A Return To ‘Think Big’?

The strange economic assessment of the proposed extension to Wellington Airport’s runway reduces to a plea for subsidies from tax and ratepayers.

I am sometimes asked to assist voluntary groups with a critique of a commissioned economic assessment of a development project. I decline because of the high standard required from me – one which would stand up as evidence to a tribunal. That means a huge effort and a lot of resources – especially my time – requiring a fee with a good number of zeros between the dollar sign and the decimal point.

What I am about to write then, is not a critique of a report on the proposed extension to Wellington Airports runway but a look at a strange aspect of it. It involves a fallacy which was common in the evaluation of the Major Projects in the late 1970s and early 1980s. It would be dreadful to go there again.

Briefly the proposal is to spend about $300m to extend the runway at Rongotai by a further 354 metres, which would enable larger planes with longer ranges to land there. There are environmental issues which I shall not comment on. Nor am I here evaluating the claim of the consultants (Sapere) that the nation's coffers will be $2b to the good, 60 years after the longer runway is up and running.

The problem  is illustrated by the report’s discussion on the funding of the extension. The report hesitates to recommend that the investment should be funded by the users of the extension. Obviously they should be paying something for the advantages of the longer runway. Why not the whole lot? Instead, the report points to ratepayers and taxpayers making a substantial contribution.

The report’s argument is a bit tortuous even to an economist, but essentially it seems to be that if the required ‘increase in fees were paid by existing users of Wellington Airport, it would necessarily mean a charge which exceeds the economic cost of supplying those services ...’

I think the report means ‘existing and new users’ for it would be astonishing if the new users who are central to the benefits from the extension made no contribution. What it seems to be saying is that were the users to have to pay for the improved service, they would not use it. In which case the extension would be not be commercially viable. Therefore, the report says, it should be largely funded by ratepayers and taxpayers.

That argument applies in lots of other cases implying, for instance, that food should be subsidised by the taxpayers too. Economic policy is increasingly chary of subsidising anything, for the good reason that such arguments used could be applied to subsidising everything. That does not mean there should never be public subsidies but that their justification requires a far greater degree of rigour than that provided in this report.

Isn’t the logic that if it is not commercially viable the investment should not go ahead? The report seems to argue that the main benefits from the extension would be elsewhere – say, those who sell services to the extra tourists. That was a well-known racket when evaluating the Think Big (and other) projects which did not cut the mustard in their own right. Typically any added benefits were frequently over-optimistically estimated. At this point sloppy thinking starts demanding subsidies from taxpayers. Given the experience of the Major Projects/Think Big that is an instant flag that the project does not stack up.

Another trick in the Major Projects evaluation was to ignore the distributional impact. Very often the locality and the company were better off but the rest of the country was worse. This resulted in an interesting political conflict with the putative beneficiaries of a subsidy shouting loudly ‘GIVE ME’ and the rest of the country asking ‘Who us?’

My superficial reading suggests there are all sorts of technical problems with the report as well as the analysis being opaque. The report does not even say who commissioned it, a standard part of the discipline of a proper evaluation. This is not to say that such reports are inevitably in the interests of the paying client. But a reader is entitled to have any potential conflicts of interest identified.

Dont ask me to sort the muddle out for nothing. Instead, demand the agencies being asked to provide the subsidies (the local authorities and the Treasury) commission another group of consultants to go through the report in rigorous detail. That will take resources – a good number of zeros between the dollar sign and the decimal point. But. as like as not, it will save economic waste far in excess of the cost of a good critique.

The Treasury has tried to set out standards for such evaluations (called cost-benefit analyses). I am struck by the ingenuity of consultants getting around them. The only defence against poor work is a detailed critique done by top rate economists and contested in a tribunal. Wellington region rate payers and New Zealand taxpayers deserve no less.