Opinion – Investing in Infrastructure: The case of the airport extension

General points about infrastructure investment

Investing in infrastructure (whether public or private) has always been problematic as time frames are so long and often the original decision-makers are nowhere to be found when success or failure occurs. But investment decisions do need to be made.

At the risk of crass simplification there are currently two broad approaches to making such investment decisions and they are the business case approach and the “build it and they will come” approach. The latter might rather have the form of build it because we think it will be needed.

Both approaches have flaws.

The business case approach has the merit of being eminently logical and rational and is much beloved by business analysts and economists.  However, many business cases are not worth the paper they are written on.  Anyone who doubts that should look at the history of IT projects in the public sector in New Zealand starting with INCIS and proceeding on through Novopay and many more.  More-over the quality of business cases is often not improved by the resources ploughed into generating them – this often simply obscures rather than illuminates the basic issues.

Why is this?

The most basic reason is that humans are extremely bad at predicting the future, and that is essentially what long term business cases try to do.  A whole treatise could be written on why that is the case but that is for another time.  The other principal reasons are that:

• business cases often try to quantify the unquantifiable, lending the numbers a spurious air of accuracy and precision,
• most business cases are written from a vested interested point of view, not an objective point of view,
• and business cases like much else are subject to the principle of GIGO – garbage in equals garbage out.   This can be effectively disguised by the use of techniques such as scenario analysis, but disguise is often what it is.

So are business cases a waste of time?  Certainly not. But they are most valuable in dealing with shorter term projects where the uncertainty is less of a factor and where the quality of the input data is relatively good and often they are a requirement which you can’t get away from.  But treat them with due caution.

What about the alternative approach of “build it and they will come”?  There are some glorious examples of this approach being successful in the private sector – almost all driven by individuals who have a vision they are driven to achieve.  I guess recent examples might include Nadia Lim and her Food in a Bag venture and Rod Drury at Xero.  The caution about this approach and these successes are that for every success there are probably many tens of ventures that have crashed and burned.  It is a close approach to the way markets operate in practice but is a risky way to make major investment in infrastructure where those making the decisions are very rarely around to pay the price of failure.

On the other hand sometimes the law of unintended consequences can work for you – on occasion the investment really does create new demands and markets which end up more than justifying the original investment.  Maybe ultrafast broadband will be an example of this and maybe our huge investment in new motorways might not be – it remains to be seen.

This begs the question of whether there might be middle course of action and I think there is.  Experience says that major projects stand or fall on a relatively small number of key success or failure factors, and the challenge is to understand enough about the project characteristics and context to identify those factors and subject them to high quality analysis so there is a clear understanding of the risks involved, and the strategies that can be put in place to manage those risks.

A peculiar aspect of public infrastructure projects too, is that cost is rarely a cause of failure.  The public purse (that’s us!!) is deep and if costs escalate – which they always do – extra money always seems to be found.  If the project is a “strategic” success, i.e. it more or less does what it was intended to do, it is amazing how the question of cost gradually disappears.

The case of the Wellington airport extension

In the case of the airport extension I think the key factor is whether airlines will come to the party and actually make use of the extended facilities and pay the associated costs.  Everything hangs on that.  In analysing that factor it is important to be realistic about what is driving the different players in the market – incumbents can be expected to be unduly negative (like Air New Zealand) while potential new players will be optimistic while being quite ruthless about playing the field of new route options.

My own gut feeling is that we should not be investing and there are some telling signs including the pressure on the Wellington Council to put up a large slice of the capital.  The rationale for this is that the whole region will benefit from increased traffic generated by the extension but that absolutely begs the question of whether the extra traffic will arrive. If the airport company is so confident let it put up the capital.

It is interesting that the resource consent application for the extension has been delayed because of concern about the stability of the extension in an earthquake, and now a new economic analysis has come out which shows dramatically increased costs and reduced benefits (see my comments above about business cases!!).  Maybe we are being softened up for a change of heart?

I suspect the argument about lengthening the runway has very dubious logic.  Even the current generation of large planes can use the current airport quite readily and I think the trend is toward planes that are less demanding on runway length.  As for the argument that the ability to land larger planes will lead to business growth in Wellington – well I think that is just wishful thinking.

My advice to the Council is to forget about the airport extension and concentrate on the real transport issues for Wellington – they are:

• deciding on a permanent replacement for our current bus fleet. (Current thinking is in favour of all electric buses but I have a sneaking feeling that light rail needs another good look)
• Getting a second tunnel under Mt Victoria – or maybe a new 4 lane tunnel which can be made a better fit with the feeder roading system – and solving the problem of feeding traffic to and from the dual tunnels (or tunnel).

Everything else is a distraction.

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This is another of Bas Walker’s posts on GrownUps.  Please look out for his articles, containing his Beachside Ponderings.