Economic appraisals of options
40. In calculating the economic benefits of an expansion
in aviation, the DfT has not attempted to include the wider economic
benefits which this might bringeven though the text of
the consultation constantly emphasises these. Instead, it has
concentrated on evaluating the "consumer surplus" and
the "producer surplus". The consumer surplus is essentially
the utility which consumers derive from consuming something minus
the price they have to pay for it. The producer surplus is effectively
profit to the airport operators.
41. For the largest "package" of options
(package 18:1 runway at Heathrow, and 2 at Gatwick),
the DfT have calculated a Net Present Value (NPV) of £18.3
billion compared to the present situation.
But £4.7 billion of this relates to foreign users,
and the Treasury's "Green Book" on investment appraisal
explicitly states that benefits should be restricted to UK residents
foreign users would reduce the NPV to £13.6 billion, and
only £8.7 billion if compared to "maximum use of present
represents a marginal amount given the fact that the appraisal
has been carried out over a period of 60 years. For a more realistic
scenario of only one new runway, a comparison on the same basis
would result in substantial economic deficits.
42. The Department for Transport has failed to
follow guidance issued by the Treasury by including in its economic
appraisal the benefits accruing to foreign travellers. In doing
so, it has significantly distorted and overstated the economic
benefits of different expansion options.
43. We are also doubtful whether the private sector
will invest the huge sums of money required on the basis of the
relatively low discount rates which the Department of Transport
has used; and concerned that the Government may ultimately be
asked to provide further financial sweeteners.
44. In addition, the costs which the DfT has included
in its investment appraisals relate only to construction costs.
It has not included the environmental costs of £1.4 billion
(rising to £4.8 billion by 2030) which are identified in
the Treasury/DfT document, Aviation and the Environment: Using
economic instruments. The Treasury Green Book guidance suggests
that where feasible monetarised values such as these should be
used in appraisals.
45. We have calculated the impact of the increase
from £1.4 billion to £4.8 billion as a Net Present Value
of minus £18 billion (at a 6% discount rate).
This is equal to the total net economic benefits for the largest
expansion option (package 18). Including this figure in the appraisal
would entirely wipe out the economic case for an expansion in
46. Support for our conclusions is provided by British
Airways' consultation submission response.
British Airways (BA) includes an appraisal table for a number
of options, and in the table has included a specific line for
discounted climate change costs. While BA has used a slightly
different methodology, it shows that the inclusion of these costs
can have a radical effect on NPVsthough BA go on to include
a very large positive figure for wider economic benefits in order
to justify an expansion.
47. Environmental costs are admittedly part of a
wider set of costs and benefits, and it is possible to argue that
wider economic benefits should also be included. However, the
DfT may have already partially taken into account some of these
wider benefits in calculating the "direct" benefits
(ie the consumer and producer surpluses) and the inclusion of
benefits to foreign travellers. Indeed, the Department itself
suggests that it has included the benefits to foreign travellers
precisely to reflect some of the wider economic benefits which
expansion might bring.
48. The Department cannot have it both ways. If it
intended to exclude the wider economic benefits, then it should
have excluded the benefits to foreign travellers. On the other
hand, if it was including the latter as a proxy for these wider
benefits, it should have included in the appraisal the discounted
value of the increase in environmental costs.
49. The net present value associated with the
increase in the cost of aviation emissions amounts to minus £18
billion. Including this amount would entirely wipe out the economic
case for an expansion in runways and result in substantial net
deficits for almost all options the DfT has put forward. Expansion
could therefore only be justified if the Department could demonstrate
substantial wider economic benefitswhich it has
not attempted to do.
EU Strategic Environmental Assessment
50. The EU Directive on Strategic Environmental Assessment
(SEA) comes into force in July 2004. It requires Governments to
assess the effect of plans and programmesthough not policieson
the environment. The Department for Transport has argued in its
supplementary memorandum that the SEA directive does not apply
to the airports strategy as it allows exemptions in the case of
work already underway at that time. It also suggests that the
key principles of SEA (environmental assessments and consultations)
are already being adhered to.
51. In view of our concerns expressed elsewhere in
this report on the failure to adhere to the Department's own guidance
on appraisal, we are sceptical about the extent to which the Department
is indeed complying with the SEA directive. Moreover, the directive
will be in force by the time any proposals for airport expansion
are actually put forward. It is also interesting that the DTI
has taken a policy decision to comply with the directive in the
development of their offshore windfarm strategy and in the wide-scale
leasing of the UK continental shelf for oil and gas exploration
52. It is disappointing that the Department for Transport
is not planning to subject any planned expansion in airport capacity
to a Strategic Environmental Assessment on the grounds that the
EU directive does not come into force until next year. The
Department should voluntarily comply with the EU Strategic Environmental
Assessment directive immediately, following the example of the
DTI which is already doing so.
29 Guidance on the Methodology for Multi-Modal Studies,
GOMMMS, DfT. Back
GOMMMS Supplement: Transport Appraisal and the New Green Book,
DfT, paragraph 35. Back
Ev73 paragraph 17. Back
See Appraisal Summary Tables, South East and East of England
Regional Air Services Study (SERAS), Stage 2, DfT February 2002.
The appraisal table for Heathrow, for example, is 15 pages long.
We note, by contrast, that the RASCO study attempted to adopt
a rather more strategic approach to appraisals. Back
The contribution of the aviation industry to the UK economy,
Oxford Economic Forecasting, November 1999. Back
Ev46 Q130. Back
The Economic Benefits of Aviation, Forum for the Future,
23 June 2003. Back
DfT South-East consultation, paragraph 3.31. Back
See National Statistics Data, Office of National Statistics.
See also, The Sky's the Limit, IPPR 2003, page 23. Back
In this context, 'largest' is interpreted in an economic sense
to mean the option offering the highest NPV. Back
DfT South East consultation, page 128 (table 14.6). Back
SERAS Stage 2: Appraisal Findings Report, Halcrow, page 474. Back
The Green Book: Appraisal and Evaluation in Central Government,
HM Treasury, paragraph 5.25 and footnote 4. Back
The NPV of the 'maximum use' scenario is £4.9 billion (DfT
South East consultation, page 128). Back
The Green Book, HM Treasury, chapter 5. Back
The calculation was based on a 4.2% per annum increase in environmental
costs from £1.4 billion over 30 years to £4.8 billion
and maintaining it at this value for a further 30 years; and on
discounting the increase only (ie deducting the £1.4 billion)
at a rate of 6%. Back
Response to consultation, British Airways, May 2003, page
31 (table 7) . Back
DfT South East consultation, paragraph 14.33. Back