It is not every day that a report I’ve worked on is instantly and without discussion branded ‘deliberately misleading’. But Flying Low, our new report which re-examines the economics of expanding Heathrow airport, has been called exactly that by the Department for Transport (DfT). If the whole, long-running, debaculous debate concerning the construction of a new runway at the UK’s best-known, largest and most expensive airport was not so serious, this would have had me in peels of ironic laughter. Because the source of almost every number in the report is in
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It is not every day that a report I’ve worked on is instantly and without discussion branded ‘deliberately misleading’.
But Flying Low, our new report which re-examines the economics of expanding Heathrow airport, has been called exactly that by the Department for Transport (DfT).
If the whole, long-running, debaculous debate concerning the construction of a new runway at the UK’s best-known, largest and most expensive airport was not so serious, this would have had me in peels of ironic laughter. Because the source of almost every number in the report is in fact the DfT.
So, while NEF has done exactly what is was commissioned to do in reviewing the economic costs and benefits of runway three, it is not us that now forecasts a worst-case scenario for Heathrow expansion of £2.2 billion of net costs, but the DfT. Similarly, it isn’t NEF that has thrown out a whole set of models produced for the 2015 Airports Commission, but the Government’s own analysts at the Department.
Flying Low assembles all of the data and tells a stark economic story. What seemed in July 2015, when the Sir Howard Davies-chaired Commission published its final report, a slam dunk for Heathrow now appears some way off target. So what has changed? And why is it so mischievous of the DfT to suggest NEF is intending to mislead?
The first, indivisible fact about appraising projects of the heft of Heathrow, is that while it can end up being somewhat reductive, the tried and tested methodology weighs up both costs and benefits and expresses them in one number know as ‘net present value’. We were shocked to note that, although the Davies Commission produced a (very) positive net present value for Heathrow’s third runway project of £11.8 billion, in its launch press release the very first economic number cited is “£147 billion in GPD impacts over 60 years”.
In a world history of misleading statements, this would rank quite highly. This number is not from an analysis of costs and benefits, but drawn from wider spatial CGE economic analysis produced by PwC for the Commission. Even at the time, the Commission’s own expert panel noted “…we counsel caution in attaching significant weight either to the absolute or relative results of the GDP/GVA SCGE approach within the Economic Case”.
Still, a net present value of £11.8 billion is, by any yardstick, a very positive outcome. Except that, like all projects passing in one way or another through the Government’s books, Heathrow’s plans to build a third, north west runway have also been subject to a DfT appraisal. Looking further at the costs and benefits and updating some of the data, the Department now assesses the net present value as between minus £2.2 billion and plus £3.3 billion.
The dramatic collapse in the scheme’s value for money, now averaging around zero, is explained by the Department as being principally for two reasons. The first is that, because of a range of changes in assumptions (partly because of updated data) the gap between the benefits enjoyed by passengers, due to cheaper tickets and time saving, and those captured by airlines has narrowed.
The second, and more significant reason for such a collapse in projected value for money is that the DfT has thrown out some whole areas of modelling that produced the Airports Commission’s high net benefit. They’ve not done this out of mendacity or because there’s a secret plot against Heathrow, but because they were simply unconvinced that, for instance, the way the Commission had attempted to model the benefits of expansion to trade really stood up to scrutiny. These benefits may be there, but they have not yet convincingly been monetised.
Now, using the DfT’s own formula for calculating value for money, Heathrow would rate as either ‘low’ value at the top of its net present value range or ‘poor’ value at the bottom. This is probably the raw nerve for the department. They say they would not apply a benefits-costs ratio formula to a project unless it was government funded. We say they should because it is being evaluated as if it were a government project and will be voted on in Parliament. We also say that even if there were no such political guarantees, the costs will not vanish into thin air; somebody will pay for Heathrow’s vast scheme.
But it could be worse, because the DfT still includes the benefits enjoyed by passengers who start and finish their journey outside the UK and only hub through Heathrow. In 2040, we calculate that three-quarters of the new passengers that result from building the third runway will be doing exactly this, and so will not bring trade or investment to the UK, nor even spend any money here apart from perhaps a coffee in the terminal while they wait for the connecting flight out.
If you take the international-to-international passenger benefit out of the analysis, Heathrow’s cost-benefit is wholly below zero. And the DfT’s own guidance suggest this is exactly what such an appraisal should do.
And even that’s not the end of it. A whole range of other ‘sensitivity analyses’ undertaken by the Department, for instance looking at whether higher charges levied by the airport on the airlines that use it will be passed through to passengers, push Heathrow even deeper into the red.
If you don’t want to take NEF’s word for it, then the committee of MPs from all parties that has just scrutinised and reported on the case for Heathrow expansion concluded on the economic case that “the DfT’s appraisal shows little separates the economic cases of the three schemes [Heathrow third runway versus Heathrow extended runway and Gatwick’s second runway]”.
The MPs did conclude that there might be a ‘strategic case’ for Heathrow (though the DfT has been unable to ‘monetise’ the strategic benefits) but with several caveats that would push its economic value further down still.
Deliberately misleading? Well if so, then the DfT should look in the mirror. Because while presiding over an erosion to zero or worse in value for money, it and the Government continues to promote Heathrow expansion. Like the MPs last week and many others before us, we think they should think again.