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SCHEDULE 1
INVITATION TO TENDER
CLYDE & HEBRIDES FERRY SERVICES

GENERAL

1.1 Introduction

1.1.1 This document invites public transport providers to tender for a subsidy that is available for the provision of passenger and vehicle ferry services on the Clyde and to the Hebrides.

1.1.2 The document should be read in conjunction with the Scottish Executive's detailed terms and conditions of contract.

1.1.3 The document has seven Schedules:

• Schedule 1 - General - This Schedule sets out the background to this public tender and describes the policy objectives of the Scottish Executive (the Executive).
• Schedule 2 - Notices and Instructions - This Schedule sets out the purpose and scope of the tender and gives the basis for the subsidy available. It sets out the expected timetable for tendering and the process that the Scottish Executive Enterprise Transport and Lifelong Learning Department will follow in evaluating bids submitted. It also outlines some key principles which will be included in the detailed terms and conditions of the contract/grant agreement that will be awarded to the successful tenderer.
• Schedule 3 - Service Specification - This Schedule sets out the Executive's detailed requirements. Our overarching concern here has been to protect existing fares and levels of service. Schedule 3 therefore is based on an approach which sets out the minimum levels of service and standards together with the maximum fares that will be required throughout the contract period while at the same time providing an opportunity for all tenderers to offer a service which meets the needs of both the Executive and Clyde & Hebrides ferry users.
• Schedule 4 - Content of Technical Submission - This Schedule sets out the issues which the Executive will require to be addressed by tenderers in response to this service specification.
• Schedule 5 - Form of Tender to the Scottish Executive - This Schedule requires tenderers to give a signed undertaking to provide the services in the Specification in accordance with the Schedules and the Scottish Executive Conditions of Contract.
• Schedule 6 - Declaration that Tender is a Bona Fide Competitive Tender - This Schedule requires tenderers to give a signed undertaking that they have not colluded with any other party in the preparation and submission of their tender.
• Schedule 7 - Statement of Understanding of Key Requirements of this Specification - This Schedule is a statement of understanding of the key requirements of the service.

1.1.4 In addition, there are 24 Annexes which provide further background information about the CHFS services.

1.2 Definitions, Interpretations and Abbreviations

1.2.1 The following abbreviations/phraseology are used in this document:

1.3 Background

1.3.1 Caledonian MacBrayne Ltd (CalMac) currently provides the majority of Clyde and Hebrides ferry services. CalMac is a nationalised company providing passenger, vehicle and freight shipping services to the islands off the West Coast of Scotland and in the Clyde Estuary. Scottish Ministers are the sole shareholder of the company. Nearly all of the services currently operated by CalMac are of a lifeline nature and require the Executive's support to keep them in operation.

1.3.2 Under the terms of the formal Undertaking ¹ between the Scottish Ministers and CalMac, Scottish Ministers provide grant to the company by way of an annual subsidy for the support of approved services. The revenue deficit subsidy paid by Scottish Ministers to the company meets the operating loss incurred in operating a current network of 26 routes.

1.3.3 The European Commission has a duty under Article 88(1) of the Treaty to keep under review aids existing in Member States and to ensure that Member States apply the appropriate measures required by the progressive development, or the functioning, of the common market. There are further detailed rules relating to maritime transport (maritime cabotage) within Member States ².

1.3.4 In April 2000, the Scottish Executive published the consultation document, Delivering Lifeline Ferry Services. Views were sought on options for putting subsidised lifeline ferry services out to tender in order that they could continue under European Union rules. Following consideration of responses, provisional proposals were announced in January 2001 and submitted to the European Commission for consideration (as required under the rules). The Executive announced in November 2001 that the Commission had advised the Executive that the way was clear to tender the network as a whole (as set out in the Executive's proposals). In 2002 the Scottish Executive consulted widely on the key principles of the tender process when the consultation document, Proposals for Tendering Clyde and Hebrides Lifeline Ferry Services, was published. Consultees views were sought on a number of complex issues including standards of service, timetabling options and the proposed performance regime which the successful bidder would be required to meet.

1.3.5 The majority of responses to the 2002 consultation were in relation to the Executive's proposals for a passenger only service on the Gourock-Dunoon route. Following further discussion with the European Commission in late 2002 Ministers concluded that it would be possible to tender the Gourock-Dunoon route with a passenger only subsidy, as at present, in a way that gave operators the choice as to whether to provide a passenger only or combined passenger and vehicle service. This was on the basis that the service was tendered separately from the rest of the network. These proposals were set out in the consultation paper, Proposals for Tendering Gourock to Dunoon Ferry Services, published in March 2003. There was a strong response to this consultation, much of it arguing that the proposal did not go far enough to guarantee a vehicle service. Discussions are ongoing in relation to the Gourock-Dunoon route and Ministers will announce their conclusions separately.

1.3.6 Other than the proposals in relation to the Gourock-Dunoon route, the proposals for tendering set out in the 2002 document were broadly welcomed. Tenderers will wish to note the following:

• with the exception of Gourock-Dunoon which is the subject of a separate tender ³, the routes will be tendered as a single bundle.
• CalMac is being restructured to form two companies. One will be a publicly-owned operating company (OpsCo). It will be allowed to bid, subject to meeting the required criteria for tenderers, to operate the routes on a competitive basis. The bid will be prepared and evaluated transparently and equally with those from other tenderers. The second company will be a publicly-owned vessel owning and leasing company (VesCo) which will be responsible for ownership of CalMac's existing vessels, piers and harbours and offices. These assets will be available to the successful tenderer on pre-agreed terms and conditions. Bidders should note that the successful tenderer will be required to lease vessels from VesCo, to make appropriate arrangements with regard to the use of VesCo harbours and to provide certain harbour management functions for VesCo harbours through a management agreement. More detail about VesCo and these arrangements is set out in Schedules 2 and 3.
• VesCo will also be responsible for providing an Operator of Last Resort function (in the event of termination of contract, breakdown of contract, or similar event) which will provide an important safeguard through this period of change. This could be done in two ways, either at VesCo's own hand or through an arrangement with a shipping provider by way of a retainer. VesCo will be responsible for considering these options and putting arrangements in place before the new contract begins. It should be noted that these arrangements are intended to be triggered in the event of an irretrievable breakdown in the contract and not in relation to normal operating difficulties e.g. due to breakdowns, etc (for which the operator will have responsibility).
• there will be a robust performance regime to safeguard reliability and punctuality of services.
• there is a framework for consultation with users. The successful tenderer will be required to consult with ferry users in line with these arrangements on a regular basis.
• levels of service and net fares will be protected.

1.3.7 The summer 2003 decision of the European Court of Justice in the Altmark case raised speculation by commentators about the possible implications of the decision for the tendering of the Clyde and Hebrides ferry services. The Minister for Transport met with the European Commission in April 2004 to discuss the possible effects of Altmark on the Executive's plans for those services. Following that meeting it is now clear that there continues to be a requirement on the Executive to tender the services. The reasons for this are:

• the Altmark case concerned the question of whether a payment constituted state aid. The requirements for public tendering of ferry services stem from the Maritime Cabotage Regulation ⁴. This regulation has a different Treaty base to the State aid rules. The Altmark judgement therefore does not affect the issue of whether public tendering is required.
• the Maritime Cabotage Regulation states that, where a Member State concludes public service contracts or imposes public service obligations, it shall do so on a non-discriminatory basis in respect of all Community shipowners. The Commission could not envisage any circumstances in which the requirements of this Regulation could be satisfied in relation to the Clyde and Hebrides services without tendering. The Altmark judgement did not change its view on this issue in any way.

1.3.8 The Executive has therefore concluded that the approved ferry services provided by CalMac are in the nature of Public Service Contracts (PSCs) and the services will be tendered in line with the relevant EU regulations and guidelines. Scottish Ministers have concluded that to comply with EU rules on State aids to maritime transport, an open Community wide invitation to tender is necessary in respect of ferry services currently operated by CalMac.

1.3.9 The EU rules provide that Member States may impose PSCs in order to ensure the adequacy of regular maritime transport services to a given island (or in relation to an estuary), where Community ship owners if they were considering their own commercial interest would not provide services of an adequate level or under the same conditions.

1.3.10 The guidance provided by the European Commission prescribes detailed rules for PSCs relating to tendering requirements and terms of contract. In particular, tenderers will wish to note:

• subsidy given for PSCs must be granted in compliance with Community legislation (in particular Regulation (EEC) no 3577/92) and the Treaty rules and procedures governing State aid, as interpreted by the Court of Justice. In practice this means that the tender should be awarded (except in exceptional and duly justified circumstances) to the bid requiring the lowest financial compensation. The subsidy which Scottish Ministers are entitled to pay is the amount necessary to cover all or part of the costs incurred in the discharge of the public service contracts which we require to be implemented in the contract, taking account of relevant receipts and a reasonable profit. Bidders should note that whilst lowest financial compensation is a key criteria the services provided must also be of sufficient quality to meet the requirements of the PSC. This tender exercise has therefore been set up in such a way that it assesses separately the technical and financial aspects of each bid i.e. only those bidders who submit an acceptable technical bid will be invited to Costed Bid Stage.
• the duration of the PSC contract should be limited to a reasonable period, in practice six years or less.

1.4 Objectives

1.4.1 The Executive's policy objectives for the CHFS services were set out in Delivering Lifeline Ferry Services as follows:

• the provision of a suitable standard of transport connection, in terms of quality, frequency and capacity, to island and remote peninsular communities
• that ferry fares and freight charges are not excessive
• that ferry services are delivered efficiently
• that the necessary level of service is provided for the minimal amount of public subsidy

1.4.2 Further, the Partnership Agreement ⁵ states that the Executive will continue to support and invest in lifeline ferry links and goes on to say that it will,

• ensure that, under the new contract for CalMac ferries, encouragement is given for innovation on existing ferry routes and for new or shorter crossings to islands, and
• ensure that the needs of cyclists are properly taken into account in future rail and ferry franchises

1.4.3 The aim of this tendering exercise is to meet the Executive's policy and strategic objectives, and to meet islands' and remote communities' needs by ensuring that the service provides a continuing, safe, stable and affordable regime for users in line with the EU rules. The Executive also encourages tenderers, where possible, to provide innovative solutions and responses when submitting their proposals for meeting the service level requirements for CHFS.

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