Op-Ed: Government ready to build and operate Western Sydney airport

It makes sense for the taxpayer to build and be the first owner of such projects

The Turnbull government has announced it will build and own Western Sydney Airport, rather than Sydney Airport Group or another private sector company.

The announcement last week has received wide support, but it also prompted questions about whether this will be a good use of taxpayers' money.

People are asking, given Sydney Airport Group was offered the chance to build and own this new airport but declined, why it makes sense for the government to do it.

Sydney Airport, in its statement to the stock exchange, said the terms "do not meet its investment criteria" - but of course governments have different criteria to private companies.

Governments have a longer investment time frame, which is particularly important when it comes to infrastructure projects that involve large capital outlays upfront and take several years before they generate a positive cash flow. Governments also typically have a lower cost of capital than most private companies.

They also may be better placed to handle the regulatory and other risks that affect the economic prospects of new infrastructure projects. This is particularly important in the early years of a project before it starts to earn revenues and the risks are highest.

Perhaps most fundamentally, when investing in major infrastructure assets, governments have an interest in not only the specific financial return to be earned from the asset but also the broader economic benefits that it will generate.

The financial return at Western Sydney Airport will depend on the revenues the airport earns - such as landing fees charged to airlines, earnings from retail shops, cafes and restaurants in the airport, parking fees and revenue from renting space at the airport to other businesses.

The airport owner, whether it is the government or the private sector, will receive a financial return, based on the net cash flows from all of these revenue streams less, of course, expenses incurred.

The most important of these expenses will be the payments the airport owner has to make for the capital invested in the airport - interest it needs to pay on loans and dividends on equity it has received.

But in addition to its direct financial return, Western Sydney Airport will generate substantial new economic activity. For example, there are expected to be about 9000 direct jobs at the airport by the early 2030s, the majority of which will probably be held by residents of western Sydney.

Many businesses will also be attracted to areas surrounding the airport, generating new economic activity and new jobs.

In addition, there are the benefits for users of the airport, particularly the two million people located closer to Western Sydney Airport than to Kingsford Smith.

The savings they will make in time and money spent on travel to catch a flight have an economic value. An airline chief executive told me that he has customers who today pay a $200 taxi fare to travel from western Sydney to Kingsford Smith Airport.

The arrival of Western Sydney Airport will mean more flights and more people travelling compared to a world in which Sydney has only one airport offering scheduled airline services.

These broader economic benefits are captured in the economic assessment carried out by Infrastructure Australia. It found that every dollar invested in Western Sydney Airport will return $1.80 to the national economy over time.

Of course, government owning an infrastructure asset in its early years is one thing; who the optimal owner is down the track is another.

Australia's existing major airports are all in private ownership, although it was government that initially owned and operated them. They are growing strongly, and investing heavily - for example, Brisbane Airport is spending $1.35 billion on a new runway, due to open in 2019 - with no contribution required from taxpayers.

There will certainly come a point when it will make sense to transfer ownership of Western Sydney Airport to the private sector - at a price that fairly rewards taxpayers for their investment in establishing what will be, by that point, a valuable asset.

More details about the government's commitment to build Western Sydney Airport will be provided in tomorrow's budget.

We will draw extensively on private sector expertise, including through the large infrastructure companies expected to be contracted to design and construct the airport following a rigorous procurement process.

But if we are to build Western Sydney Airport and have it operational by 2026, it makes sense that government builds and owns this asset in the early years.

Paul Fletcher is the federal Minister for Urban Infrastructure Infrastructure.