1. Scottish Ferries: Problems and Solutions Talk to HTNM (earlier version to AWWL) Version August 2 nd 2007 Neil Kay www.brocher.comwww.brocher.com

2. 2 The Context  Subsidised Scottish ferry services must be compliant with the EC’s 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. 3 Who is affected by the EC’s 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. 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. 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. 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. 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. 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. 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. 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. 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 CalMac’s 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. 12 General Solutions (2) Don’t 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/Ferries/CalMac%20consultation%20Kay%20f inal%20submission.pdf http://www.brocher.com/Ferries/CalMac%20consultation%20Kay%20f inal%20submission.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. 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. 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. 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. 16 But Aren’t 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. 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/Ferries.htm http://www.brocher.com/Ferries/Ferries.htm