Airport expansion report highlights the costs of major infrastructure projects

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

The Airport Commission has today released its final report on expanding aviation capacity in the UK. Perhaps what is most surprising is not that the report recommends a new northwest runway at Heathrow, but that the estimated cost of such a project would be an eye watering £17.6 billion, excluding an additional £5 billion in respect of 'surface access costs' (i.e. additional transport infrastructure costs). However, once the third runway proposal is scrutinised in detail, it is easy to see why this figure is so large; the recommended proposal includes the relocation of an energy from waste plant and redirecting the M25 into a tunnel.

Commercial and financial viability

The Commission concluded that all three proposals (the other two being an extension to the northern runway at Heathrow and a new runway at Gatwick) are "commercially viable propositions" even without direct government support and public money (although it is worth noting that Gatwick proposed an alternative arrangement that included a direct contract with Government).

This is convenient given the strong feelings amongst the public and politicians about airport expansion in the UK. The Commission believes that if public money was to be spent on the project, it would be in relation to the surface access costs and even then, the contribution would be a small amount of the circa £5 billion required.

In respect of the recommended proposal, the Commission has therefore assumed that Heathrow will finance the project via raising debt and equity and believes that there would be appetite from funders to provide finance given stable market conditions. The report concludes that there is greater demand risk at Gatwick (given competition and available capacity from other London airports) and, following consultation with prospective funders, such risk is more significant than the market capacity risk associated with Heathrow.

The primary means of servicing the debt provided by funders would be through selling the increased capacity to the airlines, the additional charges brought in by the new car parks, the rent from businesses located in the new terminal buildings and potentially an increase to the Air Passenger Duty. The Commission also recommends a new aviation noise charge or levy so that passengers share a burden of the compensation/contribution that will be made by Heathrow to the local community.

The numbers

The estimated total scheme capital expenditure for the third runway at Heathrow is £17.6 billion (including £2.6 billion of risk and £2.2 billion of optimism bias), compared to £14.4 billion for the alternative Heathrow option. Surface access costs for both schemes would be similar at circa £5 billion. Meanwhile, the total capex for the Gatwick proposal is estimated to be significantly lower at £7.1 billion.

Highlights of the breakdown of the costs associated with the third runway at Heathrow are as follows:

• £4.8 billion on terminal buildings;
• nearly £4 billion on acquiring land (including the buy-out of almost 800 local homes);
• £1.1 billion on the runway, taxiways and the aprons; and
• £800 million on car parks.

The report states that the contribution to the GDP made by a third runway at Heathrow would be (with carbon emissions traded) between £131 to 147 billion in present value terms over the 60 years following completion of the project. A new runway at Gatwick would bring an increase of £89 billion.

The costs involved with the expansion of airport capacity in London (and especially Heathrow) show that, following the Thames 'Super Sewer' (circa £4 billion), HS2 (circa £50 billion), the Olympics (circa £8.8 billion) and the Crossrail projects (circa £40 plus billion combined), the UK has some of the largest and most complex infrastructure projects in Europe, if not the world, which will attract leading contractors and consultants. In the case of airport expansion, the publication of the Report is just the first stage of obtaining approval, with the next milestone being the decision of the Government, due at the end of this year. Gaining political support will now be crucial in determining whether Heathrow's new runway gets cleared for takeoff.