Letter from the Clerk to Passengers’ View Scotland – 26 march 2008

At the meeting on 18 March, the Committee continued to take evidence on its inquiry into ferry services in Scotland. The Committee agreed to write to you seeking a response to the following questions in order that the views of Passengers’ View Scotland can inform the Committee’s consideration of its conclusions on the inquiry:

Can you explain the role of your organisation with regards to ferry users?

What input has your organisation had in the development of ferry services, e.g. meetings with operators on timetable changes or the design of new vessels?

Ferry services have only recently came within your organisation’s remit. Can you explain how you intend to take forward work in this area?

How does your organisation intend to link into the ferry service consultation structures currently operating under the auspices of Regional Transport Partnerships?

Did your organisation have any input into the design of the pilot Road Equivalent Tariff scheme which will begin in October? Do you have any views on the proposals?

Has your organisation had time to gather views from ferry users in Scotland? If so, can you advise what the key issues raised by passengers have been?

Given that your organisation also represents the interests of rail passengers can you suggest how integration between the two modes could be improved?

LETTER FROM PASSENGERS’ VIEW SCOTLAND TO THE CLERK – 28 APRIL 2008

Contrary to the assertion in your letter, Passengers' View Scotland (PVS) has no statutory remit on behalf of ferry users, nor does it have an evidence base on issues concerning ferry users. We have not been asked to have any input on the development of ferry services or the pilot Road Equivalent Tariff Scheme. Rail Passengers' interests are represented by Passenger Focus, which has responded separately.

Following the very recent resignation of the Convener of PVS on health ground, I have taken over in an acting capacity. We are in the process of amalgamating with the Mobility and Access Committee for Scotland, which has met for the last time. In the context of this we are revising our remit, on which we shall brief stakeholders, including the TICCC, once it has received ministerial approval. We shall make clear our relationship with stakeholders and how we align with the Government's Strategic Purpose.

Supplementary written evidence from Confederation of Passenger Transport – 1 April 2008

During the evidence taking session held on 18 March 2008, I agreed to seek additional information on four points raised by Committee members.

1) Tender for Scottish ferry services

I contacted senior management at both FirstGroup and Stagecoach and asked why they did not bid for the tender to run Scottish ferry services.

FirstGroup:

“At the time that these ferry services were being tendered, we were in the midst of frenetic bidding for UK rail franchises, which is clearly a huge, complex and resource demanding exercise.

We have minimal in-house experience of running ferry services, so this would have been non–core at what was a very busy time.

If/ when they come on the market again we may have bidding resource, but again, minimal direct ferry experience and may not be seen as core.”

Stagecoach:

“It is simply not part of our core business strategy.

Whilst we are interested in estuarial crossings (eg hovercraft or even a fast ferry across the Forth) due to our past experience in New Zealand, the nature of services being tendered was very different to that.”

2) Gourock to Dunoon ferry service

I made further enquiries with the relevant bus and coach operators regarding customer relations on this service, and have now elicited the information that problems experienced relate to some operational problems between coach drivers and Western’s ferry handlers during coach loading and unloading in high and low tides.

New information received from West Coast Motors [WCM] (– who had not commented on Western Ferries previously):

“Our dial-a-bus service from Dunoon to Greenock travels via Western Ferries on the last Saturday of every month and any private hires, mainly school trips to plays/ pantomimes, go via Western Ferries when heading in the Glasgow direction. To date we have never had any problems with their service; in fact, they are very obliging at carrying spares for us!”

Following this exercise, as the issues seem to be more educational at staff level than management decisions, CPT apologises for including the issue in the original submissions to the TICC Committee.

I have personally also telephoned Gordon Ross, Managing Director of Western Ferries to state that this correction has now been made, and Gordon Ross has stated his willingness to follow up personally on specific complaints.

3) Bus Interchange infrastructure – and in particular Scrabster

Information received from Scottish Citylink:

(i) The interchange at Scrabster is relatively new having been redeveloped when Northlink introduced their latest ships onto the route 3-4 years ago.

Coaches are able to wait near the terminal building and as well as the Scottish Citylink departures there is a local shuttle for the rail station operated by Highland Country Buses.

Some leeway is allowed with inbound ferries in that the waiting time in Thurso [next stop after Scrabster] can be absorbed to wait for a late ship arrival and still allow us to keep to the scheduled timetable south of Thurso.

In the event of very late running a bespoke vehicle is provided to operate via a shorter route to Latheron whereby it meets the service car and passengers can be transferred there.

(ii) The Oban Interchange project is part of the overall "Oban Action Plan" which consultants completed in May 2006.

The Transport Interchange sub-group is currently at the stage of putting together a STAG appraisal.

Thereafter the proposals will go back to the Harbour Development Group given that it will impact on other businesses currently using the Railway Pier area.

To date there has been no mention of any projected timescale for the project although anticipate a 2-3 years minimum.

Information received from West Coast Motors [WCM]:

The Managing Director of WCM has spoken very recently to Blair Fletcher of Argyll and Bute Council who has advised that the Oban Interchange Group have no money and until such time as they get some no progress will be made on a new interchange. The best they can hope to achieve within the next 12 months would be improved signage.

4) Operational arrangements

Information received from Scottish Citylink:

There are currently no statistics kept whereby we could illustrate the frequency of services having to be held back for late running ferries.

Under the present regime Caledonian MacBrayne have to try and ensure they meet arrival/departure targets for the Scottish Government and in some cases this has resulted in ferry timetables being eased to better ensure these targets are met.

Any regular problems with late running are discussed with Caledonian MacBrayne [eg when ships are in for refit and a replacement ferry is unable to achieve a crossing time comparable to the regular ship].

The Oban Interchange project is part of the overall "Oban Action Plan" which consultants completed in May 2006.The Transport Interchange sub-group is currently at the stage of putting together a STAG appraisal. Thereafter the proposals will go back to the Harbour Development Group given that it will impact on other businesses currently using the Railway Pier area. To date there has been no mention of any projected timescale for the project although I would have thought we would be looking at 2-3 years minimum.

Information received from West Coast Motors (incorporating Oban & District):

“Unfortunately we do not keep a log of the occasions we have been asked to hold our Citylink services on Oban for a late running ferry but I would guess of 5 or 6 occurrences a year. The same applies for the Islay – Kennacraig ferry”.

CPT trusts that this information will be helpful to the members of the TICC Committee.

Supplementary Written Evidence from First ScotRail – 25 April 2008

Supplementary Written Evidence from RMT – 30 April 2008

Scotland’s Ferry Services and the Island Communities

Introduction

The National Union of Rail, Maritime and Transport Workers (RMT) welcome the opportunity to contribute to the Transport, Infrastructure and Climate Change Committee Inquiry into ferry services in Scotland. As an island nation Scotland is heavily dependent on the shipping industry, as indeed is the whole UK. However ferry services play an even more prominent role in Scotland as they sustain many island communities.

RMT would like to raise a number of issues with the Transport Committee, namely the current provision of ferry services through tendering, the urgent need for investment in new tonnage and retaining the Clyde and Hebrides network. We also comment on the Road Equivalent Tariff, training and employment issues and the lack of employment regulation around the Scottish coast.

We know that the primary focus of the committee is not tendering however RMT believe that operating ferry services in this manner has a detrimental impact upon the Scottish Shipping Industry, with additional implications for the retention of maritime skills within Scotland. Information on these matters is given below.

The Provision of Ferry Services through tendering

RMT believe that that the provision of ferry services to both the Clyde and Hebrides and the Northern Isles should be through a unified service which is publicly owned and operated, and publicly accountable.

Shortly after taking office the new administration signed off the tender to the sole bidder for the Clyde and Hebrides ferry contract, Caledonian MacBrayne. We wish to see the Executive carry forward a detailed review of possible alternatives to tendering. This should include the tendering provisions currently in place for the Northern Isles contract.

The Scottish Government spent £17m on the tendering process, money that could have been spent on improved services or lower fares right across the board. Tendering has created many additional interfaces which undermine the cost savings of a unified service. To carry out the same functions as Caledonian MacBrayne the Scottish Government have set up:

• A new operating company to employ 400 pier and support staff – Caledonian MacBrayne Ferries
• A separate company to own the 31 vessels and 30 terminals – Caledonian MacBrayne Assets
• And a further company to employ the 800 seafarers whose contracts have now been registered offshore – Caledonian MacBrayne Crewing (Guernsey)

The transfer of contracts offshore has cost a further £2m through the non-payment of employers National Insurance contributions. We would like to see this reversed as soon as possible.

The close link that often exists between employment on the islands and ferry services in Scotland is of course illustrated by Caledonian MacBrayne. Around 50% of employees live in the islands and in some island communities the company employs 10% of the local population. Some critics of Caledonian MacBrayne ferry services have stated that the trade unions are representing producer interests but given the close links that exist between the communities and the company this is clearly not the case.

Tendering ferry services, especially if they fall into the hands of another operator, place in jeopardy areas that a company seeking profits would not regard as of primary importance, e.g. environmental policies, promoting tourism, the Gaelic language and training for the longer term.

Already experience from members has illustrated the inherent flaws in tendering. For example the performance regime has meant that timetable connections with other modes of transport can be of secondary importance to the potential penalties that can be incurred for lateness. The trade unions believe that the ferry services to the islands should be focused on providing a public service to the community, not merely the fulfillment of minimum contractual obligations.

Customer care and the value of local knowledge are likely to be damaged by the tendering process. The links of the workforce to the local communities are of primary importance, not just because of the skills and knowledge they bring to the work, but also because Caledonian MacBrayne has underpinned the retention of the maritime skills base in Scotland.

Items of expenditure, no matter how small, now have to be closely scrutinised and the additional costs of tendering have impacted upon the service and the employees. For example RMT Union Learning project workers have been unable to negotiate internet access on board Caledonian MacBrayne ships. This is needed for employees undertaking adult learning courses so that they can continue with their studies during their off-duty time on board during their rostered two weeks on duty.

This is a serious disincentive to members wishing to take up the Governments work place learning initiative. The reason given for the failure to provide the facilities is cost which is frustrating given the waste of resources through fragmentation.

We believe that the Executive should now conduct a wide-ranging research project on alternatives to tendering, which may also achieve compliance with the regulations. It would appear from the comments of the Scottish Transport Minister that he believes this is not urgent. However this should be examined as a matter of urgency so there is sufficient time to take the necessary action before a second round of tendering is due.

Given the fact that the committee has stated that its primary focus is not tendering we have not detailed in our evidence the academic reports that expose the flaws in tendering of ferry services. However should the committee wish to receive this information RMT will be happy to provide it on request.

Northern Isles

Ferry services to the Northern Isles have already been badly disrupted due to tendering difficulties. Before the award of the latest contract to Northlink Ferries Ltd the Scottish Executive had to directly intervene to save services when the previous operators Northlink could no longer fulfill their contractual term.

Prior to this the Scottish Executive had already paid an additional £13.4m to Northlink over and above the level of agreed subsidy between 2002 and 2004, with further payments made to ensure that trading could continue until the new contract could be put in place.

If Caledonian MacBrayne were to lose the Clyde and Hebrides contract then it is hard to see how in the longer term the Executive would be able to step in as an operator of last resort once this maritime knowledge was lost. If there is any disruption to the service this would have a disproportionate impact on the viability of island communities.

Urgent need for new investment in tonnage

The union is not able to comment in detail on capacity issues on the whole of Scottish ferry network. However we are aware that there are serious problems in respect of the ageing tonnage serving the Clyde and Hebrides.

The ships currently being utilised by Caledonian MacBrayne are performing satisfactorily at the moment, however many of these ships are thirty years old and the Fleet needs renewing. The usual working life of these ships is approximately thirty years old but there will be a lead in time of around ten years before new ships come into service. This is the time period in between finance being allocated and through the planning, building and delivery of the ship ready for service.

The larger ships will cost at least £25m and so the Scottish Government will need to allocate significant investment. Unfortunately there is currently a four year gap prior to the next new ship being introduced into service in 2011. The longer that decisions are not made on the rest of the Fleet the more problems there will be in terms of ships having to be switched between routes, or being withdrawn from service for increased maintenance or suffering possible breakdowns.

Retaining the Clyde and Hebrides ferry network

At the time of writing the European Commission has just announced that an investigation is to be launched into the subsidies provided by the Scottish Government to maintain ferry services to the Clyde and Hebrides and Northern Isles.

RMT are extremely concerned at the possible impact of this Investigation, and the possibility that the European Commission might insist that the routes be broken up and tendered on an individual basis, or fragmented in some way from the existing structure.

We know that certain shipping companies have lobbied the Scottish Government and the European Commission to be able to bid for individual routes within the existing Clyde and Hebrides network. Inevitably outside companies wish to operate on the few profitable routes on the network, whilst Caledonian MacBrayne would presumably be tasked with retaining the majority of routes which inevitably due to their nature as lifeline services cannot make a profit.

If this is permitted it will only result in increased amounts of public money being needed for the other routes with no return in terms of improved services. At the current time the network consolidates its position by subsidising the loss making routes through the other parts of the network which are profitable. Most importantly the company also gains economies of scale from the network, for example when required tonnage can be switched to redeploy ships on other routes to fill in for maintenance schedules or assist in emergencies.

Recent experience has shown that the entry into the market of other operators has often had negative consequences for the service provided. For example when the freight vessel the Taygram Trader started up operations on the Stornoway Ullapool route in 2001, it succeeded in temporarily undercutting the existing Caledonian MacBrayne service. However it could not last and it was the state owned operator that was left to pick up the pieces following its rapid withdrawl from service.

It is vital that the Scottish Government makes a sound case against the potential cherry picking of individual Clyde and Hebrides routes from outside operators. We also believe that this time the Scottish Government must be far more robust than was previously demonstrated when faced with the prospect of tendering.

Road Equivalent Tariff

RMT welcome the funding that has now been set aside by the new administration for the Road Equivalent Tariff (R.E.T.) pilot scheme. We hope that this will lead to a significant reduction in the cost of using ferry services and eventually the opening up of new services to island communities.

However there is concern that some routes will be disadvantaged, given that the R.E.T. pilot only applies to the Western Isles at the current time. Ideally therefore we would like to see the RET pilot scheme rolled out across all the islands so that the extra resources provided on some routes does not reduce revenue in other localities as their services become comparatively more expensive.

In addition as referred to earlier in our evidence there needs to be a plan in place to ensure there is sufficient tonnage available to deal with demand from either tourism or increased numbers of islanders who wish to use the cheaper ferry services. Given the current lack of investment in new tonnage on the Clyde and Hebrides routes there will within ten years not be sufficient tonnage to maintain existing service levels never mind improved services.

New and more affordable ferry services

In the short term the union believes that the Scottish Executive should make available the necessary funding to deliver the proposed new service from Mailiag to Loch Boisdale, South Uist. Through the redeployment of tonnage this would provide additional services to several island communities at relatively little cost.

Not surprisingly the Executive have stated that the cost of introducing new tonnage specifically for this route would be prohibitive at £25m. However Caledonian MacBrayne has proposed that the new service can be put in place at a cost of £600,000 through the redeployment of existing tonnage, (this figure was estimated in 2007 and so costs have increased now but it still represents good value for money given the considerable benefits to the affected local communities).

Training

Scotland will very soon be facing a crewing crisis due to the inadequate numbers of seafarers being trained, in particular seafaring ratings that RMT represent.

Whilst no exact figures are available for Scotland the last figure recorded in the UK for 2006 was 50 ratings and we strongly believe that numbers are still falling. The leading crewing agency Clyde Marine has advised RMT of the need to train more seafaring deck and engine ratings.

At the moment too many companies are chasing a dwindling supply of seafaring ratings and officers, with ratings and officers age profile steadily rising. The position in Scotland appears to be worse than elsewhere. Information provided to RMT from Caledonian MacBrayne on the age profile of their seafaring ratings makes alarming reading. Over three quarters of their seafaring ratings are aged 40 or over. The position within certain skilled grades is even more depressing. Amongst Caledonian MacBrayne motormen over 80% are aged 40 or over, and just under 50% in this grade are aged 50 and over.

Employment opportunities within the Scottish Ferry Industry

Scotland, and indeed the whole of the UK as an island nation, is heavily dependent upon ships for our trade but numbers of UK seafarers, both officers and ratings, have declined dramatically.

For example in recent years P&O Irish Sea Ferries have dismissed local seafarers on the routes operated from Cairnryan and Troon to Larne in Northern Ireland. They have been replaced by low cost nationals from Spain and the Philippines. This is due the lack of regulation of employment standards in UK Shipping.

Lack of Regulation of Employment Standards for seafarers

The shipowners can continue to replace UK seafarers due to the lack of employment protection for workers in the industry. In particular shipowners continue to enjoy an exemption from the provisions of the 1976 Race Relations Act, which allows them to pay exploitative rates of pay to foreign national seafarers recruited abroad.

In addition the National Minimum Wage does not apply to seafarers of all nationalities on board ships whilst in UK territorial waters; the legislation only applies to UK seafarers on UK flagged ships. Non UK nationals only receive the National Minimum wage when they are employed on a UK flagged ship and it is in port or UK internal waters.

RMT have lobbied for changes to the current Employment Bill going through the UK Parliament. We are pleased to report that the Government has now agreed that it is not entirely satisfactory, although predictably there will be considerable shipowner pressure to resist any move to implement minimum standards.

The application of the National Minimum Wage affects standards around the Scottish Coast and we would therefore welcome any support members of the Scottish Parliament could offer in persuading the UK Government of the need for proper Minimum Wage regulation.

A Career at Sea

The lack of regulation and social protection for UK seafarers has seen their continued replacement by low cost foreign national seafarers. The insecurity has led to a dramatic fall off in the numbers of Scottish youngsters seeking a career at sea.

There are now very few shipping companies where you can be confident of building a career. For many years Caledonian MacBrayne provided security of employment and possible career progression. However even this is now uncertain due to tendering and this is why we must impress upon the committee the importance of abandoning this very costly experiment.

Conclusion

The union has outlined the negative consequences of tendering. RMT have sought to again underline this due to the shameful waste of money squandered on this exercise. The money spent on tendering could of course have been invested in improving the service, with the most urgent requirement being that replacement tonnage be ordered as soon as possible due to the age of the Clyde and Hebrides fleet.

A loss of maritime knowledge and employment opportunities that would follow if Caledonian MacBrayne was to disappear or be devalued would be potentially catastrophic for the future of Scottish seafarers. It now appears we face a further threat from the European Commission investigation into Scottish ferry subsidies. RMT stand ready to campaign alongside the Scottish Government and the island communities in defence of a viable ferry network

15 April (7th Meeting, 2008 (Session 3)) – Supplementary Oral Evidence

Supplementary written evidence from National Farmers’ Union Scotland – 22 April 2008

Further to our appearance before the Committee last week as part of your ferry inquiry, I would be very grateful if you would add the following points to the evidence that we submitted.

The new ferry contract to the Northern Isles introduced a 'lane metre charge' for livestock. This means that livestock is classed as freight which makes charging difficult if you are using a general livestock trailer. Previously, users were charged on a per head basis, which was priced according to the animal's size (small, medium or large). Customers therefore get reasonably good value for money if they ship sixteen animals, but it is disproportionately expensive to send, for example, eight.

The six-year tender period is also too short and has obviously discouraged non-tender holders from competing due to the huge costs and time required to tender for contracts.

28 April (8th Meeting, 2008 (Session 3)) – Oral Evidence

Written Evidence from Orkney Islands Council – May 2008

Thank you for your letter in regard to the Ferry Services in Scotland Inquiry. In advance of the scheduled video-conference on Tuesday 20th May, please find below Orkney Islands Council’s written responses to the questions posed below that would have been put to our delegation when the Committee met in Shetland on 28th April 2008. Each question is taken in turn as follows:

Can you explain why Orkney Island internal ferry services have not been put out to tender, when this was required for both Northern Isles and Clyde and Hebrides ferry services?

Over the years there has been much debate as to the need and the benefits/disbenefits of tendering the internal ferry services within Orkney.

What are your views on the RET fares pilot? Have you considered how a version of RET might apply on Orkney inter-island ferries?

RET is not necessarily a good model for determining tariffs on ferry services across Scotland. Prior to the pilot, a study should have been undertaken to consider the most appropriate model for setting tariffs across Scotland, rather than pre-empting detailed economic and social examination with a commitment to an RET model.

The RET pilot has been focussed on all Western Isles routes to the Scottish Mainland plus Coll and Tiree to the Mainland. Rather than Mainland connections, an alternative view is that the focus for a sustainable Scotland is in supporting sustainable communities rather than promoting inter-area travel. So, a project to improve the affordability of access in island communities in Scotland would have been better employed focussing on access to local facilities, services, employment, healthcare etc. as well as supporting the ability of businesses to operate and compete within our isle communities. Therefore, priority should have been giving to addressing affordability of travel issues for our isle communities in accessing their nearest local centre where facilities, services, healthcare etc. are located. In the case of Orkney, Shetland and the isles of Argyll & Bute and Highland local authority areas, this would focus on local ferry links between the isles and the key centres, rather than on connections on the Scottish Mainland for onward travel in the main.

A further question on the principles of RET is as to whether it is appropriate to charge more for carriage on more distant isles? In the case of roads, and the question of road equivalence, roads are always available, 24 hours per day, whereas as the provision of a ferry is far different and the definition of a service is far more complex than just the distance involved in making the journey. For example, if RET was applied to our internal ferry network in Orkney, the highest fare would be on services to our most distant isle, North Ronaldsay, which is around 32 nautical miles from the Kirkwall on the Orkney Mainland. North Ronaldsay is twice the distance away from the Orkney Mainland as Eday, but both isles are within our Outer North Isles network, which is a network that regualarly operates outwith Categorised Waters. Orkney Islands Council is the only local authority in the UK providing a service which is regularly operating outwith such waters. Presently the fares to both Eday and North Ronaldsay are the same, while with RET North Ronaldsay’s tariffs would be a good deal higher than Eday. But, North Ronaldsay is only served with one ferry per week throughout the year (a second ferry per week is being trialled in the summer timetable this year, but for a number of reasons cannot be provided also in the winter timetable period). Should a service such as that to North Ronaldsay really be the most expensive service in Orkney, while services to other isles, which get between two and six return journeys per day, are much cheaper?

What input did your organisations have into the drafting and award of the Northern Isles ferry service contract? How might the tendering process be improved?

Orkney Islands Council, as well as user representatives were heavily involved in the design of the contract for the Northern Isles ferry services. The consultation that was undertaken by the then Scottish Executive was felt to be a worthwhile, and had a positive impact on the final service definition within the contract. Since the award of the contract a new structure for ferry service consultation in the Northern Isles has been established through the Regional Tranport Partnerships – a Tier 1 Ferry Consultative Forum exists in Orkney (and Shetland) to deal with local issues pertaining to the Northern Isles ferry services, and a Tier 2 Ferry Consultative Forum exists as a structure for discussing issues that cover both Orkney and Shetland. Initial meetings of the Tier 1 and Tier 2 groups have proved positive and it is anticipated that these groups will have a roll in engaging with the Government in relation to the long-term design of future contracts and as a voice in the Ferry Study which the Scottish Government committed to in the National Transport Strategy.

Do your organisations have any comments on Northlink ferry services, including timetabling, ferry design and port facilities, and suggestions as to how the service could be improved?

No significant issues from users have been brought to our attention. In the past there has been discussion about the arrival/departure times of the Aberdeen/Lerwick service at Orkney, which at 23:00/23:45 is late for visitors arriving into Orkney and accessing accommodation etc. However, the timing means that good arrival/departure times are possible at Aberdeen.

Working with NorthLink Ferries Ltd. the Council has been seeking to improve for example integration with bus services. For example, there is a new (started 1st May 2008) connection from Kirkwall to the Stromness to meet the first sailing to Scrabster and bus times out of Stromness in the afternoons have been adjusted to allow good interchange for onward travel in Orkney, and the main bus terminus in Stromness has been shifted to the front door of the ferry terminal building.

How do your organisations balance investment between internal air and ferry services?

Revenue spend between internal ferry and air services is targeted to provide a lifeline service to the isles in Orkney. Service provision is tailored to meet the various needs of the isles. For example, North Ronaldsay receives only a weekly ferry service (due difficulties in providing a more regular service) and so they have the highest frequency provision by the air service with two to three return trips per day (each with a capacity of seven or eight seats). Ferry services are provided by Orkney Ferries Ltd. which is a wholly owned subsidiary company of the Council. Air service are tendered under a Public Service Obligation (PSO) contract. Due to the increasing costs of these service provisions there is little opportunity for further investment in the services.

The Orkney Ferries operation is clearly grouped into two service entities. The first are the services to the six Outer North Isles of Eday, North Ronaldsay, Papa Westray, Sanday, Stronsay and Westray. The waters around the Outer North Isles are classed as an open sea area under present MCA and EU regulations. This means that the vessels need to be constructed to withstand heavy sea conditions and the crew need to be certificated to the appropriate standard for such an operation. These operating conditions and therefore the vessels which are operated in these waters are of the same type as those which are operated by both CalMac and NorthLink on their island to mainland routes. No other local authority in Scotland is responsible for such an operation. The services to the inner and south isles of Egilsay, Flotta, Graemsay, Hoy, Rousay, Shapinsay and Wyre are classified as operating in categorised waters and therefore the vessels are constructed and crewed accordingly.

Up until 2007/08 funding for the subsidy payment to Orkney Ferries came to Orkney Islands Council through the GAE mechanism. There is a fixed sum available for local authority operated ferry services with distribution based on historical expenditure levels. This system has never been entirely satisfactory, but from an Orkney perspective operated reasonably well until the introduction of the three-year budget settlement. The Government support received by the Council is less than the actual cost of providing the service. In 2006/07 this shortfall was to the tune of around £1.5M. In recognition of the shortfall, and of the unique circumstances in Orkney (i.e. Local Authority operating boats in open sea areas), the Scottish Government awarded Orkney Islands Council a Special Transport Grant in supplement since 2002/03. In 2007/08 this Special Transport Grant amounted to some £1M. A £1M addition to the baseline budget for Orkney Islands Council has been added for the three years of the current spending review period – 2008/09 to 2010/11 – however there is still a shortfall, and the settlement does not allow for any investment, such as in new vessels which is required.

Orkney Islands Council’s Local Transport Strategy 2007-2010 indicates that you are undertaking a STAG study into inter-islands connectivity. How is this study progressing and what, if any, results are available?

The STAG study has been completed and was submitted to the Government in September 2007. As no investment was afforded to Orkney Islands Council from the Government in response to the STAG study, work is continuing to explore to way forward to address the severe problems that exist right across the Orkney Ferries network. For example, non of the ferries meet the regulations pertaining to the carriage of persons with reduced mobility. There are severe issues of vessel reliability and under-capacity in the network. In addition, the three vessels that provide the service to the six Outer North Isles do not meet the MCA and EU rules for this type of vessel which come into effect for all existing vessels in 2010, at which point as things stand it will not be possible to operate these vessels in the Outer North Isles network.

The Local Transport Strategy makes it clear that many Orkney Island harbours need upgraded and ferries replaced. Can you outline what needs to be done, how much this might cost and how you intend to fund these projects?

Advanced Low Water Corrosion (ALWC) is a phenomenon affecting most piers. At present the Council is undertaking cathodic protection work at the Kirkwall pier, effecting repairs of ‘holed’ sheet piles at Kirkwall, and is undertaking studies of all steel pile piers and harbours in Orkney. At this time it is uncertain as to how future work emerging from the results of these studies will be funded. Work will be required however in order to maintain the piers, which in turn sustains the transport links with the 13 isle communities in Orkney which are connected to the Orkney Mainland by ferry.

The Committee has heard much about apparent success of the privately provided Pentland Ferries service, which links the Orkney Islands with the mainland. What are Orkney Island Council’s views on this service and could its success be replicated elsewhere?

The Pentland Ferries service provides an important alternative to the Pentland cross from Stromness. The Council supports both the Pentland Ferry service and Northlink service by promoting the services and the public transport interchange opportunities that exist on either side of the Firth in the Council’s public transport handbook. There are differences between the two services in terms of timetabling, reliability, quality and cost. The model could be replicated elsewhere but success depends upon the demand for services, and in the case of the Pentland Firth, the demand for access to Orkney for all manner of reasons.

Does HITRANS intend to improve freight and passengers facilities at Aberdeen harbour? Does it have any plans to redesign Aberdeen harbour to allow larger vessels to berth there?

The Regional Transport Partnership HITRANS covers the area represented by the five local authorities of Orkney Islands Council, Argyll & Bute Council, Western Isles Council, Highland Council and Moray Council. The Aberdeen harbour therefore falls within the jurisdiction of Nestrans regional transport partnership. In addition, Aberdeen Harbour is a trust port, and therefore any development is a matter for that trust. However, in both the HITRANS Regional Transport Strategy, the Nestrans Regional Ttransport Strategy, and our own Local Transport Strategy, the need for good access to Aberdeen harbour is outlined, as well as a desire for better integration facilities for onwards transport connections by bus and rail.

From Orkney Islands Council Local Transport Strategy:

“…there is significant room for improvement. Interchange between the Northlink service arriving in Aberdeen harbour and onward bus and rail journeys is poor, although distances involved mean that with some planning and development this could be a very good interchange point.”

Other points were provided in the Orkney Islands Council earlier written response to the call for evidence from the Committee.

6 May (9th Meeting, 2008 (Session 3)) – Oral Evidence

Written Evidence from Professor Alf Baird – 25 February 2008

Ferry Service in Scotland – Call for Views

I refer to the recent announcement that the Committee is holding an inquiry into ferry services in Scotland. I am due to give oral evidence to the Committee on Tuesday 18th March (now 6th May). However I would also like to submit the attached written evidence together with this cover letter.

The attached written evidence includes the following documents:

Report entitled ‘Future Options for Northern Isles Ferry Services’ (Jan 2006), undertaken by Napier University and partners as part of the EU-Interreg IIIB funded Northern Maritime Corridor Project. The summary on page 25 of the report notes, amongst other things, that: vessels employed on Northern Isles ferry services are inefficient relative to other ships available in the market; prices paid for newbuilds appear to be quite excessive; overall fleet composition is inefficient (i.e. 4/5 small vessels could be replaced by two large vessels); at the time of the study, savings of circa £10 million per annum could be achieved through improved fleet composition; and possible service innovations could be introduced (e.g. extended service to include Rosyth).

Report entitled ‘State Intervention in Scottish Shipping Markets’ (June 2007), undertaken by Napier University and partners as part of the EU-Interreg IIIB SUTRANET Project. The Executive Summary on page 2 notes that: the role of the state has recently been expanded in Scottish shipping/ferry markets, and this goes entirely against EU policy and trends; new subsidy schemes are constantly being introduced to the benefit of state-owned operators but to the disadvantage of private operators; subsidy levels applied to state owned operators are regularly increased; state financing of port facilities also confers advantages to state owned operators; the recent VESCO CalMac/CMAL arrangement appears unique in the EU ferry sector and is clearly not obligatory; private operators view tenders as being very bureaucratic, inflexible, and weighted in favour of state-owned operators/bidders; Scottish policy with respect to ferries appears confused and is at odds with EU trends towards market liberalisation, including concessioning of routes (subsidised or not) to private operators.

Invited A. Baird presentation to the Greek Maritime Forum, Piraeus, 5th March 2007, entitled: ‘Serving & funding non profitable ferry lines within the European legislative framework: The case of Scotland’. The presentation offers a review of both state-owned and private sector ferry operators in Scotland, with a focus towards effects on competition, the excessive extent of state-owned operation combined with low levels of innovation, and raises potential solutions to these problems including the need to attract private sector investment and innovation in shipping services through effective/fair tenders, combined with state withdrawal from operating/owning shipping companies.

Invited A. Baird presentation to the Interferry (World Ferry Organisation) Annual Conference, September 28-30, Stockholm, entitled: ‘Public vs. Private Sector in the Ferry Business: Case Study Scotland’. The presentation expanded on and summarised the findings from the EU Interreg SUTRANET Project (see number 2 attachment report above). This included analysis of ongoing trends within EU states with respect to state withdrawal from operating and owning ferry businesses, appraisal of the restructuring of CalMac which is unique in the European ferry sector, the general expansion of the role of the state (in Scotland), high and rising costs borne by taxpayers relating to the provision of ferry services, plus crowding out of private operator investment and lack of innovation in service provision, including the tendency for acquisition by state owned operators of higher cost traditional ship designs. The presentation describes the concept of the ‘subsidy paradox’ in that even although subsidy continues to increase very rapidly, at the same time ferry fares are high, ferry frequencies are low, service operating hours are limited, sub-optimal ships are employed, and traffic volumes are static. Conclusions suggest the state makes for a ‘poor shipping operator’ and that tenders should be used to bring in private sector investment and innovation for the benefit of communities served.

A. Baird article published by Ileach/Islay, September 2007, p. 14-15, ‘Professor Alf Baird calls for new Islay ferry order to be delayed’. The article notes that for the price of one traditional design CalMac vessel subsequently ordered from Poland, Islay could have had two more modern vehicle ferries, which would in turn help to double service frequency and provide a much improved service, at lower cost. The article makes the point that ‘Governments are no longer trusted to run airlines, bus or railway companies, so why should we expect them to run shipping companies especially well?’

A Baird/G. Wilsmeier article in Scottish Transport Review, Issue 37, October 2007, pp. 4-7, ‘Ferry Transport in Scotland’. The article synthesises the proceedings of a ferry transport conference held in Orkney in September 2007, organised by Napier University with the support of Orkney Islands Council and the Orkney Science Festival. Several prominent speakers from both public and private sectors of the ferry industry presented. Among the issues debated was the importance of service frequency to help expand markets, the need for higher quality ferries and more innovation, the problems with lengthy bureaucratic tenders, delays and impediments to investment and development (e.g. STAG appraisals), introduction of the new Air Discount Subsidy which has diverted passengers from ferry to air transport, and the impact of industrial disputes which appear more prevalent within state-owned services (thereby destroying any argument that somehow the state needs to be the operator of ‘lifeline’ ferry services in order to ensure a degree of reliability!).

Article in Ferry Technology, Dec/Jan 2007/8, p. 6-7, ‘EU project deplores negative effect of Scottish subsidies’. The article provides a summary of my presentation at Interferry 2007, with reference to the ‘SUTRANET Report’, highlighting again that Scotland is the only EU country that is actively expanding the role of the state in shipping markets.

In summary, there is now substantial evidence that confirms it is not necessary for the state to operate maritime transport services. There is also considerable evidence that the state is unable to effectively operate a commercial shipping business, and that subsidies are getting out of control. The state should seek to withdraw from commercial ferry operations at an early opportunity, in line with policy and trends throughout the EU and indeed trends globally. The private sector is shown to be far more astute and expert (than the state) at acquiring ships, at managing commercial shipping operations, and at fostering innovation. So-called ‘lifeline’ ferry services can easily be maintained by private sector operators through public tenders, with or without subsidy as necessary. Tenders will also prevent any so-called ‘cherry-picking’.

I trust that the above comments and attachments will be of interest and assistance to the

Committee in its deliberations.

Written Evidence from Professor NEIL KAY – 15 APRIL 2008

The following is a set of notes submitted as part of the current Transport, Infrastructure and Climate Change Committee Inquiry into ferry services in Scotland. Other material of possible interest includes a set of statements and answers from the European Commission and the European Court of relevance to the legal context in this area, it is at http://www.brocher.com/Ferries/answers.doc. Also I have recently outlined a set of possible options for complying with EC law and public service needs in the case of Gourock-Dunoon at: http://www.brocher.com/Ferries/GDoptions.htm

Why am I doing this?

“Why am I doing this?” is a question I have often asked myself over the years, and some others have asked of me. First, I have a personal interest in these issues, since 1992 I have been a regular user of both the Gourock-Dunoon ferry services. I am also an industrial economist whose main professional interest is the economics of corporate strategies. Following a fellowship (Law Department) and part–time professorship (Economics Department) in the European Commission’s own official university, I also published research on the implications of EC competition policy for corporate strategies, and vice versa. I have also been a member of UK government working parties (DTI and ACOST) related to my research, in the latter case advising UK ministers on the policy implications of the EC’s internal market programme.

But the fundamental driver behind my contributions in this area is the belief that policy over the last several years has failed to take into account elements that are important to protect and promote the public interest here. My reservations and submissions fall into distinct phases.

In the first period 2000-03, I was concerned that the administration was not adopting basic safeguards that UK precedents had shown were standard when competitive tendering was introduced into essential services, specifically needs for an independent regulator, clearly defined operator of last resort, and dedicated statutory framework. I also argued in 2005 that the administration was not giving sufficient weight to possibilities of alternatives to tendering under EC law. Latterly, I have been concerned that the administration has not been properly adopting or interpreting EC rules and regulations in this context, particularly rejecting the relevance of public service obligations (PSOs)²⁰⁵ and the Altmark principles²⁰⁶ despite what I have argued are clear statements and signals to the contrary from the Commission in this context²⁰⁷. As well as submissions to this Committee and its predecessors, I have tried to communicate these views to successive administrations and the responsible Ministers down the years.

The UK dimension and ferries as “Services of General Economic Interest”

Are ferries “Services of General Economic Interest” – i.e. public services, or are they to be simply regarded as commercial services? The answer makes a difference if they are to be treated as eligible for subsidy and imposition of PSOs. The question is important because it depends on your perspective, and the answer has to be justified. The obvious answer is they are public services if you are in Stornoway, the answer is less obvious if you are in Whitehall and your experience of ferries is limited to the cross Channel or Isle of Wight ferries.

More generally, within the UK dimension Whitehall could be expected to have a different attitude to whether or not ferries should be treated as public services (as well as the potential roles and relevance of public ownership and competitive tendering) than might be expected north of the border. Indeed, to a large extent the UK led the rest of Europe in terms of supportive attitudes towards competitive tendering as a tool of public policy over the last three decades. So when alternatives to tendering CalMac were submitted by myself and others in 2005, to the extent that Whitehall had or has a voice in such proposals, it might not have been expected to be a supportive one.

In another document, I look at some of the difficulties that may have been caused by Scotland Office and other UK ministries. It notes that the involvement of UK ministries in this issue, while still unclear, may have been at best unhelpful here. The Scotland Office in particular seem to have been not clear about what a PSO was, and since one of the Ministers responsible in the Scotland Office at the time is now an MSP, the Transport, Infrastructure and Climate Change Committee might find he would be able to add some clarification of the role of the Scotland Office here over this period. See: http://www.brocher.com/Ferries/nopso.htm

Legal threats from EC

There will be no surprise if and when the EC launches an investigation of Scottish ferry policy, it has been well trailed for years At the same time, I find it distasteful that we recently saw the re-emergence of the discussion in the media of the supposed threat made down the years that the European Commission could effectively take action that would lead to the cessation of lifeline ferry services to the islands,

That supposed threat has been used in the past as a stick to push through policies which many people, including myself, disagree with. It also points the finger in the wrong direction, it is the responsibility of government to properly frame policy here, not to deflect blame towards a supposed bogeyman in Brussels.

The threat of cessation of services causes undue alarm if it is to be believed, and reduces the credibility of government when it is not. Cutting the ferry links to the islands would be like cutting all road and rail links into Edinburgh, and I leave to the imagination the effect any such actions would have after a few days or weeks. Communities on the islands may be made of hardier stuff than those of us living on the mainland, but even they have need for medical supplies, food and other essentials just like the rest of us. It is worth noting that Canadian authorities²⁰⁸ declared a state of emergency last year when ferry links to a community were cut off by frozen ice for just a few days. If lifeline ferry links to the islands were cut by human rather than natural intervention, then both the political implications and world-wide interest would be considerable.

Lack of Policy Formulation

Again, while there is no doubt the threat of Brussels action here is real, this seemingly permanent threat of cutting the ferry supply link has had a pernicious effect on the formulation of ferry policy – or the lack of it – for almost the whole 9-year lifetime of this parliament.

Instead of regarding European law here as a framework be built on (with elements which facilitate actions, as well as elements which prohibit actions), policymakers have tended to regard it as creating problems, constraints or obstacles to be dealt with, with time horizons little more than a year for the most part – starting with April 2000 when the Executive said they were “aiming to have the first tender in place by Spring 2001 with implementation to follow”²⁰⁹. I noted in evidence (June 2001) to this Committee’s predecessor that even revised deadlines by the government were unrealistic and that time should be taken for a more considered review of policy or strategy for Scottish ferries (though I do not think anyone had any idea how long it would eventually take).

And unsurprisingly, the SPICe briefing notes²¹⁰: “The Scottish Government has never produced a separate ferry strategy document. However, the National Transport Strategy (Scottish Executive 2006)²¹¹ does briefly mention lifeline ferry services…”. There is also now Road Equivalent Tariff which I discuss below.

The old CalMac no longer exists

For good or ill, the CalMac that existed before compliance with EC law here became a major issue no longer exists, though many people have not realized that or come to terms with it. It is true that the brand name is still there, and the vessels, personnel, fares, and timetables look (indeed are) much the same in most cases. But that conceals major changes in corporate governance and objectives. The old CalMac (Caledonian MacBrayne) was constituted as a nationalised industry and had major public interest obligations and responsibilities as part of its statutory obligations.

As part of the corporate restructuring in preparation for the tendering process, Caledonian MacBrayne Ltd had its name changed to Caledonian Maritime Assets Ltd. (CMAL). It retained ownership of the ships and piers, and leases them to the operator of the ferry services. The company is also charged with the procurement of new vessels and the improvement of the harbour facilities which it owns. Also, the David MacBrayne Group was set up as a state-owned holding company for ferry operating activities and its subsidiaries include CalMac Ferries and Northlink,

The operation of services of the CalMac routes is in the hands of CalMac Ferries (or Cowal Ferries in the case of Gourock-Dunoon), subsidiaries whose time horizons are heavily delineated by the 6-year public service contracts they were set up to serve.

CalMac Ferries and Northlink are deliverers of services bound by the terms and conditions of their respective public service contracts, while CMAL is a manager of assets. It is a mistake to see their corporate roles and responsibilities as stretching beyond these boundaries. Indeed, there could be dangers if the incumbent operator of such services was seen as having undue influence over government ferry policy. And CMAL’s competences and capabilities are in the field of asset ownership and management; as I noted in evidence to this Committee’s predecessor in 2001, well before CMAL was set up, there are real public interest problems and indeed dangers if it is asked to stray beyond this role, for example in acting as operator of last resort for the tenders it supplies assets for.

I think it is important to emphasise these changing roles since many still think that it is the responsibility of CalMac (however defined) to set and influence ferry policy, or at least play a major role in that process. If that did happen, it could lead to problems with Brussels. It is not just that the changing roles and responsibilities of new “CalMac” mean that they cannot play a major lead role in setting ferry policy, it is also the case that it means they should not.

In that respect, it is also worth noting that if you wish to keep the CalMac routes as a single bundle (which many people, including myself, argued for) then much of the restructuring and associated costs which were incurred would be inevitable, albeit largely as one-off costs. The case I put forward under the Altmark ruling to this Committee’s predecessor in 2005 disputed the need to tender, but not the need to restructure. A fundamental reason was that under Maritime Cabotage and State aid law, a case could be made to Brussels for subsidising the operation of the various routes of the CalMac network, but not the building or maintenance of assets. Separability of asset ownership from operations facilitates transparency and an arms length commercial relationship in terms of asset leasing to the tender operator. It also means the asset owner (CMAL) is able to have a planning horizon longer than that defined by the 6-year public service contract for operations. In this specific respect at least, I would not criticise previous administrations’ policies, and indeed in some respects this may be superior to current practice elsewhere in Europe.

Is Subsidy too High?

CalMac’s subsidy has certainly increased significantly in recent years, though tightening safety requirements at European level may be one factor, and it may also be due to the fact that preparation for the new arms length leasing of assets at commercial rates from CMAL to CalMac Ferries meant an end to soft loans and grants, if so that is not necessarily a bad thing because it reflects increased transparency. Clearly those influences, if they exist, could only be confirmed by detailed auditing.

But asking the question “is subsidy too high?”, invites the further question; “too high in relation to what?”. If you decide to tender the services (which Brussels encouraged, and this Parliament accepted), and if you decide that the existing vessels should be used (they were custom designed, it would be wasteful to have them not used, it increases competition to make them available to all potential bidders), if you accept there should be a cap on fares, if you accept that there should be a minimum timetable extending into off-peak and out of season services, if you accept that crewing levels are set by MCA (the safety regulator) and that fuel costs are set by the market, and if you accept that CalMac Ferries only has to make a deficit subsidy to cover its losses, while commercial operators have to make a return for their shareholders, then if you accept all that, you have to ask the further question; where and how could any operator other than the incumbent expect to actually beat the subsidy bid that CalMac Ferries offered?

The obvious candidate solutions (revising the terms and conditions of employees, reducing HQ overheads, improved marketing) all have problems and limited scope and it could be argued (as I did in 2005) that the actual tendering would be a waste of time and resources and that there were alternatives under the Altmark ruling that should be explored.

I do not want to re-open the issue of whether or not tender was necessary at this point, and indeed the actions of successive administrations may have poisoned that well, at least temporarily. Altmark notwithstanding, Brussels still regards tendering as the default solution here, and if it has been expressing concerns about the tender process, they are unlikely to be enthused about alternatives to tendering at this point. And what is increasingly clear is that my argument in 2005 that policy here should be built on PSOs and Altmark may turn out to be as, or more, important than the issue of whether or not you tender.

The nature of the tender process itself means that while some flexibility for improvements and innovation by tenderers could be allowed for, you cannot expect to see major innovation delivering better quality or lower cost solutions through the tender process itself in cases like the CalMac network tender. You have to look for these things before it gets to that stage and feed them in as inputs into the tender process, and not expect them as outputs of the tender process itself. That is not what it is there for.

Of course, you can then argue the ships, routes, timetables etc are wrong but the time to say that is not when routes are going out to tender under PSOs, it is when plans based on clear policies are being formulated, not when these plans are being implemented

The case for lower fares

There is a strong case that fares should generally be significantly lower across the ferry network and I have argued that case for some years. There have been a number of studies over the past several years of the possible effects of fare changes, mostly by commissioned consultants, particularly with respect to the CalMac network. The problem is that these studies tended to focus on short term effects of price changes, typically a year or so.

On the demand side, this meant that it was not long enough to allow for possible user relocation and investment effects responding to any fares reductions, and it is too limited a time frame if you wish to look at ferry fares in the context of economic development . In general, the longer the time period the more elastic (responsive) we can expect traffic demand to be to any price change. I have suggested in the past that as a first approximation it was not unreasonable on the basis of previous work in transportation studies to benchmark against a long run elasticity of demand being equal to, or close to, one – that is that the direct effect of a 10% increase in fares would be a 10% reduction in traffic in the long run, the direct impact of a 10% reduction in price would be a 10% increase in traffic Obviously the actual elasticity of demand would depend on route characteristics. But where elasticity of demand was at or close to unity, it meant that fare structure could be effectively regarded as revenue-neutral – you could choose a high price regime, or a low price regime, and it would not make much difference to the revenue side in the long run. I argued that policy for CalMac had settled more towards a high price regime in recent years.

When a longer term view is taken and fares issues put in the context of economic development, it greatly enhances the case for lower fares, especially where there is spare capacity on the ferry network. Indeed, where demand is quite responsive in the long run and there is spare capacity, fare reductions may be significantly or largely self-financing. Obviously the supply side matters as well, particularly if fare reductions lead to capacity constraints being hit, but one complementary device which may help before this leads to demand for new investment in vessels and infrastructure is price differentiation.

Price differentiation

One of the most unhelpful questions I have ever read in a consultants report in recent years was for a Scots-based ferry company where the consultants asked users; “do you think that peak period fares should be higher than normal fares?” I could have told them what the answer would be before they asked it, unsurprisingly the general answer was “no”, people hate the idea of higher fares, however expressed. The consultants concluded that price differentiation was a bad idea.

Had the consultants asked; “do you think that off-peak fares should offer a reduction on standard fares”, the general answer would have been “yes”.

But both questions are essentially the same question, it all depends what you call “normal” or “standard” – and possibly also what your question implies about the direction fares are going to take. It is well known in market research and polling techniques that how you frame or phrase the question can influence the results you get.

Price differentiation / differential fares can be a force for equality (targeted at groups for whom there is a recognised case for lower fares) and efficiency (e.g. in the case of off-peak and off-season pricing encouraging those able to vary their plans to travel off-peak to do so). They should be used to achieve these purposes.

Fast ferries

In recent years, fast ferries (catamarans, hovercraft) have attracted attention from the media and policymakers that is wholly out of proportion to the potential contribution they could make in the Scottish ferry network, at least in the foreseeable future. Technical and environmental issues aside, fast ferries tend to be only economically viable in certain circumstances, such as sufficient willingness to pay the high prices (or subsidy) typically associated with this mode of transport, and sufficient barriers to alternative forms of transport. Inter-city business travel down the Norwegian fjord coast is one example, intra-urban river transport (eg Brisbane CityCats) is another.

In the surveys of users needs on the islands that I am aware off (and as a former member of an NDPB in this area, CalMac Users Consultative Committee), speed has not figured largely as a desired feature compared to price, capacity, reliability, and frequency needs.

For example, there have been regular attempts over the years to promote the idea of a fast ferry up the Clyde, Rothesay-Dunoon-Gourock-Glasgow. However, once Gourock is reached, a 30 knot fast ferry would be very slow up the Clyde for most of the rest of its journey compared to rail and road alternatives. Even those travelers for Glasgow who got on the fast ferry at Rothesay or Dunoon would probably find it quicker, cheaper, with more frequent stops, to get off the ferry at Gourock and catch the train.

Road Equivalent Tariff (RET)

I would very much prefer to be able to ignore RET, but given the role it is currently playing in policy circles, that clearly is impossible.

Some years ago, I was asked to advise an authority on ferry pricing options, they made it clear they were interested in RET, I made my views equally clear on the subject, and I was not invited back. My views have not changed since then. The benefits, costs and subsidies associated with different forms of transport can vary widely and this should be taken into account in specifying public service obligations. RET reminds me of the decision to base the original tolls for the Skye Bridge around that of the ferry it was replacing – Ferry Equivalent Tariff or FET for the bridge, if you like. I recall that particular decision being criticised as arbitrary and unfair at the time, and I agreed with that viewpoint

On the plus side, it could be said RET is a mechanism for significant fares decreases in many areas which have fares which could be regarded as too high for economic and/or social reasons, and it is simple. But I would still argue it makes much more sense to base ferry prices on a thorough analysis of the economic and social costs and benefits of alternative fare structures, justifying the actual fares regime chosen on those grounds, and of course that is a job that still has to be done by the government whether or not RET is applied. The fact that some public service fares are apparently already below the RET rates proposed reinforces that last point. If RET is not to be applied to them, an alternative basis will have to be devised for them if they are to continue to be subsidized, which really brings us back to where we started and the need for a coherent and general framework for determining public service ferry fares on grounds of fairness and efficiency, and clearly defined and justified public service obligations.

Need for Independent Regulator

I argued the case for an independent regulator in the Inquiry set up by this Committee’s predecessor in 2001 and continue to do so. An independent regulator would be responsible for the maintenance and enforcement of effective competition and competitive benchmarks, including responsibility for award of tenders. Operators do not like this idea, civil servants do not like this idea, politicians do not like this idea, and when I argued it in 2001, councils did not like this idea. Depending on whose perspective you are looking at the regulator from, it will be seen by some interested parties as diminishing their power and influence, which is of course in a limited and specific respect exactly what it should do if it is to be effective. At the same time, those who should benefit from effective regulatory control – that is, the users – do not have the lobbying power, organization, or access to professional support that established vested interests often have.

A weak regulatory system of the kind which we have makes the whole system vulnerable to lobbying, both in terms of policy formulation and implementation. Many of the firms who wish to come into the market will understandably seek as low fences as possible, while incumbents will understandably argue for a system which suits their competences and the vessels to which they have access.

An effective independent regulator whose mandate included awarding and monitoring tenders would facilitate the pursuit of the public interest and help insulate and buffer commercial and political interests from each other. Business folk, whether incumbents or potential entrants love to talk to directly to politicians and civil servants, and while they should have a voice like all other interested parties, there can be too much of a good thing. A sound statutory and regulatory framework would also help buttress the government from accusations and complaints, reasonable or otherwise, under competition and State aid law.

Since I first argued for an independent regulator in 2001, successive administrations have resisted the proposal, most bluntly in 2005 by a Minister who stated on BBC Newsnight Scotland that we did not need another expensive bureaucracy. Apart from the fact that I had argued that the regulator could be largely or wholly cost–neutral in resource terms by transferring resources and responsibilities from the Executive, if its absence helps contribute to intervention by Brussels, then we may finish up finding out just how expensive not having such a safeguard may be.

And in 2003, the Commission advised that for ferry tenders; “In principle, an independent authority should be responsible for the whole procedure. However, the Commission recognises that, in some cases, it might be sufficient for only the final part of the procedure (evaluation of the bids and adoption of the final decision) to be entrusted to an independent body”²¹². It is hoped the present system is defensible in such terms.

How should policy be formulated and implemented?

There has not been much systematic discussion of how ferry policy should be formulated or implemented, but there is scope for confusion as to who has or who should have responsibilities here.

As I noted above, expecting CalMac Ferries, David MacBrayne or CMAL to play the same public interest role that CalMac did in the past is no longer relevant since that old CalMac no longer exists or should not exist.

As far as the role of the European Commission is concerned, despite what is often argued, there is a limit to what can be expected here from the Commission. Just as football managers do not ask referees if they should play 4-4-2 or 4-3-3, it is not the Commission’s role to formulate policy or strategy but to advise (and if necessary intervene) if they think the rules are being broken or in danger of being broken. At the risk of stating the obvious, it is of course the responsibility of government to formulate policy and make sure that the structures and processes through which it can be implemented are appropriate.

Policy information

There is a dearth of useful, up-to-date economic studies to help inform policymaking in this context. In recent years, councils, HITRANS, the former Scottish Executive (and now CMAL²¹³) have all commissioned consultants to do work here, but it is patchy. Ironically, the old Scottish Office did a series of informative and useful studies in the Nineties on such issues as the new ship effect and fare elasticities through inhouse work by R. A. Henderson and his colleagues, and outside consultants. And the calibre of the Scottish Government’s economics team would match that of a good university economics department – I know that because many of them left a good university economics department to join the Scottish Government. Having the governments own economists do much more of this work would add value, while still allowing for outside specialists to be brought in to do expert studies, especially where a public service case has to be argued to the Commission.

Last Comments

In the debate on the proposed CalMac tender in 2005, one of the participants, an MSP Reporter to whom I gave evidence in the first Inquiry in 2001 said “I spoke to Professor Kay (four years ago), but he is still trotting out the same old arguments”.

Yes, and three years on I am still trotting out the same old arguments, and I have found new ones to reinforce and extend the criticisms I have made in 2001. The “old arguments” were based on the law and economics in this area and what is generally recognised to be good practice. Whenever appropriate and possible, I took advice from authorities on European law and the ferry industry before making recommendations.

On the issue of EC law, over the past few years I have argued that (a) an independent authority or regulator, (b) clearly defined and justified public service obligations (PSOs), and (c) an adherence to the Altmark principles, are all needed if you want to have Scottish ferry services treated as public services and compliant with EC law. The fact that these arguments have not been accepted down the years by administrations is something I find difficult to accept and understand.

None of the issues that are really important in terms of ferries as public services (fares, capacity, frequency, quality, etc) will be properly pursuable until and unless the regulatory, PSO and Altmark issues are seen as essential building blocks for Scottish ferry policy, and as the way forward to help develop and apply a systemic and robust approach to ferry policy.

There is a double problem here. As long as these building blocks as rejected, it is difficult to fashion coherent polices to pursue and protect the public interest in individual cases. The other problem is that rejecting the need for an independent regulator, PSOs and Altmark principles here may have, totally unnecessarily, created vulnerability under EC law. It is a bit like someone publicly claming that they are a good driver but they do not need a license to prove it. Even if their claims to competence were true, they should not be surprised if such statements attract the attention of the authorities.

The irony is that such matters as the award of the contact to CalMac (strictly speaking, its successor, CalMac Ferries) could and should be defensible under EC law with due reference to be made to PSOs embedded and implicit in the tender contract, and especially when (as I discuss above) it is difficult to see circumstances under which any other operator could reasonably have beaten CalMac Ferries’ subsidy bid to deliver these lifeline services. The problem is that the tangles that successive administrations have got themselves into over this could make those points difficult to defend.

The last point I would make is one that might surprise some of those I have criticised in the past. It is easy to say that ministers are ultimately accountable, but those decisions by ministers that I have criticised were taken by them in the context of legal advice given to them. Even if they had reservations about that advice, if they acted against that advice it could have exposed them as personally liable. In that sense, ministers may have been far less free to take decisions in the public interest than appeared to be the case looking from the outside. And there is no evidence I know of that policymakers were doing anything other than trying to pursue the public interest here, irrespective of any justified criticism that could be made of individual decisions they took. Apart from eliciting due sympathy for the ministers responsible down the years (a notion I surprise myself by putting forward), it does suggest that solutions lie less in political recrimination, and more in identifying the root source of these unfortunate decisions, as well as searches for ways to rectify the neglect of the key building blocks discussed above, and a commitment to make sure it does not happen again. Because if the government and the parliament do not recognise the dangers that lie ahead for Scottish ferry policy here, then recognition will almost certainly be forced on them, and in ways that will probably reduce whatever freedom of manoeuvre they possess just now.

6 May (9th Meeting, 2008 (Session 3)) – Supplementary Oral Evidence

Supplementary Written Evidence from Caledonian Maritime Assets Limited – 12 May 2008

Thank you for allowing me to give evidence at the 9th Meeting of the Transport, Infrastructure and Climate Change Committee. I was asked to write to the Committee with further information regarding the condition of the linkspan at Brodick.

The ferry terminal infrastructure at Brodick is nearing the end if it’s serviceable life. The linkspan and supporting structures were constructed in 1970, with further improvements and additions provided during the 1990s. The requirement to replace and improve this infrastructure has been identified, and processes in this regard are underway, with a view to works being undertaken circa 2012.

A full condition inspection of the infrastructure at Brodick was undertaken in 2007, and further detailed inspection, repair and monitoring works are on going to ensure continued safe operation until the replacement scheme is implemented.

The linkspan at Brodick is subject to annual structural inspection and twice yearly inspection of the operating machinery, together with associated maintenance.

The last structural inspection found the linkspan to be in fair condition, following refurbishment in 1999, however the paint system is starting to breakdown, and surface corrosion is monitored during the annual inspections. Given the linkspan’s current condition it is anticipated that the structure will perform satisfactorily over the period until terminal redevelopment without further structural maintenance being undertaken. The linkspan operating machinery is generally in fair condition for its age, following replacement in 1989, and will continue to be subject to routine maintenance until terminal redevelopment.

I trust this information will be of use to the Committee as part of its enquiry into Ferry Services in Scotland. Please do not hesitate to contact me if you require further information. Thank you once again for allowing me the opportunity to give evidence to the Committee.

Supplementary Written Evidence from Caledonian Maritime Assets Limited – 30 May 2008

Introduction

Caledonian Maritime Assets Limited (CMAL) welcomes the opportunity to present its formal written evidence to this Scottish Parliament Inquiry.

The Managing Director of CMAL gave evidence in front of the Committee on 6th May 2008 and this submission gives members of the Committee further background information regarding CMAL and its role in helping to ensure the continuance of lifeline ferry services.

Background

Until 1 October 2006 Caledonian MacBrayne Ltd provided the majority of Clyde and Hebrides ferry services and owned the associated vessels and a number of the ports and harbour facilities that the vessels used. That company was and still is, wholly owned by Scottish Ministers. These services required an annual revenue deficit grant from the then Scottish Executive to maintain lifeline service levels.

In order to comply with European guidelines on State Aids in Maritime Transport, an open public tender was deemed necessary in respect of these ferry services.. The then Scottish Executive tendered the Clyde and Hebrides Ferry Services (CHFS) as a single bundle, with the exception of the Gourock-Dunoon service.

In recognition of the uniqueness of the fleet, and in order to ensure a level playing field for all bidders, Caledonian MacBrayne Ltd was split into an asset owning company, Caledonian Maritime Assets Limited (CMAL) , and a new operating company, CalMac Ferries Ltd (CFL).This occurred on 1st October 2006. This was achieved by Caledonian MacBrayne Ltd transferring its operations to CFL. But it retained the assets in the old company which was then re-named CMAL.

The operation of the lifeline ferry service was then put out to open competitive tender. Caledonian MacBrayne Ltd, now CMAL, continues to own all vessels and land based assets (ports, harbours etc) and makes them available to the Operator selected. From 01 October 2007 CalMac Ferries Limited continues to operate the services having won the tendering process with their bid. Under the terms of the tender CFL is bound to use the vessels of CMAL. CFL holds the Public Services Contract (PSC) until 30 September 2013.

CMAL continues to be a publicly owned company with Scottish Ministers as the sole shareholder.

Responsibilities

CMAL’s mission is straightforward ‘To provide, safeguard and develop ferries and harbours’. The primary responsibilities of Caledonian Maritime Assets Ltd. are as follows:

• Vessels – The ownership, maintenance and replacement as necessary of the fleet of vessels. It discharges this responsibility by implementing and managing vessel charter agreements with the operator, currently CalMac Ferries Limited.
  
  
• Piers and Harbours – The ownership, management and maintenance of piers, harbours, buildings and associated infrastructure. It discharges this responsibility by implementing and overseeing Harbour Access and Operation Agreements with the operator.
  
  
• Harbour Authority – All operations, public safety, environmental and other statutory responsibilities of the harbour authority at its own harbours.
  
  
• Brand – the ownership, safeguarding and ‘licensing’ of the Caledonian MacBrayne Ltd. brand and other registered trademarks.
  
  
• Pension Scheme – ensuring that the company meets its obligations in respect of the pension rights of employees past and present, including continuing to act as Principal Employer of the existing Caledonian MacBrayne Ltd Pension Fund following the transfer of operations to CFL.
  
  
• Administration of the Grant in Aid scheme for lifeline ferry port infrastructure for CMAL and independent trust ports on behalf of the Scottish Government.

The various leases, charters and agreements run for periods of 6 years in parallel with the ferry service contracts issued by the Scottish Government.

The Company is essentially tasked by Scottish Ministers with the long term asset maintenance, replacement and development and as such is currently engaged in the development of a 10 year plus strategic plan. This plan will cover vessel replacement, port development and maintenance. This will allow long term financial planning to be carried out to ensure the availability of safe, fit for purpose assets and the continuance of the lifeline ferry service long beyond the time horizon of the six year public services contract.

Structure

Scottish Ministers have appointed a highly experienced Board of Directors with backgrounds in finance, shipping and logistics and they in turn have appointed an executive management team and supporting staff at CMAL’s headquarters in Port Glasgow. The Chairman of the Board is Grenville Johnston. The small CMAL full time team is comprised of 9 specialists in ports, vessels, civil engineering, business planning, finance and administration led by the Managing Director Guy Platten. The Managing Director started in August 2007 and the rest of the team were in place by April 2008.

ASSETS

Ships

CMAL owns the following vessels:-

The average age of the CMAL fleet is 19 years. One vessel is currently under construction at the Remontowa Yard, Gdansk and is expected to serve on the Islay-Kennacraig route when she is delivered in 2011.

Ports and Harbours

CMAL operates the following ports and harbours through a Harbour Access and Operating Agreement with CalMac Ferries Limited, the current operator-

Armadale

Brodick

Castlebay

Claonaig

Colintraive

Coll

Colonsay

Cumbrae

Fishnish

Gourock

Kennacraig

Kilchoan

Largs

Lochaline

Lochboisdale

Lochranza

Oban

Portavadie

Port Ellen

Tarbert (Harris)

Tiree

Tobermory

Wemyss Bay

CMAL leases property at the following locations in connection with the provision of lifeline ferry services and makes them available to the current operator:-

Ardrossan

Barra

Bull Hole

Canna

Craignure

Fionnaport

Gigha

Iona

Lochmaddy

Mallaig

Otternish

Port Askaig

Rothesay

Stornoway

Tarbert (Loch Fyne)

Ullapool

Uig

Income

CMAL derives it income primarily from the following sources:-

a. An annual fee from Operator(s) for chartering the vessels.

b. An annual fee from the Operator for accessing the piers and harbours and property owned by CMAL (similar to Harbour Dues).

c. Income from other users of CMAL harbours and piers (for example fishing boats, small cruise ships, leisure users and cargo vessels).

d. Third party rental of CMAL Property.

e. Piers and Harbours Grants. CMAL is allowed to apply for grants from the Scottish Government to develop piers and harbours in support of lifeline ferry operations.

f. Loans. CMAL is allowed to apply for loans from the PWLB in order to fund vessel replacements.

Expenditure

CMAL’s main areas of expenditure are as follows:-

a. Harbour maintenance and improvements.

b. Existing Vessel Loan repayments of capital and interest.

c. Vessel Upgrades.

d. Capital Investment in Piers and Harbours.

e. Capital Investment in New vessels.

f. Funding shortfalls in Pensions (CalMac Pension Fund, Merchant Navy Officers’ Pension Fund and Merchant Navy Ratings Pension Fund).

g. Leasing charges for various properties.

h. Running Costs including staff overheads, legal fees, insurances etc

Progress to date

From the creation of CMAL as the asset owning company in October 2006 amongst many achievements the following progress has been made:-

a. Establishment of organisation including board, staff, policies, procedures and financial systems

b. Complete audit and condition survey of all assets.

c. Placing of an order for a new ferry for Islay/Kennacraig route for delivery in March 2011.

d. Successful completion of negotiations for Fleet Charter, Harbour Operating and Access agreements amongst others with the successful operator (CalMac Ferries Ltd). Contracts were signed with the new operator in September 2007 and the contracts came into force on 01 October 2007.

e. Engaging with the Operator and drawing on their considerable experience in helping to develop long term plans for the assets.

f. Completion of new linkspan and covered passenger access at Oban.

gf. Tendering for a new pier at Largs (work to commence Autumn 2008)

h. Procurement of engineering services to develop and modernise facilities and piers at Port Ellen and Kennacraig.

i. Proactively seeking solutions to manage funding shortfalls in the various pension funds CMAL acts as principal employer for.

j. Establishment of a grant management group along with independent trust ports to look at lifeline ferry port infrastructure and long term investment plans

k. Establishment of audit regimes to ensure ongoing maintenance of assets

l. Development of an operating plan and significant progress in developing a 10 year strategic plan ready for publication late 2008.

m. Establishing links with communities and stakeholders.

n. Development of long term vessel replacement programme.

o. Leading on the STAG for the Lismore routes.

p. Partnering with Government organisations in Northern Ireland and Ireland to seek EU funds for small ferries and associated infrastructure funds.

q. Development of a 10 year maintenance, repair and replacement programme for harbour infrastructure and properties.

Challenges and Opportunites

CMAL is about long term asset maintenance, improvement and replacement. New ships and substantial improvements to piers and harbours of necessity take a number of years from conception to realisation and the planning horizon for the company must therefore be beyond the current period of the public service contract with the operator chosen by the Scottish Government. Indeed CMAL intendes to publish a 10 year plus strategic plan later in the year.

In establishing CMAL one of the first actions carried out by the Company was to undertake a full audit and condition check on the assets taken on.

For the first time there is now a complete record of all the assets and equipment used in delivering the ferry services together with comprehensive knowledge of their condition. This will allow detailed maintenance and replacement plans to be developed to ensure that the ports and harbours remain in a safe condition and for fleet replacement of older vessels to be made.

Unfortunately the condition of many of the ports and harbours is such that more expenditure is required than first envisaged when the initial financial model for CMAL was developed. Detailed analysis of the assets has also revealed shortfalls in funding if a realistic vessel replacement programme is to be instigated. The average age of the fleet is now 19 years.

In order to deliver on CMAL’s key Aim and Mission long term funding must be secured. The current rate of funding through the Fleet Charter and Harbour Access fees presents challenges in maintaining existing infrastructure before substantial improvements and replacements can be considered. However with CMAL now in place focussing on the assets rather than day to day operation of the service it is believed the plans developed will allow longer term infrastructure investment by the Scottish Government in the lifeline ferry services to be incorporated within future spending reviews. Additionally CMAL will explore other funding avenues for example seeking potential funds available from the EU and elsewhere.

The focus upon infrastructure rather than just ferry operations allows the opportunity for CMAL to engage with other stakeholders to look at overall port development beyond just providing infrastructure for ferries. This could potentially allow subsequent economic benefits to the islands and areas served by the ports beyond that which is purely for ferry operations.

Although the current six year public service contract with CalMac Ferries Ltd does not end until 01 October 2013 the retendering exercise will commence some time before this. With the establishment of CMAL and the focus on long term asset value, maintenance and delivery the company will be in a position to provide advice and support to the Scottish Government in this process.

Conclusion

It is hoped that the outline information included in this short paper is of assistance to the Inquiry. CMAL is committed to working and engaging with the current operator (CFL) along with other stakeholders to ensure the long term continuance and development of the lifeline ferry services.

We believe the decision to separate the ownership of assets from the operation of the lifeline ferry services ensures control of these assets by the public is maintained and that long term financial benefits can realised.

Supplementary Written Evidence from Professor Neil Kay – 13 May 2008

Ferry inquiry - point of information: operator of last resort

I am grateful for the opportunity to give evidence last week.Clearlythere are many pointsI couldmake regardingevidencebut I will restrict myself to one pointwhich I cannot leave without comment. I hope it could be provided to the Convenor and/or the Committee for information.

The Member Alison McInnes was absolutelyright in response toPentland Ferries insayingthat you cannot wait until theincumbent operator fails before trying findingan operator of last resort. Such an operator of last resort has to be able to be directed and contractually obligated to take over immediately in providingessentialservices in the event of an operatorfailure for whatever reason.

Representativesof privateinterests have said in evidencethat the state/CalMacshould be the operator of last resort. Unfortunately, if what is meantbyCalMac is CalMac Ferries,CalMac Ferriesonly one of potentially many operators (whichjust happensto be State owned), they cannot be discriminated for or againstunder EC law, and indeed CalMac ferries (and its holding companyDavid MacBrayne)has no guaranteed existence, status or function as an operator beyond the time horizon of a six-yearPSC contract.You cannot solve the problem by assigning a role in perpetuity to an entity with a finite and uncertain existence under EC law.

The only way you could safely assign that role to CalMac would be if you were preparedto fix things so that it would always win its present contract and network tender- which of course would certainlybreach EC State aid rules and is where we came in with the Commission's recent decision.

Making CalMac the operator of last resort would likely confirm the Commission’s worst suspicions.

If what is meant by the state orCalMac is CMAL, the asset owningcompany, it would not qualify as operator of last resort either since MCA is very restrictive as to who would qualify as an operator, and CMAL would not have the appropriateexperienceor certificates.If you doubt this (and it is a point I have made to successive Committees from 2001 to 2008) down the years), just ask the CEO of CMAL. The same point holds for any state entity that is not already an active and certificated operator.

Indealingwith these problemsI would draw the Committee's attention to my concluding statmentin oral evidenceto Committee last week.

I finish with a simple point. It is easy to consider the problems in isolation—the regulator, the operator of last resort, PSOs, or the Altmark judgment—but the problems are systemic, and the solutions must be systemic.

I said as muchfor the first time to this committee's predecessorin 2001

Supplementary Evidence from VisitScotland – 26 May 2008

VisitScotland welcomes the opportunity to submit further evidence on whether we would like the Government to take a particular direction in relation to the prioritisation of expenditure on internal air services versus ferry services.

Scottish tourism relies heavily on passenger transport not just to access the country, but also to travel around and experience the country when they are here. The majority of domestic visitors to Scotland from the rest of the UK arrive by car. In contrast, for overseas visitors air travel is the main mode of travel to Scotland. The Scottish Government and the previous administration have been proactive in increasing both the number of direct flights to Scotland from overseas, and more recently to Scottish Islands, as well as new ferry routes. This investment has dramatically improved accessibility to and within Scotland and has been warmly welcomed. Indeed, our research shows that access is a key factor in visitors decision making process when they are conside