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Cost-Benefit Analysis of Investments in Airport Infrastructure: A Practical Approach.

José-Doramas Jorge
European Investment Bank, Luxembourg

Ginés de Rus
University of Las Palmas de G.C. (Spain) and
Institute of Transportation Studies (UC Berkeley)

Abstract

This paper presents a cost-benefit analysis approach devised to conduct project evaluation in conditions of limited analyst time, research budget and data availability. The emphasis is on discarding economically viable from unviable projects rather than on arriving at a precise return figure. The paper starts by setting out the theoretical background regarding the identification and measurement of project benefits. It then presents a practical approach to measure such benefits in projects involving the expansion of passenger capacity and, subsequently, those aimed at expanding aircraft capacity. Projects for the freight market and the estimation of airport costs are both treated separately.

Keywords: airports, cost-benefit analysis, infrastructure, transport JEL codes: D61, H43, H54, R41

The authors gratefully acknowledge comments by M. Hansen (Institute of Transportation Studies, U.C. Berkeley), by M. Turró, P. Boeuf and A. Lynch from the European Investment Bank (EIB) and by participants at the EIB internal seminar on cost-benefit analysis of airport infrastructure investment. The views presented in this paper are those of the authors and do not necessarily reflect those of the EIB or institutions to whom the authors are affiliated.

1. Introduction

The main issues in the economic evaluation of airport projects are common to all cost-benefit analysis of major transport investments. The basic comparison of social benefits and costs and the criteria and procedures to avoid errors and biases are not significantly different: the definition of the base case; the identification and measurement of relevant effects; the use of appropriate parameter values; and the prevention of double or triple counting (see for example: Adler, 1987; Mackie and Preston, 1998; Boardman et al, 1996; and Gramlich, 1990)

Airport investments are centers of thriving retailing activity, and projects with a sound financial performance might not be considered as good from a broader economic perspective. This paper is concerned with the cost-benefit analysis of airport infrastructure. The principle underlying the paper is that airport investments are to be assessed as transport infrastructure improvements aimed at addressing a demand for transportation. The analysis should therefore focus on the impact of the investment on the generalized cost of travel for the users and on the costs of supplying the transportation service, including both airport and airline costs.

The methodology proposed in this paper is aimed to help the practical application of cost-benefit analysis for a project analyst facing limited availability of data and a short period of time for issuing an opinion, a situation faced by many analysts in government and international agencies. Also, the political context within which project appraisal is carried out in practice and the uncertainties it is subject to (see Turró, 1999) can make a quick, low cost assessment valuable. The emphasis is placed in the consistency of decision criteria across projects as to whether a given project is a “good” or “bad” investment, rather than on the detailed accuracy of the estimates of project returns.

The approach must be workable, meaning both that it must be pragmatic about data availability, and that it must be consistent with the limited resources usually available for project appraisal. When the full appraisal option is not possible (a full cost-benefit analysis with surveys of local conditions) the approach to be followed has to rely on data readily available from the majority of airport operators. There are significant differences in data availability across...
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