To: Sam Haddad, Director-General, NSW Planning and Infrastructure From: Jonathon Flegg, Strategy and Planning Unit, NSW Planning and Infrastructure Email: [email protected]Date: 20-Jun-2011 Re: Evaluating a Proposed Second International Airport for Sydney Executive Summary Sydney’s Kingsford-Smith Airport is Australia’s major international and domestic air transport hub. In 2008-09 there were 32.7 million passengers moved through the airport, including 43.5% of all international arrivals into Australia. As a result there are major concerns that the current airport will reach capacity within the next 10 years. Capacity is current limited by a physical lack of space, federal regulation limited traffic volume, and a lack of land-based transport substitutes. The Policy and Strategy Unit (PSU) has analyzed whether Sydney should: (1) maintain the status quo; (2) seek the removal of the regulatory constraints limiting traffic at the current airport; or (3) build a new secondary airport at the most promising site of Badgery’s Creek in MEMO MEMO
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To: Sam Haddad, Director-General, NSW Planning and Infrastructure
From: Jonathon Flegg, Strategy and Planning Unit, NSW Planning and Infrastructure
me an area that is not going to end up causing enormous grief to people who currently live
around it10.”
This cost-benefit analysis will compare in detail the leading first three proposals. This is for
efficacy purposes and to not clutter the comparison with proposals that will ultimately prove
physically or politically infeasible. Finally, cost-benefit analysis is complex and predicting the
impact of the final three proposals is beyond the scope of this memo. Specifically, Proposal 4 is
less preferable than Proposal 3 because of the immense distance any other site has to
overcome in connecting with Sydney. Proposal 5 is also physically infeasible given the current
space restrictions and inability to reclaim more land in Port Botany. Finally Proposal 6 to build
high-speed rail almost 2,000 kilometres between Brisbane, Sydney and Melbourne is not a
practical solution because it will not be able to be achieved within the given timeframe, or at a
reasonable cost.
Decision Criteria
The Kaldor-Hicks criterion is the basis of cost-benefit analysis. It states, “A policy should be
adopted if and only if those who will gain could fully compensate those who will lose and still be
better off11.” It is a method designed to achieve the most allocative efficient public policy
proposal. It is most suited to infrastructure project appraisal as it allows for a systematic
consideration of all potential impacts of an appraisal, both positive and negative. The major
downside of cost-benefit analysis is that it does not consider equity considerations, for example
the issue of equity in building a new airport in the lower socio-economic Western suburbs to
avoid noise and congestion impacting wealthier residents in Sydney’s East and Inner West. The
Policy and Strategy Unit (PSU) argues that while cost-benefit analysis is certainly the most
appropriate way of appraising infrastructure projects, the NSW Government should also
consider compensation, where necessary, as a method for achieving a more equitable policy
solution.
Additionally, all proposals must be considered within the light of political feasibility. Part of the
reason why all new airport proposals since the 1970s have failed is because of the political
saliency of the issue to the electorate. NSW is perhaps the only jurisdiction in the world that has
10 Saulwick, J. and K. Munro. 6
th April 2011. “O'Farrell calls for high-speed trains instead of second
Sydney airport”. Sydney Morning Herald. Retrieved from: http://www.smh.com.au/ . 11
Boardman, A. E et al. 2011. Cost-Benefit Analysis: Concepts and Practice (4th ed.). Pearson: Upper
Saddle River, NJ. Page 253.
well-organized “No Aircraft Noise” Party running at elections12. The political situation is
complicated by the different positions taken by the Federal and State Governments.
Analysis of Alternatives and Decision Matrices
The following will address the methodology the PSU adopted for cost-benefit analysis of the
three proposals. Cost-benefit projections are made over the period 2013-63.
Cost to Local Residents
There are many social costs associated with living close to an airport, including noise pollution
and increased traffic congestion. The most straightforward method for assessing all these costs
is by using the hedonic regression method. The PSU constructed a dataset of 107 suburbs
located within 1.0 to 14.0 kilometres of Kingsford-Smith Airport, combining:
all median house sale price data for the last 24 months from www.domain.com13;
the direct distance of the suburb from the Kingsford-Smith Airport and the Central
Business District; and
a dummy if the suburb is on the coast, Sydney Harbour, Port Botany or Port Hacking.
Households reveal a preference for paying more for properties closer to the CBD and for those
on the water, while paying if closer to the airport. The PSU performed the following hedonic
regression14:
The results for all three independent variables was highly significant. Figure 2 shows property
prices improved by A$73,000 with every kilometre further away from the airport, while moving
closer to the CBD improves prices by A$59,000. Coastal status causes prices to jump
A$282,000.
The co-efficient β1 for distance from the airport can be used for assessing the social costs of the
proposed new airport on residents around the Badgery’s Creek site because it captures the
12
In 1995 State Election the Party managed to achieve 39.55% in the electorate of Marrickville (Reference: http://www.noaircraftnoise.org.au/). 13
www.domain.com is the major online residential property search engine, combining data on all publicly available property sale data. 14
For simplicity the functional form is assumed to be linear, however in reality it is likely the relationship between distance and property prices is of a quadratic form.
price of avoiding the costs associated with living near an airport. Figure 3 shows the affected
population living within 5km, 10km and 20km of the proposed site15.
Given the PSU assumed the social costs to be linearly associated with distance, we evaluate
the social cost affecting values within a 10 kilometre threshold. Residents within 5 kilometres of
15
Webb, R and R. Billing. 2005. “Second Sydney Airport – A Chronology”. Parliamentary Research Paper (Economics, Commerce and Industrial Relations Group). Retrieved from: http://www.aph.gov.au/ .
Figure 2: Hedonic Regression of Distance from the Airport Against Median House Price Figure 2: Hedonic Regression of Distance from the Airport Against Median House Price
Figure 3: Affected Populations Surround Kingsford-Smith Airport and Badgery's Creek Figure 3: Affected Populations Surround Kingsford-Smith Airport and Badgery's Creek
a new airport will bear a total social cost of A$1.1 billion and those within the 5-10 kilometre
range will incur A$1.2 billion. It is assumed this figure is the discounted net present value of all
future social costs and is borne by present owners, so is incorporated at the start of the project
in 2013.
If the federal legislation was changed at Kingsford-Smith Airport to permit the airport to avoid a
regulatory constraint on flight-movements, the PSU can model the effect by the following
method:
1. Find the total net present value of the cost on property prices for the current limit of 80
flights per hour (A$48,243 million).
2. Find the annual discounted cost to property owners over the long-term (A$3,260 million).
3. Multiply this discounted cost by the amount Kingsford-Smith Airport is projected to
exceed the 80 per hour limit every year. This equals A$33,700 million.
Cost of Flight Delays
As Sydney Airport approaches capacity it will create costs to passengers of flight delays.
According to projections performed by consultancy Tourism Futures International and
independently reviewed by Booz Allen Hamilton16 the daily flight movement on a typical “busy
day” will look something like Figure 4, with the 80 flights per hour constraint being reached from
around 0730 to 1230 and briefly at 1900.
16
SAC. 2006. “Aviation Activity Forecasts 2006”. In Sydney Airport Master Plan 2006. Retrieved from: http://sydneyairport.com.au/ and SAC. 2009. “Aviation Activity Forecasts 2009”. In Sydney Airport Master Plan 2009 Retrieved from: http://sydneyairport.com.au/
Figure 4: Typical "Busy Day" Traffic Projection in 2023 Figure 4: Typical "Busy Day" Traffic Projection in 2023
To evaluate the cost increase in flight delays the PSU projected the trend in flight delays into the
future. In the period 2005-10 the proportion of on-time flights decreased from 85.8% to 79.7%,
averaging a 1.46% decrease per year. The PSU projected a similar trend until 2029, with the
trend slowing to -0.05% thereafter. Average length of delay is held constant at 20 minutes. This
is a conservative estimate of the delay profile if the status quo is maintained, as the congestion
that is likely to occur around peak times will certainly increase the average length of delay. The
annual percentage of delayed passengers is then multiplied by the projected number of
passenger movements through Kingsford –Smith Airport and the average length of delay to
arrive at an estimate of total passenger-hours lost each year to flights delays.
As the most important airport hub in the country, delays at Kingsford-Smith Airport also flow-on
to have significant delays at other airports around the domestic network. Welman et al17 in an
extensive empirical study calculate the propagation multiplier for cost-benefit analysis to be
consistently around 0.50. Therefore to capture the time lost in passenger delays at other
airports we multiply the Kingsford-Smith delay figure by this propagation multiplier.
Finally, the PSU assessed the economic cost of these flights delays. We assessed the cost only
to passengers, however in reality costs would also be borne by the airlines. Taking the average
annual salary of A$57,324 would suggest an average hourly wage of A$19.60 based on a 8-
hour working day. This figure is used as our estimate of the economic cost of lost hours through
delays, resulting in a total cost projection of A$11.37 billion over the next 50 years18.
Capital Costs of a New Airport
Estimates of capital cost are mainly derived from the NSW Government submission to the
Federal Government Environmental Impact Assessment conducted in 199919. The major costs
associated with building the new airport are shown in Table 1. These costs are factored into the
analysis as spread evenly over the construction phase from 2014-2016.
17
Welman, S., A. Williams, and D. Hechtman. 2010. “Calculating Delay Propagation Multipliers for Cost
Or A$1.47 billion discounted at a rate of 5.5% per annum. 19
NSW Government. 1999. “Submission by the NSW Government to the Commonwealth Minister for the Environment and Heritage Concerning the Environmental Impact Assessment for the Proposed Second Sydney Airport”. Retrived from: http://badgerysacpnp.homestead.com/files/NSWGOVSUB.htm .