverted traffic (row 41). The environmental benefit is larger than in the greenfield case because the real price of carbon is higher, as it is assumed that carbon price would increase by 3 per cent per year in real terms. This is not a necessary result of airport projects.
For any project, whether there is a net environmental cost or benefit would depend largely on the means of transport used by diverted traffic. For example, if diversion to the alternative airport is effected by train, which can be far less polluting than road transport, the environmental benefits of avoiding traffic diversion will be smaller and the environmental performance of the project would deteriorate. The result reported here serves only to illustrate that the net environmental impact of an airport is not necessarily negative. Moreover,
recall that it has been assumed in section 4.1 above that there is either an environmental tax lower than the social cost of carbon or that MBMs only apply to a portion of traffic. If the tax reflected the social cost of carbon or if MBMs covered all of the traffic in the airport, there would not be an external environmental cost from the project.
The finding of a positive net environmental benefit illustrates the desir-ability of internalising the external costs of aviation. Even partially internalising environmental costs is better than nothing. Still, making the users of any transport mode pay for the mode’s full external costs yields the most eco-nomically efficient outcome. If airline users paid for their external costs in full, the economic returns of airport investments would improve, as any non- internalised environmental cost from generated traffic (rows 42 to 44) would disappear.
4.4 Involving the private sector (2): room for capital