It is not only “the establishment”, “the Treasury” and “the CBI*” who don’t support London mayor Boris Johnson’s plans for a new giant London airport, as Boris himself said in an interview with the Financial Times last week. It’s private capital. Even if his plans did attract popular support, they would be much less financially feasible than what he wants least: expansion of Heathrow Airport through a third runway.
Boris’ plans: the state takes the costs and risk
Currently the UK government has launched a commission to consider options for expanding airport capacity, to which the mayor has sent three separate proposals. Two involve his preferred option: an entirely new airport. One would be in the inner Thames estuary on the Isle of Grain and initially cost £47.3 billion; the other would be further out in the Thames, 50 miles (80km) from central London and cost £63.2 billion, according to the estimates. Those costs include road and rail links, but not the cost of buying Heathrow Airport from its owners (note: Boris has finally publicly admitted what I’ve been hearing since 2011, that a new major London airport would force the closure of Heathrow).
The trouble with getting both of these options built is that they require very significant government finance (£96 billion** for the Isle of Grain, £122 billion for the outer Thames estuary). And that’s just for the first phase of each, spread over just twelve years. The proposals estimate that in both cases, more than half that cost would be recouped, but that still leaves big net costs to the public sector (£25 and £46 billion, respectively). And that’s if the private sector would be willing to pay record-breaking fees to buy or operate the new airport and to acquire the land of the former Heathrow (which would of course need tremendous redevelopment).
It beggars belief, in this age of austerity with the price tag of High Speed 2 under scrutiny, to hear Boris’s adviser call these costs “easily affordable“, whether one approves of his plans or not.
Why are these proposals, from a mayor whose instincts believe in the private sector, require the public and not the private sector to provide the initial cash? After all, many major modern airports have been privately financed without a government contribution, and pay fees to the government too. That’s how the Turks are building their biggest airport ever. As I’ve noted, Boris has employed some canny advisers to help produce the proposals, which both give the same answer.
Because, they say, of the size and complexity of building a new airport for London and the political and environmental controversy it would generate, “Particularly in the early (pre-operational) stage of the project, Government is likely to be the only party able and willing to provide the level of funding required and take on the associated project risks.” Once the airport is up and running, it can be leased to the private sector or sold outright, but the price they would pay would depend on a number of factors: the airport’s expected cash flows, the risks attached to it and the ability to raise the finance needed to pay for it. The biggest infrastructure privatisation in the UK so far has been the sale of rights to operate the High Speed 1 rail link, and that paid for only £2.1 billion of the £5.8 billion costs.
The anti-Boris plan: smaller, cheaper, with the delivery model in place
Compare all that with the proposal put forward by the owners of Heathrow Airport for a third runway and associated infrastructure. They present three options ranging from £14-18 billion, also including transport links, which they say would increase Heathrow’s capacity to 100 million passengers per year by 2030, compared to 90 million a year with the above plans. They ask for £4-6 billion in government funding (although I would question whether they need this at all). Private finance, they say, could provide the rest.
The relatively low cost of the Heathrow plans is part of the reason for this, but not the only one. Because Heathrow is a regulated asset, its owners are guaranteed by regulations to be able to recoup the cost of their investment through airport charges, so the risk of that finance not being paid back is remote, making it easy for Heathrow Airport Holdings to borrow the necessary money***.
Also, Heathrow’s owners have the opportunity to watch and learn from the owners of Melbourne Airport in Australia as they go about fulfilling an A$10 billion (£5.76 billion) masterplan between 2014 and 2033, of which the main event is… a third runway.
*Confederation of British Industry, a lobby group for British private sector businesses of all sizes and sectors
**These figures are calculated on a different basis to the costs given in the paragraph above. They also include the cost of buying up Heathrow
***Update, 1 September: I should have done a bit more research before making such a sweeping statement. A study by KPMG (which has flaws in my view, but they don’t affect this issue) says that the cost of a third/third and fourth runway at Heathrow would be £16-25 billion excluding the cost of surface access works (i.e. roads). Since Heathrow’s entire regulated asset base value is currently £14.8 billion, it’s unlikely that either the regulator or the financial markets would want Heathrow to borrow quite so much money. However, this doesn’t shoot down my point. It would probably mean that Heathrow would require government subsidy to bring down the amount of debt it needed to borrow, and possibly a government guarantee too. Heathrow’s owners could even go down the route of the Thames Tideway Tunnel and set up a new third-party ‘infrastructure provider’ to own and build the third runway, with Heathrow as the customer.