DfT states alleged £147 billion economic benefit to UK (over 60 years) of Heathrow runway more like “up to £61 billion”
It appears the economic benefits of a Heathrow runway have been exaggerated wildly. [We have been saying that for a year and a quarter …. as have numerous critics of the runway – but the media and the government preferred to believe the exaggerated numbers]. The government announcement on 25th October only says the benefit of the Heathrow runway would be £61 billion, for the whole of the UK, over 60 years. The earlier figure had been “up to £147 billion” (both for a carbon-traded scenario). The Airports Commission used economic modelling for its projections, which was criticised as being unreliable, by its own economic advisors, Professor Peter Mackie and Mr Brian Pearce (May 2015) which warned of double counting, and questioned the “robustness and reliability” of the method. Heathrow then took an even higher figure, of £211 billion (UK benefit, over 60 years) from part of the Commission’s analysis, and promoted this widely. Many, unfortunately, were misled. One of the ways the AC forecasts were to high is including benefits to non-UK residents. Another is double counting all sorts of spin-off activities, that are already accounted for in other sectors. DfT says given the uncertainties, “various calculation approaches have been proposed over time. Ongoing engagement with external experts means that the preferred methodology continues to evolve, and is likely to continue doing so after the publication of this report.” ie. these figures may change again (downwards??)
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Benefits compared – Airports Commission (July 2015) and DfT (Oct 2016)
Below are the Heathrow North West runway sections of both the Airports Commission Final Report (on the left) and the new DfT sensitivities report, (on the right) comparing their assessments of Heathrow’s benefits to all of the UK over 60 years. The AC looked at both carbon traded (CT) and carbon capped (CC). The DfT has now abandoned carbon capped, and looks only at carbon traded (hoping the ICAO deal will be enough to take account of CO2).
Source:
Airports Commission Final report. P 147
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/440316/airports-commission-final-report.pdf
DfT sensitivities report P 39 of
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Heathrow overvalued by £86 bn
27 Oct 2016 (The Times)
By Graeme Paton (Transport Correspondent) , Alistair Osborne
The economic benefits of expanding Heathrow airport were overstated by up to £86 billion, buried government figures reveal.
Building an extra runway at Gatwick airport would bring virtually the same benefits to the nation as expanding Heathrow, the figures suggest.
Questions were raised over Theresa May’s endorsement of Heathrow after a Department for Transport report more than halved previous estimates for the size of the economic boost to be provided by Heathrow over 60 years.
….. and it continues ….
Full Times article at
http://www.thetimes.co.uk/edition/news/heathrow-overvalued-by-86bn-lx2w5tfnh
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Official reports cast doubt on claims that pointed to Heathrow
27.10.2016 (The Times)
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However, a series of reports published by the Department for Transport (DfT) appeared to cast doubt on some of the commission’s findings.
However, a DfT report said the government “identified a number of concerns, which cast further doubt on these estimates” and it “does not recommend using these figures to inform a decision on preferred location”.
In its own statements, the government said that a third runway would be worth up to £61 billion to the economy, £86 billion less than the commission’s highest forecast.
Furthermore, it said that Gatwick was now worth up to £54 billion to the country, just £7 billion less than Heathrow.
…. and it continues …..
Full Times article at
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It has also emerged that the case for Heathrow may have been inflated by the inclusion of transfer passengers in the final economic assessment. Passengers who pass through the hub en route to other countries but never leave the airport are likely to have a lower impact on the economy than those who actually spend time in Britain. Stripping out these passengers — about a third of the total at Heathrow — would put it on practically an equal footing with Gatwick, it is believed. Last night the government denied that its own figures represented a downgrading of the benefits of Heathrow, saying that it was impossible to compare the higher and lower assessments as they were calculated in different ways.”
Airports Commission’s own economic advisors warned economic claims were inflated
The Airports Commission based its decision to advocate a Heathrow runway in part on economic models that its own advisory panel believed were questionable. Economic experts Professor Peter Mackie and Mr Brian Pearce had advising the Commission that the forecast the runway would deliver a £147 billion boost to Britain should be treated with “caution”.
This is what they said, on 5th May 2015 (over a month before the Commission made its recommendation on 1st July 2015, and their concluding remarks copied below:
“Conclusion
“This is one of the most ambitious attempts to prepare a quantified Economic Impact Assessment. There are few comparators available. While the content of the model itself has been well-tested, the same cannot be said of the front end, where an increase in capacity is converted into an increase in trip-making, trade, tourism and finally productivity. Furthermore the interpretation of the result— what exactly do they mean and is their basis transparent— is an issue. Overall, therefore, we counsel caution in attaching significant weight either to the absolute or relative results of the GDP/GVA SCGE approach (PwC report) within the Economic Case. We would accept that there is some useful indicative material for the Strategic Case but care is required in assessing its robustness and reliability.”
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The short 1 page DfT document on the Heathrow runway says it would benefit the UK by up to £61 over 60 years.
It states:
Economy • Based on the Airports Commission’s analysis, the Government estimates that the benefits to passengers and the wider economy would be up to £61 billion over 60 years.
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The DfT document assessing the validity of the Airports Commission analysis is at
Further Review and Sensitivities Report.
Airport Capacity in the South East
Moving Britain Ahead
DfT
October 2016
81 pages
The “sensitivities” document contains the £61.1 billion figure, in Table 7.1 on Page 39.
Below are some extracts, but there is a lot of it and it is not that easy for anyone not well informed on economics to follow :
The Wider Economic Impacts section starts on P. 30
This looks at the the two approaches undertaken by the Airports Commission (AC) to estimate the wider economic effects:
i. conventional appraisal
ii. S-CGE modelling of Gross Domestic Product (GDP). [ie. Spatial Computable General Equilibrium (S-CGE) modelling of the GDP impacts of airport expansion.]
It then summarises the DfT’s assessment of these 2 approaches.
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5.6 While the department fully recognises the existence of wider economic benefits, and supports the framework of impacts set out by the AC in Figure 5.1, the exact magnitude of these benefits is inherently uncertain. In the department’s review of the AC’s evidence base, some potential issues were found with the approaches taken.
5.7 The rarity of airport expansion appraisals limits the extent to which relevant best practice can be established. Departmental guidance does provide a robust starting point, but it has been generated largely for surface modes of transport, so careful consideration must be given to its application in the case of airport development.
5.8 The impacts from increased output and tax take made use of the department’s appraisal guidance, while the agglomeration impacts were based on a similar but not identical method. There is currently no guidance on appraising the trade impacts of expansion – although the department agrees that such benefits might exist – and as a result the AC developed its own approach.
5.9 The department’s review of the calculated agglomeration benefits found issues relating to the underlying evidence and implementation of the chosen methodology.
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5.13 The AC presented estimates for wider economic impacts that included productivity benefits arising from additional trade. Some of these benefits may however already be captured in the estimates of other economic impacts. This is discussed in more detail in Box 5.1. To avoid counting these benefits twice, trade benefits have not been included in the total reported wider economic impacts, but are reported separately.
5.14 Given the uncertainty associated with estimating wider economic impacts, various calculation approaches have been proposed over time. Ongoing engagement with external experts means that the preferred methodology continues to evolve, and is likely to continue doing so after the publication of this report.
5.15 Because of this, and in an approach consistent with the AC and best practice, the overall impact of the capacity options has been presented both including and excluding estimates of wider economic impacts. Wider economic impacts, where appropriate, are presented as a range to reflect the inherent uncertainty underlying their calculation. Estimates of wider economic impacts included within the NPV are shown in Figure 5.2. [The table has the Heathrow North West runway giving a total of “Wider economic impacts (present value, £bn, 2014 prices) of £2 – 3.9 billion]
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Box 5.1
Trade While trade impacts have not been included in the estimates of NPVs, this is not to suggest that the department no longer considers them likely. Rather, an assessment of the approach taken by the AC found that the inclusion of trade impacts risked the double-counting of benefits.
This double-counting is thought to largely occur in two ways. Firstly, where trade induced productivity benefits accrue to a business passenger’s firm, these impacts can be expected to be incorporated into purchasing decisions and thus be reflected in direct business passenger impacts. Secondly, because trade studies do not separate out the two effects, the estimated trade impacts will include some impacts already attributed to agglomeration effects.
…. and there is a lot more in Box 5.1
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5.22 The S-CGE model created for the AC by PwC modelled four distinct effects of airport expansion:
• changes in passenger flows
• productivity effects (captured through international trade)
• frequency benefits to airport users • transport economic efficiency effects
5.24 The use of S-CGE modelling, while increasingly common in the appraisal of improvements to surface modes of transport, is highly innovative when applied to a project of this scope. The addition of international relationships inherently complicates attempts to model changes in the UK economy. And, as in conventional appraisal, the transmission mechanisms for air travel may be significantly different to those observed in other modes of transport.
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5.26 At present, it is the view of both the expert panellists and the department that given this lack of consensus, it is highly challenging to produce a single central estimate of the GDP impact of airport expansion using the S-CGE approach with the evidence currently available. The existence of the relationships within the modelling, however, is accepted (such as an increase in airport capacity leading to greater levels of productivity).
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7.3 After the department’s changes, the revised central case suggests that, in line with the AC, the LHR Northwest Runway scheme delivers the greatest benefits to passengers, government and the wider economy, net of environmental disbenefits. It would also lead to the most jobs created locally. The revised net benefits, disbenefits to private business from reduced profits (due to lower fares), and the costs of construction are shown in Table 7.1.
Gatwick airport complained earlier:
Most of the rest of the difference in economic impacts derives from PwC’s estimates of productivity impacts, using a new and untested approach that leads to estimates of the relationship between passengers and productivity that are over ten times larger than has been found in other studies, and almost twice as high for Heathrow as for Gatwick, for comparable inputs. This is the element of the model that is most heavily criticised by the Commission’s expert advisors.
and
The economic benefit (net present value) generated by Heathrow expansion would more than halve if the direct benefits enjoyed by international transfer passengers who never set foot in the UK – or generate a penny for the economy – are removed from the calculations, according to separate reports commissioned by Gatwick Airport from Deloitte and Oxera. Link Oct 2015
On adding in the benefits to non-UK residents
The DfT now says (Oct 2015) Link P 15
65. A considerable proportion of the stated benefits in the Final Report, particularly for Heathrow, accrue to foreign residents, and to International-to-International (I-to-I) passenger transfers. WebTAG suggests that benefits accruing to UK and foreign passengers should be included, and that I-to-I should be excluded. There are reasons however why including I-to-I makes sense, particularly because there is no robust way to separate out completely all impacts – costs and benefits – for each group, including passengers. Whereas it may be possible to do so in relation to benefits, it would be very difficult to do so for costs. This would lead to an unbalanced representation of the costs and benefits which would be misleading. In the Department’s view therefore, the Commission’s approach to I-to-I transfers is appropriate.
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Letter in the Times from Howard Davies, on 30.10.2016:
Airport estimates
Sir, You have commented on the apparent discrepancies between the airports commission’s estimates of the economic benefits of expanding Heathrow and the figures quoted by the government when endorsing our recommendations (report, Oct 27, leader, Oct 28). It is true that there was a difference: the government’s estimate is £61 billion, while the commission’s estimate was £68 billion.
The basis for our calculation was explained in our report last July. We thought it reasonable to assess the second-order economic impacts, on trade intensity, productivity and employment, something which the government does not normally do in assessing infrastructure projects.
On the basis of a study by PWC, we estimated that the impact on GDP of Heathrow expansion would be in the range of £131-147 billion. The analysis for Gatwick also showed GDP impacts that were higher than the standard economic benefits alone. Our expert panel said this approach was legitimate, but that it should be part of the strategic case for airport expansion, rather than being used in the economic assessment. So that is what we did, and we continue to believe that is a more sensible approach to assessing the overall impacts of airport expansion.
Sir Howard Davies Chairman, Airports Commission
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