Connecting remote coastal communities – An evaluation of the economic feasibility of a RoRo ferry between Reykjavík and Ísafjörður in Iceland

Abstract

Arctic coastal communities are typically very remote, with relatively undiversified economies, limited infrastructure and poor transport connectivity to key population centres. In this study, a case study is presented regarding a potential fast and low-carbon ferry that would link Ísafjörður, the remote de facto capital of the sparsely populated Westfjords region of Iceland, with the nation's capital city of Reykjavík. A cost-benefit analysis is conducted to evaluate the Net Present Value (NPV) of six different scenarios, which involve different assumptions concerning willingness to pay (derived from a contingent valuation survey), whether a suitable ferry is either purchased or hired, and varying discount rates of 2%, 5% and 10%. Only one of the six scenarios result in a positive NPV – the one whereby the ship is purchased and at the lowest discount rate of 2% – and this might be the least likely scenario. These outcomes imply the strong likelihood that government subsidies will be necessary for such a project to be economically viable. Further sensitivity analysis revealed that a 40% government subsidy would result in a positive NPV under five of the six scenarios, all other factors being equal. The findings reinforce often anecdotal evidence about the economic challenges of improving transportation infrastructure in remote coastal communities, especially in the Arctic, and the necessity of governments recognising such ventures as merit goods with positive externalities that need to be subsidised. Management and policy-making implications are discussed for remote coastal communities, especially those in the Arctic.