Important Note. Airport Authority Hong Kong

Transcription

1 Important Note Airport Authority Hong Kong (AAHK) is responsible for preparing the Hong Kong International Airport (HKIA) Master Plan 2030 and commissioning the associated consultancies. At different stages of these consultancies, the consultants produced various documents for AAHK s consideration, culminating in the production of final reports. Where a final report was not produced, the consultants work was consolidated into the HKIA Master Plan 2030 Technical Report. As the reports were produced at different times, they may contain outdated or inconsistent contents. The HKIA Master Plan 2030 was not drawn up solely on the basis of the various consultancies commissioned by AAHK, but also has incorporated input from relevant airport stakeholders as well as AAHK s own input on the basis of its solid experience in airport operations. Hence, for any differences between the consultancy reports and the HKIA Master Plan 2030, the latter and the Technical Report should always be referred to. Airport Authority Hong Kong July 2011

2 Contract C For Airport Master Plan 2030 Economic Impact Study For The Hong Kong International Airport Final Report Prepared by Enright, Scott & Associates Limited May 1, 2011 Enright, Scott & Associates Ltd. Suite 1001, 10/F Wellington Place 2-8 Wellington Street Central, Hong Kong Phone: Fax:

3 CONTENTS EXECUTIVE SUMMARY...5 Existing contribution of HKIA to Hong Kong s economy...5 Future contribution of HKIA to the Hong Kong economy to Economic impact of construction investment...16 Risks associated with expanding and not expanding capacity at HKIA...18 Main conclusions INTRODUCTION BACKGROUND ON THE STUDY Background on HKIA The present Study Project objectives Scope of the Study METHODOLOGY NOTE General economic impact methodology Direct impact estimates Indirect and induced impacts Catalytic impacts Methodology for the present Study AVIATION-RELATED BUSINESS IN HONG KONG AND NON-AVIATION BUSINESSES AT HKIA Present impact on Hong Kong s economy Future impact on Hong Kong s economy Main situations Pessimistic cases CATALYTIC IMPACTS OF TOURISM AND TRADE Present impact on Hong Kong s economy Aviation-facilitated inbound tourism impacts Aviation-facilitated net tourism impacts Aviation-facilitated trade impacts Future impact on Hong Kong s economy Main situations Pessimistic cases TOTAL QUANTIFIABLE IMPACTS

4 6.1. Present impact on Hong Kong s economy Future impact on Hong Kong s economy Main situations Pessimistic cases BROADER CATALYTIC IMPACTS Hong Kong as an international business centre Foreign direct investment into Hong Kong Hong Kong as a location for regional headquarters Hong Kong as a centre for multinational business Major sectors of Hong Kong s economy Additional considerations Summary on broader catalytic impacts CONSTRUCTION COSTS AND IMPACTS Scenario Scenario POTENTIAL RISKS Risks of not expanding HKIA Foregone economic benefits Congestion and delays Risks to connectivity Risks of rising aviation costs Risks to attaining or maintaining world city status Potential loss of competitiveness to other airports Risks associated with expanding HKIA Financial risk Environmental risks Conclusions on risks STUDY CONCLUSIONS APPENDIX A. METHODOLOGIES AND DATA SOURCES A.1. Present HKIA economic impact A.1.1. Aviation businesses in Hong Kong and non-aviation businesses at HKIA direct impacts A.1.2. Catalytic direct impacts A.1.3. Indirect and induced impacts A.2. Economic impact of capital investment A.3. Future projections A.3.1. Base projections A.3.2. The economic impact of Scenario 1 and Scenario 2 at HKIA A.4. Economic cost benefit analysis A.5. Economic benefit analysis cash flows

5 APPENDIX B. FEATURES NOT INCLUDED IN THE PRESENT STUDY APPENDIX C. CAVEATS APPENDIX D. RECONCILIATION OF ATAG GLOBAL IMPACT ESTIMATES WITH HONG KONG IN 2008 IMPACT ESTIMATES APPENDIX E. GDP FORECAST DATA

6 Executive Summary The Hong Kong International Airport (HKIA) has been in operation since The airport has experienced dramatic growth in passenger numbers, cargo throughput, and aircraft movements. This growth has caused the Airport Authority (AA) to examine the potential to add capacity at HKIA. The AA commissioned Enright, Scott & Associates, Ltd (ESA) to carry out an Airport Master Plan 2030 Economic Analysis Study to complement the work already undertaken. The Economic Analysis Study is reported in this document. It addresses the present impact of HKIA on Hong Kong s economy; the projected economic impact of HKIA in a Status Quo Situation, in a scenario in which two runway capacity is optimised, and in a scenario that includes a third runway; and the projected economic impacts of the investment programmes associated with the scenarios. The Study uses variations of traditional economic impact techniques that are tailored to the particular situation of Hong Kong. Economic impact analysis attempts to quantify the impact that an investment, event, or decision can have on a given economy. It is frequently used in order to determine whether capital investments should be made. The economic impact analysis consisted of five major components for the present impact of HKIA. First, the direct, indirect, and induced impacts of aviationrelated industries were estimated. Second, estimates were made of the direct, indirect, and induced impacts of other businesses that are carried out on Chek Lap Kok, the airport island. Third, estimates were made for the impact of aviation-facilitated tourism, both for inbound tourism only and for net tourism in which the effect of lost spending from outbound tourists is netted against the effect of the local spending by inbound visitors. Fourth, estimates were developed for the impact of trade facilitated by HKIA. Fifth, areas of additional, but non-quantifiable impacts were identified and rough indicators of their importance to the Hong Kong economy were described where possible. Looking forward, passenger and cargo throughput projections generated by the AA s Master Plan Consultants were used to project the quantifiable economic impact of HKIA in a Status Quo Situation, and in two investment scenarios, Scenario 1 in which the two-runway configuration is optimised, and Scenario 2 in which a third runway is constructed. Next, the potential economic impacts of the construction and operation under the scenarios were projected. The potential economic benefits in terms of Economic Net Present Value (ENPV) and Economic Internal Rate of Return (EIRR) were estimated for both investment scenarios. Pessimistic cases, incorporating arbitrary assumptions for demand and costs, were also estimated in order to stress test the results. Given the fact that there are no universally recognised standards as to what to include in an economic impact analysis, how the estimates are done, and what are the relevant benchmarks, a variety of results are reported so that they can be compared to each other and potentially to other analyses. Finally, a number of risk factors associated with not expanding and with expanding HKIA were identified, as were items beyond the scope of the current project, and the caveats that one should use in this and any other economic impact analysis. Existing contribution of HKIA to Hong Kong s economy As we have indicated, there are no universally recognised standards for what to include in an economic impact analysis and previous studies differ substantially in terms of what is covered and not covered. Thus we have chosen to report economic impact results for: 1. The combined direct, indirect, and induced effects of aviation-related businesses in Hong Kong and non-aviation businesses at HKIA; 2. The combination of the direct, indirect, and induced aviation-related businesses in Hong Kong and non-aviation businesses at HKIA PLUS the direct impact of aviation-facilitated tourism (inbound only) and trade; 3. The combination of the direct, indirect, and induced aviation-related businesses in Hong Kong and non-aviation businesses at HKIA PLUS the direct impact of aviation-facilitated tourism (inbound and outbound) and trade; 5

7 4. The combination of the direct, indirect, and induced aviation-related businesses in Hong Kong and non-aviation businesses at HKIA PLUS the total (direct plus indirect plus induced) impact of aviation-facilitated tourism (inbound only) and trade; 5. The combination of the direct, indirect, and induced aviation-related businesses in Hong Kong and non-aviation businesses at HKIA PLUS the total (direct plus indirect plus induced) impact of aviation-facilitated tourism (inbound and outbound) and trade; The reasons for the complex reporting include: 1. The combined direct, indirect, and induced impacts of aviation-related businesses in a location and non-aviation businesses at an airport tend to be more comparable in terms of methodologies across studies. 2. Some studies include only the impact of inbound tourism, while others include the impacts of both inbound and outbound tourism. 3. Some studies include only the direct impacts of catalytic effects such as those on tourism and trade, while others report the total impacts (direct + indirect + induced), at least for tourism. Estimates of the quantifiable economic impacts of aviation in Hong Kong for the year 2008 are presented in Exhibits ES.1 and ES.2. In ES.1, the tourism impacts only include aviation-facilitated tourism inbound to Hong Kong, while in ES.2. the tourism impacts include both inbound and outbound tourism impacts. Note that the Direct, Direct + Indirect, and Direct + Indirect + Induced lines in Exhibits ES.1 and ES.2 include only aviation-related businesses in Hong Kong and non-aviation businesses at HKIA. The Direct + Indirect + Induced + Catalytic Direct Only line adds in the direct effects of tourism and trade while the Direct + Indirect + Induced + Catalytic Total line adds in the direct, indirect, and induced impact of tourism and trade. According to our economic impact estimates, the combined direct, indirect, and induced value added impact of aviation-related businesses in Hong Kong and non-aviation businesses at HKIA was HK$77,587 million in 2008, equivalent to 4.6 percent of Hong Kong s GDP. 1 The relevant employment impact was 185,458 people employed, equivalent to 5.3 percent of Hong Kong s total employment in that year. Depending on whether outbound tourism is included as well as inbound tourism and whether the total catalytic effect (direct, indirect, and induced contributions of catalytic tourism and trade) is included or just the direct catalytic effect, the value added impact estimates when catalytic effects are included ranged from HK$126,531 million to HK$256,459 million in 2008, or equivalent to between 7.6 and 15.3 percent of Hong Kong s 2008 GDP. The estimates of the associated employment impacts ranged from 224,328 to 559,482, or from 6.4 to 15.9 percent of Hong Kong s total employment. The estimates that include net tourism are lower than those that include only inbound tourism because Hong Kong runs a net tourism deficit by air (Hong Kong residents departing by air spend more on travel outside of Hong Kong than foreign residents arriving by air spend inside Hong Kong). 1 We focus on value added rather than revenue because value added represents the contribution to GDP. 6

8 The estimates indicate the aviation has an extremely large impact on Hong Kong s economy. This is not at all surprising. Aviation itself is a major portion of Hong Kong s economy compared to national economies or the global economy, as would be expected for a city economy containing a major air hub. 2 In addition, Hong Kong s share of global international air cargo is roughly 12 times its share of global GDP. 3 Hong Kong s trade dependence is approximately 6 times that of the global average 4 and roughly one-third of the value of Hong Kong s trade is carried by air. 5 Hong Kong s economy is significantly more tourism-dependent than the global average according to the World Travel and Tourism Council 6 and a large portion of Hong Kong s inbound tourists come by air. 7 This importance of aviation to Hong Kong is even greater than the estimates would indicate when one realises that there are numerous additional non-quantifiable impacts that are not taken into account in Exhibits ES.1 and ES.2, such as the importance of aviation to Hong Kong s finance, professional service, regional headquarters, management, and business coordination activities. The importance of aviation to Hong Kong is due to Hong Kong s small size, its location, its internationally-oriented economy, the importance of trade to Hong Kong, its distinctive business makeup, and its unique history in that for most of the time since the 1960s air transport has been the main way that Hong Kong has interacted with the rest of the world and until relatively recently using airports in the Chinese Mainland was not an option. The importance of aviation to Hong Kong means that any decisions that will influence the competitiveness of HKIA will have a disproportionate influence on Hong Kong s overall competitiveness and its economic development. 2 See the comparison between Hong Kong estimates and ATAG global estimates in Appendix D of the Main Report. 3 Comparison of GDP and cargo figures from the World Bank, World Development Indicators 2008 and ACI, Air Cargo Traffic Statistics Calculated from data in World Bank, World Development Indicators Hong Kong Census and Statistics Department and Enright, Scott & Associates, Ltd. analysis. 6 See World Travel and Tourism Council, Travel and Tourism Economic Impact: Hong Kong million visitors by air according to the Hong Kong Census and Statistics Department and Hong Kong Tourism Board in

9 Exhibit ES.1. Quantifiable Economic Impact of Hong Kong International Airport, 2008 (Includes only Inbound Tourism) Impact 2008 Percentage of Hong Kong GDP / Employment Direct 233,331 Direct + Indirect 437,216 Direct + Indirect + Induced 464,367 Direct + Indirect + Induced + Catalytic Direct Only 1,604,610 Direct + Indirect + Induced + Catalytic Total 2,082,381 Direct 29, Direct + Indirect 61, Direct + Indirect + Induced 77, Direct + Indirect + Induced + Catalytic Direct Only 149, Direct + Indirect + Induced + Catalytic Total 256, Employment (Persons) Direct 61, Direct + Indirect 128, Direct + Indirect + Induced 185, Direct + Indirect + Induced + Catalytic Direct Only 295, Direct + Indirect + Induced + Catalytic Total 559, Note: Dollar values are in 2008 dollars. Exhibit ES.2. Quantifiable Economic Impact of Hong Kong International Airport, 2008 (Includes both Inbound and Outbound Tourism Net Tourism ) Impact 2008 Percentage of Hong Kong GDP / Employment Direct 233,331 Direct + Indirect 437,216 Direct + Indirect + Induced 464,367 Direct + Indirect + Induced + Catalytic Direct Only 1,542,370 Direct + Indirect + Induced + Catalytic Total 1,968,031 Direct 29, Direct + Indirect 61, Direct + Indirect + Induced 77, Direct + Indirect + Induced + Catalytic Direct Only 126, Direct + Indirect + Induced + Catalytic Total 213, Employment (Persons) Direct 61, Direct + Indirect 128, Direct + Indirect + Induced 185, Direct + Indirect + Induced + Catalytic Direct Only 224, Direct + Indirect + Induced + Catalytic Total 425, Note: Net tourism impact equals the impact of tourism exports (minus the impact of spending on the airport island) minus the impact of tourism imports. Dollar values are in 2008 dollars. 8

10 Future contribution of HKIA to the Hong Kong economy to 2030 Future projections of the quantifiable economic impact of HKIA were generated for three main situations. The first is a Status Quo Situation in which already approved capital investments to expand investment are continued up through 2014 with no further investments to expand capacity. This is a status quo option and a benchmark by which to measure the impact of investment scenarios. The second is Scenario 1 in which capital investments are made to expand capacity in a two-runway configuration beyond The third is Scenario 2 in which capital investments are made to expand capacity of two runways and also construct a new third runway, with the first investments being made in In addition, pessimistic cases for Scenarios 1 and 2 were developed by incorporating arbitrary assumptions of 15 percent lower demand, 50 percent higher investment costs, and a declining value added to revenue ratio for aviation businesses, as compared to the main scenarios, in order to stress test the base analysis. Projections for the net benefit attributed to Scenario 1 and Scenario 2 together with their pessimistic variants were generated by subtracting the economic impact of the Status Quo Situation from the economic impact of Scenario 1 and also from Scenario 2. The total incremental cost of the Scenario 1 investment programme was projected at HK$22,531 million. 8 The total incremental cost of the Scenario 2 investment programme was projected at HK$79,799 million. 9 The forecast throughput for the three situations is given in Exhibit ES.3 for passengers and Exhibit ES.4 for cargo. Projections for the ongoing future quantifiable impact of aviation-related businesses in Hong Kong, non-aviation businesses at HKIA, aviation-facilitated tourism, and aviation-facilitated trade for the three main situations are given in Exhibit ES.5 including only inbound tourism and in Exhibit ES.6 including net tourism. The economic impact of HKIA and aviation in general on Hong Kong s economy is projected to be substantially larger in Scenario 1 than in the Status Quo Situation and substantially larger in Scenario 2 than in Scenario 1. The reason is that the throughput forecasts developed by AA s Master Plan Consultants indicate that capacity becomes constrained in 2015 in the Status Quo Situation, in 2020 to 2021 in Scenario 1, and is not constrained through 2030 in Scenario 2. Given the demand and capacity forecasts, Scenario 1 yields on the order of 37 percent more traffic than the Status Quo Situation by 2030, and Scenario 2 yields on the order of 71 percent more traffic than the Status Quo Situation. 8 The figure includes HK$700 million Midfield Development Phase 1 contingency cost estimates in the year The figure includes HK$700 million Midfield Development Phase 1 contingency cost estimates in the year

11 Exhibit ES.3. Passenger Throughput 100 Passenger Number (Millions) Scenario 2 Throughput Status Quo Situation Throughput Scenario 1 Throughput Passengers (millions) Status Quo Situation Scenario Scenario Source: Airport Authority of Hong Kong and IATA. 10

12 Exhibit ES4. Cargo Throughput 9 8 Cargo Tonnes (Million) Scenario 2 Throughput Status Quo Situation Throughput Scenario 1 Throughput Cargo (million tonnes) Status Quo Situation Scenario Scenario Source: Airport Authority of Hong Kong and IATA 11

13 Exhibit ES.5. Total Economic Impact of Hong Kong International Airport (Three Situations) (Includes only Inbound Tourism) Impact Status Quo Situation Direct 233, , , , ,473 Direct + Indirect 437, , , , ,286 Direct + Indirect + Induced 464, , , , ,321 Direct + Indirect + Induced + Catalytic Direct Only 1,604,610 1,750,229 1,748,145 1,746,693 1,744,814 Direct + Indirect + Induced + Catalytic Total 2,082,381 2,302,059 2,299,610 2,298,252 2,296,136 Direct 29,446 51,221 51,062 50,864 50,659 Direct + Indirect 61,486 74,495 74,136 73,690 73,229 Direct + Indirect + Induced 77,587 91,753 91,310 90,759 90,190 D + I + I Percentage of Hong Kong s GDP Direct + Indirect + Induced + Catalytic Direct Only 149, , , , ,929 Direct + Indirect + Induced + Catalytic Total 256, , , , ,265 Total Quantifiable Impact % of Hong Kong s GDP Employment (Persons) Direct 61,604 77,286 76,936 76,503 76,054 Direct + Indirect 128, , , , ,659 Direct + Indirect + Induced 185, , , , ,702 Direct + Indirect + Induced + Catalytic Direct Only 295, , , , ,181 Direct + Indirect + Induced + Catalytic Total 559, , , , ,795 Scenario 1 Direct 233, , , , ,841 Direct + Indirect 437, , , , ,277 Direct + Indirect + Induced 464, , , , ,675 Direct + Indirect + Induced + Catalytic Direct Only 1,604,610 1,750,229 2,194,485 2,260,810 2,343,653 Direct + Indirect + Induced + Catalytic Total 2,082,381 2,302,059 2,890,463 2,976,352 3,086,104 Direct 29,446 51,221 62,833 65,288 67,405 Direct + Indirect 61,486 74,495 91,286 94,754 97,679 Direct + Indirect + Induced 77,587 91, , , ,305 D + I + I Percentage of Hong Kong s GDP Direct + Indirect + Induced + Catalytic Direct Only 149, , , , ,865 Direct + Indirect + Induced + Catalytic Total 256, , , , ,220 Total Quantifiable Impact % of Hong Kong s GDP Employment (Persons) Direct 61,604 77,286 94,725 98, ,403 Direct + Indirect 128, , , , ,715 Direct + Indirect + Induced 185, , , , ,477 Direct + Indirect + Induced + Catalytic Direct Only 295, , , , ,429 Direct + Indirect + Induced + Catalytic Total 559, , , , ,881 Scenario 2 Direct 233, , , , ,598 Direct + Indirect 437, , , , ,433 Direct + Indirect + Induced 464, , , , ,495 Direct + Indirect + Induced + Catalytic Direct Only 1,604,610 1,750,229 2,204,200 2,783,686 3,418,992 Direct + Indirect + Induced + Catalytic Total 2,082,381 2,302,059 2,903,625 3,672,701 4,515,307 Direct 29,446 51,221 62,984 77,624 93,764 Direct + Indirect 61,486 74,495 91, , ,975 Direct + Indirect + Induced 77,587 91, , , ,472 D + I + I Percentage of Hong Kong s GDP Direct + Indirect + Induced + Catalytic Direct Only 149, , , , ,300 Direct + Indirect + Induced + Catalytic Total 256, , , , ,143 Total Quantifiable Impact % of Hong Kong s GDP Employment (Persons) Direct 61,604 77,286 94, , ,141 Direct + Indirect 128, , , , ,557 Direct + Indirect + Induced 185, , , , ,632 Direct + Indirect + Induced + Catalytic Direct Only 295, , , , ,123 Direct + Indirect + Induced + Catalytic Total 559, , ,936 1,037,564 1,267,603 Note: Year 2008 dollar values are in 2008 dollars, following years are in 2009 dollars. 12

14 Exhibit ES.6. Total Economic Impact of Hong Kong International Airport (Three Situations) (Includes both Inbound and Outbound Tourism Net Tourism ) Impact Status Quo Situation Direct 233, , , , ,473 Direct + Indirect 437, , , , ,286 Direct + Indirect + Induced 464, , , , ,321 Direct + Indirect + Induced + Catalytic Direct Only 1,542,370 1,670,928 1,653,016 1,631,971 1,609,818 Direct + Indirect + Induced + Catalytic Total 1,968,031 2,152,487 2,120,184 2,081,871 2,041,517 Direct 29,446 51,221 51,062 50,864 50,659 Direct + Indirect 61,486 74,495 74,136 73,690 73,229 Direct + Indirect + Induced 77,587 91,753 91,310 90,759 90,190 D + I + I Percentage of Hong Kong s GDP Direct + Indirect + Induced + Catalytic Direct Only 126, , , , ,388 Direct + Indirect + Induced + Catalytic Total 213, , , , ,615 Total Quantifiable Impact % of Hong Kong s GDP Employment (Persons) Direct 61,604 77,286 76,936 76,503 76,054 Direct + Indirect 128, , , , ,659 Direct + Indirect + Induced 185, , , , ,702 Direct + Indirect + Induced + Catalytic Direct Only 224, , , , ,814 Direct + Indirect + Induced + Catalytic Total 425, , , , ,823 Scenario 1 Direct 233, , , , ,841 Direct + Indirect 437, , , , ,277 Direct + Indirect + Induced 464, , , , ,675 Direct + Indirect + Induced + Catalytic Direct Only 1,542,370 1,670,928 2,099,356 2,146,088 2,208,658 Direct + Indirect + Induced + Catalytic Total 1,968,031 2,152,487 2,711,037 2,759,971 2,831,485 Direct 29,446 51,221 62,833 65,288 67,405 Direct + Indirect 61,486 74,495 91,286 94,754 97,679 Direct + Indirect + Induced 77,587 91, , , ,305 D + I + I Percentage of Hong Kong s GDP Direct + Indirect + Induced + Catalytic Direct Only 126, , , , ,324 Direct + Indirect + Induced + Catalytic Total 213, , , , ,570 Total Quantifiable Impact % of Hong Kong s GDP Employment (Persons) Direct 61,604 77,286 94,725 98, ,403 Direct + Indirect 128, , , , ,715 Direct + Indirect + Induced 185, , , , ,477 Direct + Indirect + Induced + Catalytic Direct Only 224, , , , ,062 Direct + Indirect + Induced + Catalytic Total 425, , , , ,909 Scenario 2 Direct 233, , , , ,598 Direct + Indirect 437, , , , ,433 Direct + Indirect + Induced 464, , , , ,495 Direct + Indirect + Induced + Catalytic Direct Only 1,542,370 1,670,928 2,109,072 2,668,964 3,283,996 Direct + Indirect + Induced + Catalytic Total 1,968,031 2,152,487 2,724,201 3,456,320 4,260,687 Direct 29,446 51,221 62,984 77,624 93,764 Direct + Indirect 61,486 74,495 91, , ,975 Direct + Indirect + Induced 77,587 91, , , ,472 D + I + I Percentage of Hong Kong s GDP Direct + Indirect + Induced + Catalytic Direct Only 126, , , , ,758 Direct + Indirect + Induced + Catalytic Total 213, , , , ,492 Total Quantifiable Impact % of Hong Kong s GDP Employment (Persons) Direct 61,604 77,286 94, , ,141 Direct + Indirect 128, , , , ,557 Direct + Indirect + Induced 185, , , , ,632 Direct + Indirect + Induced + Catalytic Direct Only 224, , , , ,756 Direct + Indirect + Induced + Catalytic Total 425, , , , ,632 Note: Year 2008 dollar values are in 2008 dollars, following years are in 2009 dollars. 13

15 Projections for the ongoing net economic impacts associated with Scenario 1 and Scenario 2 were generated by subtracting the economic impact of HKIA projected for the Status Quo Situation from the economic impact of HKIA projected for Scenarios 1 and 2. These projections are given in Exhibit ES.7. Exhibit ES.7. Ongoing Net Economic Impact of Scenario 1 and 2 Investment Programmes Impact Scenario 1 Direct ,004 64,921 75,369 Direct + Indirect , , ,993 Direct + Indirect + Induced , , ,357 Direct + Indirect + Induced + Catalytic Direct Only , , ,842 Direct + Indirect + Induced + Catalytic Total , , ,969 Direct ,771 14,425 16,745 Direct + Indirect ,151 21,065 24,449 Direct + Indirect + Induced ,125 25,946 30,114 D + I + I Percentage of Hong Kong s GDP Direct + Indirect + Induced + Catalytic Direct Only ,716 50,703 58,936 Direct + Indirect + Induced + Catalytic Total ,597 89, ,955 Total Quantifiable Impact % of Hong Kong s GDP Employment (Persons) Direct ,788 21,838 25,349 Direct + Indirect ,089 37,100 43,056 Direct + Indirect + Induced ,218 53,226 61,775 Direct + Indirect + Induced + Catalytic Direct Only ,693 95, ,250 Direct + Indirect + Induced + Catalytic Total , , ,088 Scenario 2 Direct , , ,127 Direct + Indirect , , ,149 Direct + Indirect + Induced , , ,176 Direct + Indirect + Induced + Catalytic Direct Only ,057 1,036,996 1,674,181 Direct + Indirect + Induced + Catalytic Total ,016 1,374,452 2,219,174 Direct ,924 26,760 43,105 Direct + Indirect ,368 38,958 62,747 Direct + Indirect + Induced ,391 47,984 77,283 D + I + I Percentage of Hong Kong s GDP Direct + Indirect + Induced + Catalytic Direct Only ,467 98, ,373 Direct + Indirect + Induced + Catalytic Total , , ,879 Total Quantifiable Impact % of Hong Kong s GDP Employment (Persons) Direct ,014 40,411 65,087 Direct + Indirect ,454 68, ,898 Direct + Indirect + Induced ,749 98, ,930 Direct + Indirect + Induced + Catalytic Direct Only , , ,943 Direct + Indirect + Induced + Catalytic Total , , ,811 Note: Year 2008 dollar values are in 2008 dollars, following years are in 2009 dollars. The economic benefits of Scenarios 1 and 2 were projected by calculating the respective Economic Internal Rates of Return (EIRR) and Economic Net Present Values (ENPV). These incorporated the value added contributions to Hong Kong s economy as positive cash flows, the construction investments for Scenarios 1 and 2 as negative cash flows, and a 4 percent discount rate typically used for projects funded by the Hong Kong government. The results may be found in Exhibit ES.8. We note that the EIRRs and ENPVs for both Scenarios are highly positive. The EIRRs for Scenario 1 are higher than in Scenario 2 because the benefits of Scenario 1 are frontloaded and the costs are much lower than in Scenario 2, while the ENPVs for Scenario 2 are higher because there is ultimately a larger recurrent benefit that goes on for a long period of time. The 14

16 high EIRRs, particularly for Scenario 1, are due in part to the fact that significant leverage can be achieved with the existing asset and benefits can be readily realized from the second year of investment. In addition, IRR (EIRR) assumes that all the benefits from the project under review are reinvested at the internally generated rate of return, yielding further returns at this same rate in the following period(s). However, if the IRR is exceptionally high by comparison to the normal rate of return one could expect from similar investment opportunity (as in the case of Scenario 1), or to the average cost of capital in the market over a period of time, then the estimated IRR may not be a good and reasonable measure for project evaluation. In particular, if the IRR (EIRR) and the NPV (ENPV) give different answers in the evaluation of mutually exclusive projects, the correct answer is by NPV (ENPV). The ENPV results would be strong indicators that either investment programme would be highly beneficial to Hong Kong, but that Scenario 2 would have greater ultimate benefit. Exhibit ES.8. Economic Internal Rate of Return and Economic Net Present Value for a 50 Year Return, Scenarios 1 and 2 EIRR (Percent) ENPV (HK$ mn) Impact Scenario 1 Direct ,646 Direct + Indirect ,744 Direct + Indirect + Induced ,673 Direct + Indirect + Induced + Catalytic Direct Only 1, ,406 Direct + Indirect + Induced + Catalytic Total 2,144 1,532,911 Scenario 2 Direct ,862 Direct + Indirect ,071 Direct + Indirect + Induced ,009 Direct + Indirect + Induced + Catalytic Direct Only 47 1,930,652 Direct + Indirect + Induced + Catalytic Total 63 3,532,127 Note: The Direct, Direct + Indirect, and Direct + Indirect + Induced lines include only aviationrelated businesses in Hong Kong and non-aviation businesses at HKIA. The Direct + Indirect + Induced + Catalytic Direct Only line adds in the direct benefits of aviation-facilitated tourism and trade. The Direct + Indirect + Induced + Catalytic Total line adds in the direct, indirect, and induced benefits of aviation-facilitated tourism and trade. Dollar values are in 2009 dollars. Economic benefits for the Pessimistic Cases for Scenarios 1 and 2 were projected by calculating the Economic Internal Rate of Return (EIRR) and Economic Net Present Value (ENPV) for these cases, using similar methods to those just described and using the pessimistic assumptions of a 15 percent lower demand than projected in every year of the analysis, 50 percent higher construction costs than projected, and a decline in the ratio of value added to revenue in the aviation sector by one percent per year until Note that the Pessimistic Cases are of a hypothetical nature and are tabled here to stress test the results through the use of demand and construction cost estimates far worse that what is expected. Exhibit ES.9 shows that either investment programme would be highly beneficial to Hong Kong, even with the pessimistic assumptions. Again, we note similar caveats to the use of EIRR values in the present context, but include them for sake of completeness. 15

17 Exhibit ES.9. Economic Internal Rate of Return and Economic Net Present Value for a 50 Year Return, Scenarios 1 and 2, Pessimistic Cases EIRR (Percent) ENPV (HK$ mn) Impact Scenario 1 Direct ,502 Direct + Indirect ,782 Direct + Indirect + Induced ,527 Direct + Indirect + Induced + Catalytic Direct Only ,317 Direct + Indirect + Induced + Catalytic Total 104 1,233,435 Scenario 2 Direct ,551 Direct + Indirect ,909 Direct + Indirect + Induced ,057 Direct + Indirect + Induced + Catalytic Direct Only 23 1,021,152 Direct + Indirect + Induced + Catalytic Total 30 2,052,923 Note: The Direct, Direct + Indirect, and Direct + Indirect + Induced lines include only aviationrelated businesses in Hong Kong and non-aviation businesses at HKIA. The Direct + Indirect + Induced + Catalytic Direct Only line adds in the direct benefits of aviation-facilitated tourism and trade. The Direct + Indirect + Induced + Catalytic Total line adds in the direct, indirect, and induced benefits of aviation-facilitated tourism and trade. Dollar values are in 2009 dollars. Economic impact of construction investment The investment in construction of airport infrastructure associated with Scenarios 1 and 2 also would have economic impacts on Hong Kong. The projected direct, indirect, and induced economic impact for construction investment in Scenario 1 and Scenario 2 are given in Exhibits ES.10 and ES.11. These economic impacts have not been factored into the economic benefit calculations in the present Study. 16

18 Exhibit ES.10. Economic Impacts of Construction Investment, Scenario 1 Impact 2015 to to 2030 Total Direct 17,976 4,555 22,531 Indirect 10,841 2,747 13,588 Induced 4,770 1,209 5,978 Total 33,587 8,511 42, to to 2030 Total Direct 7,135 1,808 8,943 Indirect 1, ,468 Induced 2, ,617 Total 11,990 3,038 15,028 Employees (Person Years) 2015 to to 2030 Total Direct 12,682 3,214 15,896 Indirect 4,101 1,039 5,140 Induced 9,535 2,416 11,951 Total 26,318 6,669 32,987 Note: Dollar values are in 2009 dollars. Values given for each period represent the total over these periods and not an annual value. Note Scenario 1 investments are projected to commence in Exhibit ES.11. Economic Impacts of Construction Investment, Scenario 2 Impact 2012 to to to 2030 Total Direct 60,643 12,036 7,120 79,799 Indirect 41,589 8,254 4,883 54,727 Induced 13,656 2,710 1,603 17,970 Total 115,888 23,001 13, , to to to 2030 Total Direct 19,054 3,782 2,237 25,072 Indirect 7,554 1, ,940 Induced 8,262 1, ,872 Total 34,869 6,921 4,094 45,884 Employees (Person Years) 2012 to to to 2030 Total Direct 30,673 6,088 3,601 40,362 Indirect 15,733 3,123 1,847 20,703 Induced 27,299 5,418 3,205 35,923 Total 73,705 14,629 8,654 96,988 Note: Dollar values are in 2009 dollars. Values given for each period represent the total over these periods and not an annual value. Note Scenario 2 investments are projected to commence in

19 Risks associated with expanding and not expanding capacity at HKIA There are a number of potential risks associated with expanding capacity at HKIA. However, in economic terms, the main risks would appear to be related to not expanding capacity. One major risk of not expanding capacity at HKIA is that of foregoing the quantifiable and non-quantifiable economic benefits of expansion. In addition, there are a number of risks associated with insufficient capacity or congestion at major hub airports that have been identified in studies elsewhere. These include increased congestion costs, a reduction in the number of destinations served, a reduction of connectivity with other destinations, potential loss of competitiveness to other airports, and potential loss of business hub or world city status. Hong Kong has been highly dependent on aviation in the past and will continue to be so in the future. The risks associated with insufficient capacity to maintain or rather expand Hong Kong s connectivity to Hong Kong s role as a financial, management, trade, tourism, and coordination hub should not be minimised. On the other hand, the main risks associated with expanding HKIA, particularly adding a third runway, would be financial risks (if the investment did not pay for itself) and environmental risks. Such risks have been identified for expanding hub airports globally. Many of these risks are environmental risks associated with taking land for construction, disturbing natural habitats, creating additional noise through expanded airport operations, and creating additional air pollution and a larger carbon footprint through expanded airport operations. Assessment of these risks will doubtless be part of any further examination HKIA expansion, but is outside the scope of the present Study. Main conclusions There are several main conclusions that come out of the present Study. HKIA at present generates enormous economic value for Hong Kong. According to our economic impact estimates, the combined direct, indirect, and induced value added impact of aviation-related businesses in Hong Kong and non-aviation businesses at HKIA was HK$77,587 million in 2008, equivalent to 4.6 percent of Hong Kong s GDP. The relevant employment impact was 185,458 people employed, equivalent to 5.3 percent of Hong Kong s total employment in that year. Depending on whether outbound tourism is included as well as inbound tourism and whether the total catalytic effect (direct, indirect, and induced contributions of catalytic tourism and trade) is included or just the direct catalytic effect, the value added impact estimates when catalytic effects are included ranged from HK$126,531 million to HK$256,459 million in 2008, or equivalent to between 7.5 and 15.3 percent of Hong Kong s 2008 GDP. The estimates of the associated employment impacts ranged from 224,328 to 559,459, or from 6.4 to 15.9 percent of Hong Kong s total employment. The contribution of HKIA goes far beyond those that can be quantified. Despite the very large estimates, we believe the contribution of HKIA goes far beyond those that can be readily estimated. Without aviation services Hong Kong would not be a major trading centre, financial centre, or business management centre. Without HKIA we doubt Hong Kong would be a leader in international investment, an important location of multinational companies, or a leading regional headquarters location. While it is impossible to estimate the impact precisely, aviation services are closely linked with the four key industries in Hong Kong s economy: financial services, trading and logistics, tourism, and professional and producer services, which together accounted for approximately 57 percent of Hong Kong s GDP in HKIA s future contribution depends on future investment decisions. If limited to the Status Quo Situation, based on demand forecasts and capacity projections supplied to us by AA s Master Plan Consultants, and if impacts associated only with aviation-related businesses in Hong Kong and non-aviation businesses at HKIA are taken into account, then the projected value 18

20 added contribution of HKIA in 2030 is HK$90,190 million or 2.5 percent of forecast GDP in that year. If the total catalytic impact of tourism and trade is included (in the Inbound Tourism only case) the figure for the Status Quo Situation would be HK$304,265 million (8.3 percent of projected GDP). In the Net Tourism case, the figure for the Status Quo Situation would be HK$210,615 million (5.8 percent of projected GDP). In Scenario 1, in which capacity of the two runway configuration is expanded, impacts associated with aviation-related businesses in Hong Kong and non-aviation businesses at HKIA are projected to reach a value added of HK$120,305 million in 2030, or 3.3 percent of forecast GDP in that year. When tourism and trade impacts are also factored in, value added is projected to reach HK$408,220 million (11.2 percent of projected GDP) in 2030 for the Inbound Tourism only case and HK$314,570 million (8.6 percent of projected GDP) for the Net Tourism case. In Scenario 2, in which capacity of the two runway configuration is expanded and a new third runway is built, impacts associated with aviation-related businesses in Hong Kong and non-aviation businesses at HKIA are projected to reach a value added of HK$167,472 million, or 4.6 percent of projected GDP in When tourism and trade impacts are factored in, value added is projected to reach HK$590,143 million (16.2 percent of projected GDP) in 2030 for the Inbound Tourism only case and HK$496,492 million (13.6 percent of projected GDP) in the Net Tourism case. The results indicate that the investment programme termed Scenario 1 would enable HKIA to make a much larger contribution to Hong Kong than in the Status Quo Situation and that the investment programme termed Scenario 2 would make a much larger contribution to Hong Kong than in Scenario 1. The projected net economic impacts of Scenario 1 and Scenario 2 are both strongly positive, with the impacts of Scenario 2 (which includes a third runway) being much higher. Our analysis leads us to project that by 2030 the net economic impact of the investment associated with Scenario 1 including only impacts associated with aviation-related businesses in Hong Kong and non-aviation businesses at HKIA would reach on the order of HK$30,114 million in value added (0.8 percent of projected GDP) and 61,775 in employment. If the total catalytic impact of tourism and trade is included, the value added impact in 2030 is projected to be HK$103,955 (2.9 percent of projected GDP) and the employment impact 224,088. For Scenario 2, the net economic impacts associated with aviation-related businesses in Hong Kong and non-aviation businesses at HKIA would reach on the order of HK$77,283 million in value added in 2030 (2.1 percent of projected GDP) and 157,930 in employment. If the total catalytic impact of tourism and trade is included, the value added impact in 2030 is projected to be HK$285,879 (7.8 percent of projected GDP) and the employment impact 611,811. The net value added impact in both scenarios is strongly positive, with the impact of Scenario 2 over two and a half times that of Scenario 1 in The pessimistic cases show that both Scenario 1 and Scenario 2 are robust to even substantial downside risks. Pessimistic Cases for Scenarios 1 and 2 were generated by assuming 15 percent lower demand, 50 percent higher capital costs, and a declining ratio of value added to revenue as compared to the main scenarios. For the Pessimistic Case associated with Scenario 1, the net impact of aviation-related businesses in Hong Kong and non-aviation businesses at HKIA is projected to be HK$ 24,925 million in value added and 56,006 in employment in If the total catalytic impact of tourism and trade are included, the projected impact is HK$98,766 million in value added and 218,319 in employment. For the Pessimistic Case associated with Scenario 2, the net impact of aviation-related businesses in Hong Kong and non-aviation businesses at HKIA is projected to be HK$42,680 million in value added and 95,452 in employment in If the total catalytic impact of tourism and trade is included, the projected impact is HK$187,768 million in value added and 409,925 in employment. 19

21 The projected economic impacts of the Pessimistic Cases associated with Scenarios 1 and 2 are both strongly positive, showing that either investment programme should have a strong positive impact even if large deviations from projected demand and cost eventuate. The projected Economic Internal Rate of Return and Economic Net Present Value indicate that between Scenario 1 and Scenario 2 an investment in Scenario 2 would ultimately have the larger economic payoff. The results of Economic Internal Rate of Return (EIRR) and Economic Net Present Value (ENPV) calculations show strongly positive ENPVs and EIRRs in each of the cases that are estimated. Even if only the direct impact of aviation-related businesses in Hong Kong and non-aviation businesses at HKIA are factored into the analysis, Scenario 1 gives an ENPV of HK$233,646 million with an EIRR of 354 percent, and Scenario 2 gives an ENPV of HK$481,862 million with an EIRR of 23 percent. If the indirect and induced impacts of aviation-related businesses in Hong Kong, and non-aviation business at HKIA are taken into account, the Scenario 1 ENPV rises to HK$431,673 million and the EIRR to 623 percent, Scenario 2 ENPV rises to HK$912,009 million and the EIRR to 32 percent. This is not even including any impact for aviation-facilitated tourism or trade. When the full impact of aviationfacilitated tourism and trade are taken into account, Scenario 1 yields a projected EIRR of 2,144 percent and a projected ENPV of HK$1,532,911 million, and Scenario 2 yields a projected EIRR of 63 percent and a projected ENPV of HK$3,532,127 million. Scenario 1 has a higher EIRR than Scenario 2 largely because of the large investment required to construct a third runway in Scenario 2 and the fact that the projected benefits are farther into the future. Scenario 1 benefits in this regard from the fact that it leverages the already large investments that have been made to develop the existing two runway configuration. The high EIRRs, particularly for Scenario 1, are due in part to the fact that significant leverage can be achieved with the existing asset and benefits can be readily realized from the second year of investment. In addition, IRR (EIRR) assumes that all the benefits from the project under review are re-invested at the internally generated rate of return, yielding further returns at this same rate in the following period(s). However, if the IRR is exceptionally high by comparison to the normal rate of return one could expect from similar investment opportunity (as in the case of Scenario 1), or to the average cost of capital in the market over a period of time, then the estimated IRR may not be a good and reasonable measure for project evaluation. In particular, if the IRR (EIRR) and the NPV (ENPV) give different answers in the evaluation of mutually exclusive projects, the correct answer is by NPV (ENPV). The ENPVs in Scenario 2 are approximately over twice those of Scenario 1, indicating that Scenario 2 has the greater long term economic payoff. The projected EIRRs and ENPVs in the Pessimistic Cases associated with Scenarios 1 and 2 are both strongly positive, showing that either investment programme should have a strong positive impact even if large deviations from projected demand and cost eventuate. The same caveats about EIRR estimates hold. They are included for the sake of completeness. In economic terms, the risks of not expanding capacity at HKIA appear to substantially outstrip the risks of expanding capacity. The risks associated with not expanding capacity at constrained airports identified elsewhere in the world include loss of regional and short-haul routes, loss of some connectivity, and potential risks to world city status or ambitions. On the other hand, the risks of expanding airports include the financial risks and the environmental risks associated with loss of habitats, loss of nature reserve areas, increased noise, and increased air pollution. In both the Greater Pearl River Delta and the wider Asia- Pacific region we note that HKIA s competitors have been investing aggressively and in some cases have been growing rapidly. This implies that HKIA cannot assume that its status as a premier airport in China and in the Asia-Pacific region will be maintained without concerted efforts. Finally, we note that capacity constraints at HKIA could set in motion dynamics that could result in a significant reduction in HKIA s competitiveness for both air cargo and passenger services and could hand significant advantages to competing airports. Given the forecasts used as inputs into this analysis, in economic terms the risks of not expanding capacity substantially outweigh the risks of expanding capacity at HKIA. 20