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Title: Scottish%20Ferries:%20Problems%20and%20Solutions

1
Scottish FerriesProblems and Solutions
Talk to HTNM (earlier version to AWWL) Version
August 2nd 2007
Neil Kay www.brocher.com
2
The Context

Subsidised Scottish ferry services must be
compliant with the ECs 1992 Maritime Cabotage
Regulation and State aid law
Domestic ferry services have the characteristics
of essential services
As such, they are more like essential fuel
and water services, than
other transport
services for which substitutes exist or can
be quickly
found
Without a regular and reliable sea link,
communities and individuals
will be in
real trouble

3
Who is affected by the ECs 1992 Maritime
Cabotage Regulation here?

Potentially four sets of routes (1) CalMac
Network (2) Northern Isles (3) Gourock-Dunoon (4)
Campbeltown-Ballycastle
All must comply with the Regulation in terms of
any subsidy to be awarded
If subsidy is to be awarded, this must be
justified by use of Public Service Obligations
(PSOs)
Commission has acknowledged that all routes
(including Gourock-Dunoon) are
eligible for PSO
status under the 1992 Regulation

4
Economic and social problems created and left by
previous administrations

Fares (including Gourock-Dunoon) significantly
higher than for comparable domestic ferry
services in most other countries, constraining
and inhibiting economic and social development
These high prices will further enable cherry
pickers to pick off profitable segments
(vehicles, freight, short crossings) leaving the
public service higher cost to users and/or
taxpayer
Crowding out of the public service by
cherry pickers will
also leave users and
communities who are dependent on
these
essential services vulnerable to
subsequent exploitation
by these
unregulated commercial interests

5
Legislative problems created and left by Previous
Executive (SE 2003-07)

Wrongly argued Altmark not relevant here
Wrongly argued PSOs not relevant here
Failed to deal with Operator of Last Resort
issue as with other essential services this
needs active and qualified operator ready to take
over immediately in case incumbent
goes bankrupt
or threatens to default
Neglected questions such as need for
Regulator and
Operator of Last Resort not seen
by Commission as their
responsibility is for
national authorities to
sort out to protect public

interest aspects for which
they are responsible

6
Administrative problems created and left by
Previous Executive (SE 2003-07)

Rejected need for independent Regulator even
though this is standard for other essential
services. Regulator would also fit with EC
requirement for independent body to award tenders
Ferry issues tend to be arms-length and part-time
issue for the geographically distanced SE
(Scottish
Executive) and Whitehall
departments
who are responsible here
At least seven SE departments and

sub-departments involved in the setting

up of the CalMac tender alone, much of
this work
could be replaced by single
Regulator
better decisions at lower cost

7
Whitehall Problems created and left by Previous
Administrations

It is Whitehall and not the SE that negotiates
and has direct relations with the EC in matters
relating to EC law and its implementation
This is probably why plans for PSOs for Scottish
ferries and Scottish air services to the islands
were abandoned by SE 2003-7
Whitehall has not wanted, and will not want,
PSOs for Scottish ferry or
air services for fear of
precedent and subsequent demand to apply PSOs
to justify transport
subsidies in the rest of the UK
(e.g. for regional air
services)

8
Specific Gourock-Dunoon problems created and left
by past Administrations

Previous administrations have imposed frequency
and timetable restrictions on CalMac and did not
permit it to invest in the modern low-cost
vessels needed here
Result was to prevent CalMac from competing on
level terms in lucrative vehicle-carrying part of
market
Western Ferries now dominant operator
over what is a
strategically critical route,
a transport parallel to the Forth
Bridges
Whole route could and should be
subject to PSOs in the public
interest,
this rejected by SE 2003-07

9
Specific Campbeltown-Ballycastle problems created
and left by past Administrations

Operator would only have a 6 year tender under EC
rules
No-one will build vessel with 30 year life for a
project with no assured future after 6 years
Means reduced to second-hand vessels surplus to
requirements, probably obsolete and/or
inappropriate
Even if adequate vessel available, why invest
in
building up market if subsequent
retendering mean
that others can then
appropriate the market you
have built up?

10
Solutions

The 1992 Regulation does not mention tendering
and the Altmark judgment also sets out criteria
in this context which must be satisfied in order
to pass State aid requirements
Tendering is only one way of satisfying EC law
here, there is no reason in principle why
alternatives should not be pursued.
In the next two slides we note the existence of
at least two different ways of complying with EC
law here. In future, if the first way (tendering)
is chosen, it is argued there are safeguards
which must be adopted to protect the public
interest
An alternative Altmark-compliant approach that
does not require tendering should also be
considered in future
Some route-specific solutions are also suggested
for
Gourock-Dunoon and Campbeltown-Ballycastle

11
General Solutions (1) Tender

Tenders for up to 6 years can be set up for all
four sets of routes, one way to comply with EC
law here.
But if tender chosen, all tenders must be set up
in the expectation that commercial interests
other than CalMac will win any or all of the
tenders, now or in the future. Otherwise, run
risk of EC judging tenders are rigged in CalMacs
favour
All routes (including Gourock-Dunoon) should have
appropriate PSOs set for them applicable to all
operators on the PSO route
One PSO should be common to all operators on all
four sets of routes that they will act as
Operator of Last
Resort for any other of the four
sets of routes
as and when called upon to do
so (this solution
similar to that adopted by other essential
services)

12
General Solutions (2) Dont Tender

This alternative could be considered for the
CalMac network after the present CalMac tender
process is completed and tender awarded
Proposal on Altmark-compliant solution that does
not require tendering already submitted as part
of the previous SE consultation process on the
proposed CalMac tender http//www.brocher.com/Ferr
ies/CalMac20consultation20Kay20final20submissi
on.pdf
SE 2003-07 rejected that (and other alternatives)
on grounds that Altmark not relevant and that
PSOs would break up
the network and were, in any case,
not necessary
These SE criticisms were invalid and not
competent
New SE should be prepared to reconsider future
alternatives to tender
(with CalMac network as priority)

13
Gourock-Dunoon Solution

EC law (including case law) encourages operators
to cross-subsidise unprofitable and subsidised
activities (e.g. foot passengers) from profitable
services (e.g. vehicle-carrying)
SE or PPP funds build of two modern roro
vehicle/passenger ferries for CalMac service
(Deloitte-Touche report justification)
Open tender to operate for 6 years, PSO provision
for subsidy for foot passengers centre-to-centre
if needed
Second PSO to significantly lower vehicle fares
on all operators in the
Gourock-Dunoon market
The latter PSO (without subsidy) on lowering
vehicle fares to be
held in reserve and only
implemented if competition in
vehicle-carrying
fails to deliver competitive vehicle fares

14
Campbeltown-Ballycastle Solution

Based on economic and social case for the
service, SE or PPP funds build of vessel suitable
for route, then leased under tender to lowest
bidder for 6 years in the first instance
As in other EC countries, private operators and
also local authorities eligible to bid for the
tender
Necessary subsidy would be expected to decline
over subsequent tendering rounds as
market (and usage)
builds up on the
back of associated economic growth,
and confidence
that the continuity of
the service has been securely
established

15
Urgent needs

Bearing in mind sunk costs and political
considerations, should continue present CalMac
network tender process to completion
Should set up study of possible impact of major
ferry fares decreases on economic development in
Highlands and Islands
Should set up Independent Task Force to examine
alternative methods for complying with EC State
aid law and the 1992 Regulation in this context
Bring forward build-and-lease proposal for
Gourock-Dunoon
centre-centre vehicle service
Bring forward build-and-lease proposal
for
Campbeltown-Ballycastle ferry service

16
But Arent These Solutions Expensive?

No
Fare reduction through PSOs largely
self-financing in the long run though increased
traffic levels, especially where spare capacity
Leasing charges pay for building of new vessel
for Campbeltown-Ballycastle route, only
additional cost is subsidy for operations
The SE / Deloitte Touche Report showed a frequent
vehicle-carrying service Gourock-Dunoon would
significantly reduce subsidy compared to a
passenger-only service
Payoff from Solutions
An extensive, low fare, reliable public service
ferry
network across the HIE region, with the side
effect
of inhibiting cherrypicking opportunities

17
Conclusion

The new Executive has been left with a daunting
set of problems by previous administrations,
including the old Scottish Office, previous SE
administrations, and Whitehall
These problems are not the fault of the present
SE administration, they have inherited these
problems
The problems are serious but remediable
But if appropriate solutions such as those here
are
not adopted, the problems will worsen
The longer they are left unresolved, the more
the
problems will be associated with the new SE
More details of various problems and solutions
can be found at
http//www.brocher.com/Ferries/Ferr
ies.htm