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SCHEDULE 2
INVITATION TO TENDER
CLYDE & HEBRIDES FERRY SERVICES

NOTICES AND INSTRUCTIONS

2.1 Introduction

2.1.1 Tenders are invited in accordance with the following Notices and Instructions for the provision of services detailed in the accompanying documents. The issue of this Invitation to Tender should not be construed as a commitment by the Scottish Executive to place an order as a result of the tendering exercise. Any expenditure, work or effort undertaken prior to contract award is accordingly a matter solely for the commercial judgement of the tenderer.

2.1.2 This Schedule contains the following sections:

• Purpose of Tender Exercise
• Scope
• Tender Process:
  • Propriety and Fairness of Evaluation
  • Clarification
  • Timetable for Tendering
  • Confidentiality
  • Cost of Bidding
  • Changes in Circumstances
  • Communication During the Tender Period
  • Guidelines for Submitting a Tender
  • Freedom of Information
  • Gourock-Dunoon
• Key terms and conditions which tenderers should be aware of:
  • Contracts with VesCo
  • Allocation of Costs
  • Financial Structure
    
  • Insurance
  • Contract and Compliance Legal Jurisdiction
  • Compliance with EU and Domestic Law
  • Disabled People
  • TUPE
  • Pensions
  • Staffing Issues
  • Contract Duration
  • Subsidy
  • Payments
  • Performance Regime
  • Material Change
  • Relief Events
  • Variations
  • Clawback
  • Change Mechanism
  • Monitoring and Audit
  • Disputes
  • Transfer or Assignation
  • Termination
  • Consultation between the Executive, VesCo and the successful tenderer
• Constraints, Risks and other Key Points to note
• New Vessel/Infrastructure Proposals

2.2 Purpose of Tender Exercise

2.2.1 As previously outlined, the purpose of this tendering exercise is to meet the Executive's policy objectives to bring ferry services in the Clyde and Hebrides and which are subsidised by the Executive into compliance with EU maritime state aids rules.

2.2.2 The service requirements are set out in Schedule 3. In preparing the service specification we have also had particular regard to the following key principles:

• Safety Standards - Safety of passengers and crews is a fundamental issue which under no circumstances can be compromised or diluted.
• Standards and Quality - Emphasis has been placed not only in accurately defining the existing level of services supplied but also on quality. Tenderers will be required to submit quality plans and set out minimum standards.
• Reliability - Emphasis is placed on the ability to consistently deliver the required levels of service, hence reliability is a fundamental principle.
• Performance - Continued high standards of punctuality and availability of ship and shore facilities.
• Objectivity - As many aspects of the service specification as possible must be capable of specific measurement.
• Impartiality - In the evaluation of bids and treatment of tenderers.

2.2.3 The project is designed to identify, by competitive tender, the tenderer requiring the lowest financial compensation⁶ to meet the defined service requirements and outputs. This is in line with EU rules.

2.3 Scope

2.3.1 The tender covers the passenger/vehicle/accompanied and unaccompanied freight ferry services to specified routes in the Clyde and Hebrides. The tender includes the provision of efficient and safe services, fully compliant with all the current safety requirements and supported by appropriate on board and shore facilities adequate for handling passengers and the loading, carriage and discharge of vehicles, freight, livestock and hazardous goods. The services are described in Schedule 3 and attached Annexes.

2.3.2 With the exception of Gourock-Dunoon which, as mentioned above is being tendered for subsidy separately, the routes named in the CHFS project will be the only ferry services in the immediate area in receipt of direct operating subsidy from the Executive. Subsidy will be made available to provide passenger/vehicle/freight ferry services on all routes.

2.3.3 Tenderers will wish to note that there are other ferry providers (local authorities, Western Ferries, etc.) operating services within the Clyde and Hebrides area and competitors are free to enter the market. The Gourock-Dunoon route ⁷, which is currently operated by CalMac, will, in the future, be operated by the successful tenderer for the separate tendering exercise for that route.

2.3.4 Tenderers are encouraged to investigate alternative innovative revenue streams over and above the minimum service requirements which add value beyond the publicly supported part of the project. As mentioned, EU rules specify that the winning bid in respect of maritime PSCs will normally be that which requires the lowest financial compensation ⁸.

2.3.5 Tenderers are also encouraged to consider issues which have emerged through consultation as issues where users feel improvements might be made. A summary of such issues is set out in Annex 11. ⁹

2.3.6 Tenderers will note that additions to the service which require extra subsidy will jeopardise tenderers' competitiveness. Tenderers should strive to include proposals for generating extra revenue and which reduce the level of subsidy, thereby improving the competitiveness of the bid.

2.4 The Tender Process

Propriety and Fairness of Evaluation

2.4.1 The Executive believes that it is necessary to evaluate bids transparently and fairly both to meet the standards of public accountability and to achieve the best contract. To this end, the Executive has produced evaluation criteria that will be strictly adhered to in evaluating bid compliance.

2.4.2 The evaluation criteria will include emphasis on quality as well as price. Each tender will be the subject of a technical, commercial and financial analysis. The aim of the evaluation is to select the Tender that requires the lowest financial compensation for the provision of the minimum standards.

2.4.3 The Executive will consider the information provided in the Technical Proposal in response to this document and will reach an objective decision as to whether or not, in its view, the organisation and arrangements described in the technical proposal will be capable of meeting the requirements set out in this service specification. This process may involve a period of clarification with tenderers. The technical evaluation criteria will include but is not limited to the following aspects:

• general understanding of the requirements, i.e. provision of ferry services on the Clyde and Hebrides network
• analysis of the technical viability of the proposals
• operation of proposals with particular emphasis on quality and performance measurements
• staffing proposals
• proposals for safety management
• depth of experience of key staff
• suitability of any additional vessels proposed
• assessment of proposals against the minimum standard

2.4.4 The Scottish Executive intend utilising the services of external consultants to assist in the tender evaluation process.

2.4.5 Tenderers will wish to note that the Executive may wish to visit tenderers' headquarters to carry out an operational audit and/or to audit vessels (chosen by the Executive) from tenderers' fleets before taking a final view on the Technical Submission.

2.4.6 Tenderers whose Technical Submissions are deemed compliant will be invited to submit costed bids for subsidy. Any Technical Submission not complying with the requirements set out in this Service Specification will be rejected and a Costed Bid will not be invited. Commercial and financial analysis will be used at the costed bid stage to establish the full price of tenders.

2.4.7 Tenderers should note that a financial plan will not be required until Costed Bids stage and subsidy bids must not be included in the Technical Submission. However, they will wish to be aware that, at Costed Bid Stage, they will be required to provide detailed financial and other information to enable the Executive to make a full assessment of the bid cost. The Executive also needs to be confident, as part of the financial and monitoring arrangements, that the successful tenderer has a clearly identifiable organisational and financial structure to allow the subsidy award to be transparent, ring-fenced and auditable to ensure compliance with the Executive's requirements. The information required at Costed Bid stage will therefore include (but is not limited to):

• total and disaggregated costs, revenues, profit and subsidy assumptions
• elements such as the harbour management agreement, pier dues and leasing charges which must be clearly identifiable

2.4.8 Further guidance will be provided about the format for Costed Bids to those tenderers who pass Technical Bid stage.

2.4.9 The contract will be awarded following evaluation of Costed Bids. As indicated in Schedule 1 the successful tenderer will be the one who requires the lowest financial compensation ¹⁰.

2.4.10 Tenderers will be aware that the Executive is involved with the sponsorship of CalMac OpsCo which, as noted earlier, will be invited to tender for the contract. Organisational measures have been designed and implemented to ensure that OpsCo is treated in exactly the same way as other tenderers. This involves clear delineation and separation of tasks and responsibilities within the Transport Group of the Executive.

Clarification

2.4.11 If any bid is found not to comply with the Executive's requirements, lack any information necessary to enable evaluation or to contain inconsistent information, the Executive may:

• evaluate the bid as submitted
• seek additional information or clarification from the tenderer, or
• reject the bid

Timetable for Tendering

2.4.12 The project timetable envisages the contract commencing on XXXX although this may be subject to change. Key dates for the tendering process are as follows:

Information Disclaimer

2.4.13 Information regarding the type and pattern of carryings on CHFS, as provided by the current operator, is included in the attached Annexes. These Annexes also provide information on the vessels available via charter/lease arrangement from the VesCo for use on the CHFS routes, the vessel capacity on the routes and capacity utilisation.

2.4.14 Additional detailed information is available to tenderers. This information is available through a secure Information Room (details are provided in the covering letter inviting tenderers to submit Technical Proposals). As far as possible information will be provided via electronic means and will include:

• information relating to the provision of the services
• terms and conditions of the agreement with the Executive

2.4.15 In addition VesCo shall also make available through the Information Room:

• details of vessel leasing arrangements including charges and conditions of lease
• details of the management agreement in respect of VesCo's harbours
• details of harbour dues etc for use of VesCo harbours
• details of passenger and terminal facility leasing arrangements including charges and conditions of lease
• details of licensing agreement for the use of the Caledonian MacBrayne brand
• information about the vessels, harbours and terminal facilities

2.4.16 While every effort has been and will be made to provide accurate information, tenderers will wish to note that the Executive does not guarantee the accuracy of the information provided and it is provided for guidance only. It is for tenderers to fully satisfy themselves as to the accuracy and relevance of all of the information provided in connection with this tender. It is the responsibility of the tenderer to verify and interpret the information provided and to obtain for themselves, at their own expense, any additional information necessary for the preparation of their tender. Tenders will be accepted by the Executive on the understanding that the tenderer is deemed to have satisfied himself on the scope of the requirement from the information provided.

Confidentiality

2.4.17 Tenderers are reminded of the agreement they provided at Pre-Qualification Questionnaire stage which confirmed that all information supplied by the Scottish Ministers in connection with this Invitation to Tender shall be treated as confidential by tenderers except that such information may be disclosed for the purpose of obtaining sureties and quotations necessary for the preparation and submission of the tender.

Cost of Bidding

2.4.18 Each tenderer is responsible for all costs, expenses and liabilities incurred by it in connection with the tendering process, including in relation to the preparation and submission of expression of interest and/or qualification questionnaire, negotiations and any other costs regardless of whether the bid is successful or not. ¹¹

Changes in Circumstances

2.4.19 Tenderers are required to inform the Executive immediately of:

• any changes to the corporate structure or membership set out in their application to the Executive
• any other changes to their circumstances or their bids which might affect the Executive's decisions as to the suitability of their bid

2.4.20 Tenderers must include, as part of their technical submission, a clear statement confirming that they have and will comply with this requirement.

Communication During Tender Period

2.4.21 Correspondence connected with the tender which requires attention before the tender return date or communication stating that no tender will be submitted should be sent in a separate envelope bearing no external reference to the tender number or return date and addressed to:

The Scottish Executive
Scottish Procurement Directorate
3rd Floor
Meridian Court
5 Cadogan Street
Glasgow G2 6AT

2.4.22 This procedure is designed to preserve equity between tenderers by ensuring no premature disclosure of tender details can take place. No useful purpose is served by enquiring after the result of the tender exercise - tenderers will be notified as early as possible.

2.4.23 Please note that the responses to any questions raised during the tendering period will be circulated to all tenderers in the form of a Circular Advice Note. The closing date for raising questions is XXXX 200X and the Scottish Executive will circulate answers to tenderers not later than XXXX 200X. Questions should be submitted to the Scottish Procurement Directorate.

Guidelines for Submitting a Tender

2.4.24 Tenderers must provide their proposal for the operation of the services as set out at in this document. This will be known as the "Technical Submission" and must address, as a minimum, the issues set out in Schedule 4. Tenderers should note that the operational details, service standards and other statements on service provision and legislative compliance made by the tenderer in the Technical Submission will form a binding part of the final contract for the tender.

2.4.25 Tenderers may submit their Technical Submission using their own text creation facilities, however, the content layout must be identical to that set out in Schedule 4 and it must be in the same order.

2.4.26 Tenderers should be aware that failure to supply the details requested in this service specification will seriously affect the competitiveness of their bid. In addition, tenderers will be issued with a Microsoft Excel spreadsheet listing each area of the service specification where a response is expected from tenderers. Tenderers will be required to make a cross-reference to where, in their Technical Submission documentation, their response to each of the Executive's requirements can be located. The completed disk should be returned to the Executive with the technical bid. This process serves two purposes. It acts as a checklist for tenderers, ensuring that each area of the specification that requires a response receives one. It also allows the Executive's evaluation team to confirm that all relevant aspects of the tenderer's proposal for each of the requirements have been taken into account during the evaluation process.

2.4.27 Tenderers are required to submit (xx) copies of their Technical Submission (excluding any price information) in the following format:

• (xx) copies in paper format contained in ring binders with each section suitably segregated. Each ring binder should be clearly labelled with the tenderer's name and an index of contents.
• (xx) copies in electronic format contained in a CD-ROM. Each CD-ROM shall clearly identify the tenderer's name and an index of contents, should be stored in either Acrobat (pdf) or Word/Excel format and should be compatible with Office 97.

2.4.28 Each copy of the Technical Submission must include the following information:

• name of contact for this tender
• position
• address
• telephone number
• fax number

2.4.29 The copies of the Technical Submission must be submitted in a sealed envelope bearing the attached label to the address shown thereon, for receipt before 3.00 p.m. on the due date. Late tenders will not be considered.

Freedom of Information

2.4.30 Scottish Ministers are committed to open government and to meeting their responsibilities under the Freedom of Information (Scotland) Act 2002. Accordingly, all information submitted to the Executive may need to be disclosed and/or published by the Executive. If you consider that any of the information included in your tender is commercially confidential please identify it and explain (in broad terms) what harm night result from disclosure and/or publication. You should be aware that, even where you have indicated that information is commercially sensitive, we may be required to disclose and/or publish it, whether or not your tender is accepted. We may also require to disclose and/or publish details of unsuccessful tenderers. The Executive may publish, on its website, the names and contact details of companies who have been issued with an Invitation to Tender document.

2.4.31 Tenderers will wish to note that the Freedom of Information Act 2002 may be applicable to the CHFS services. Scottish Ministers may, by order under Section 5 of the Act, designate any persons who are (a) exercising functions of a public nature or (b) providing a service under contract with a Scottish public authority. Before making such an order the Scottish Ministers will consult with any such persons. The Executive will be consulting on the criteria for determining candidates for such a section 5 order.

Gourock-Dunoon¹²

2.4.32 Tenderers who are also bidding or intend to bid for the Gourock-Dunoon route should be aware that the bids will be considered separately and tenderers are required to bid separately. Tenderers should not, therefore, base bid proposals for one tender on the assumption that they will win the other. For example, at Technical Bid stage, the proposed arrangements for relief for the CHFS services should not include the use of vessels serving the Gourock-Dunoon route (and vice versa).

2.5 Key Terms and Conditions

2.5.1 Tenderers will, along with this service specification, be provided with the proposed terms and conditions of the subsidy contract. Tenderers are expected to bid on the basis of these terms and conditions and a bid which rejects any of the terms and conditions will be deemed to be non-compliant. If tenderers wish to suggest a change to a particular term or condition, they must specify this clearly in their Tender, setting out their proposed alternative wording. They must justify the proposed change with details of the expected advantages and disadvantages to the tenderer, Executive and users of the services. In the event that the Executive accepts a change proposed by a tenderer, the Executive will ask the other tenderers whether they wish to have the same change made in the terms and conditions. Tenderers must include, as part of their technical submission, a clear statement confirming that they accept all the terms and conditions as provided (as set out in Schedule 7).

2.5.2 Some of the key contract terms are set out below.

Contracts with VesCo

2.5.3 The Executive proposes to bind the successful tenderer to lease, from the VesCo, the vessels that the successful tenderer deems to be required. The successful tenderer will also be required to enter into a Harbour Management agreement with VesCo and a licensing agreement for the use of the CalMac brand. Shore facilities will be available from VesCo on an optional basis. This will require separate contracts between VesCo and the successful tenderer. Tenderers should note that VesCo vessels are registered in the UK.

2.5.4 The successful tenderer will be required to enter into these contracts with VesCo as a condition of the contract for subsidy with the Executive. Technical submissions should include a clear statement ( Schedule 7) confirming that the tenderer accepts this requirement and details setting out what arrangements have been made with VesCo. The diagram on the next page shows the key relationships with VesCo (although these are an indication only and full details will be provided to tenderers by VesCo).

Allocation of Costs

2.5.5 The successful tenderer will be responsible for all costs arising out of the introduction of the service, the operation of the service as described in this specification including crewing and other staff costs, upkeep of vessels, the provision of any replacement vessel when required and obligations relating to the hand over of the operation of the services at the end of the contract period (if the operator is not appointed to provide the next contract). Tenderers will bear their own tender cost. Tenderers must include, as part of their technical submission, a clear statement ( Schedule 7) to this effect.

Financial Structure

2.5.6 Tenderers are required to make full disclosure to the Executive of any relationships with other companies.

2.5.7 Any tenderer meeting the service requirement, but sharing the cost of assets involved in relation to the provision of other services, will be required to satisfy the Executive that adequate systems would be put in place - and if a contract is placed the successful tenderer will have to satisfy the Executive that such adequate systems have been put in place - to ensure no cross-subsidisation between the CHFS routes and any other ferry route or any other activities. Tenderers may wish to consider whether it might be appropriate to set up a separate special purpose company to provide the services to ensure that there is adequate transparency. Details of charging arrangements in respect of services provided by other parts of the special purpose company's Group must also be provided.

2.5.8 The successful tenderer will be required to account for subsidy in a transparent and auditable fashion so that he is able to demonstrate that there is no cross-subsidisation with other business activities. Tenderers must include, as part of their technical submission, a clear statement ( Schedule 7) confirming that they will comply with this requirement and detail proposals setting out how they intend to satisfy this requirement.

Insurance

2.5.9 The successful tenderer will be required to ensure that all chartered, leased and rented assets or assets provided by any other arrangement, are fully insured at the appropriate commercial value. The successful tenderer will also be required to provide any other insurances required by VesCo. Additionally, the successful tenderer will be required to carry the necessary insurances, sufficient to cover for all and any third party claims which may occur as a result of providing the CHFS. The final list of insurances required will depend on the nature of VesCo's contracts.

2.5.10 The successful tenderer will be responsible for providing demonstrable evidence that all the necessary insurances are in place prior to the award of the contract and thereafter copies of policy renewals on the specified date shall be submitted to the Executive and/or VesCo as appropriate.

2.5.11 Under no circumstances shall the successful tenderer be allowed to provide the services without appropriate insurance being in place. The payment of all associated premiums, deductibles and other costs will be for the successful tenderer's account.

Contract and Compliance Legal Jurisdiction

2.5.12 The basis of the formal grant agreement with the successful tenderer will be the Transport (Scotland) Act 2001.

Compliance with EU and Domestic Law

2.5.13 This tender exercise and the terms of the subsidy contract are designed to comply with the Public Service Contract (PSC) requirements of the relevant EU regulations and guidelines (set out in Schedule 2).

2.5.14 Tenderers will wish to note that a PSC may only be concluded with a community ship owner/operator as determined in the EU Regulations. Technical submissions should include a clear statement ( Schedule 7) confirming that the tenderer complies with this requirement.

2.5.15 The successful tenderer will be required to ensure compliance with all applicable International Conventions, EU Council Directives and Regulations, and National Regulations and to ensure that relevant industry codes, guidance and standards are fully taken into account.

2.5.16 The statutory framework for regulating the safety standards of ferries in UK waters is administered by the Maritime and Coastguard Agency (MCA). Tenderers should note that the successful tenderer will be required to comply with international, European and national regulations, Codes and procedures at all times and, in particular, with the requirements of the International Safety Management (ISM) Code and Merchant Shipping legislation enforced by the Maritime & Coastguard Agency . Technical submissions should include a clear statement ( Schedule 7) confirming that the tenderer accepts this requirement and detail how the tenderer will comply with this requirement.

2.5.17 The successful tenderer will be responsible for the day-to-day activities and operations covering port activities and therefore will be required to comply with all relevant rules and regulations including Health & Safety at Work Regulations enforced by the Health and Safety Executive and the Port Marine Safety Code as applicable. Technical submissions should include a clear statement ( Schedule 7) confirming that the tenderer accepts this requirement and detail how the tenderer will comply with this requirement.

2.5.18 The successful tenderer will be required to meet the terms of the Terrorism Act 2000 (as amended by the Anti-Terrorism, Crime and Security Act 2001) in relation to the collation and distribution of information on the carriage of passengers, cars and freight.

2.5.19 Tenderers should include as part of their Tender Submission a clear statement ( Schedule 7) confirming that, if successful, they will provide all information which may be required in order to allow Scottish Ministers to comply with the provisions of Directive 80/723 (as amended) "The Transparency Directive" in so far as it applies to the operator of the Clyde and Hebrides ferry service.

2.5.20 The successful tenderer will be required to have regard to the legislative framework and obligations in relation to disabled people ¹³ and to consider the needs of disabled travellers. Technical submissions should include a clear statement ( Schedule 7) confirming that the tenderer accepts this requirement and detail how the tenderer will comply with this requirement.

TUPE

2.5.21 Tenderers' attention is drawn to the Transfer of Undertakings (Protection of Employment) Regulations 1981 (as amended) (TUPE). The application of the TUPE Regulations is a matter of law based on the individual circumstances of the particular transfer. As the Executive would be neither transferor nor transferee of the employees in respect of the contract awarded as a result of this Invitation to Tender, it is the responsibility of the Tenderer to consider whether or not TUPE applies in the particular circumstances of this tender exercise and act accordingly. However, it is the Executive's view that TUPE is likely to be applicable and Tenderers will wish to note recent case law where similar circumstances have been considered by an Employment Tribunal.

2.5.22 Tenderers are required to cost their bids as if TUPE applies and to make clear the cost that they are attributing to TUPE. If it is subsequently found that the Regulations do not (as a matter of law) apply, there will be a reduction in subsidy throughout the contract, equivalent to any reductions in the successful tenderer's costs as a consequence of that decision.

Pensions

2.5.23 The TUPE Regulations do not currently apply so as to transfer contract terms in relation to membership of an occupational pension scheme. However, the successful tenderer will be required to ensure actuarial equivalent pension schemes and entitlements for transferring staff. Technical submissions should include a clear statement confirming that the tenderer accepts this requirement, and provide full details of the proposed scheme. Tenderers should note that all proposed schemes will be subject to the approval of the Government Actuary Department. Details about the cost of the proposed scheme will be required if the tenderer is invited to Costed Bid stage.

Staffing Issues

2.5.24 Tenderers will be required to detail proposals for staffing related issues. This will include crewing and other staffing arrangements such as training, recruitment and retention, and industrial relations. Tenderers will wish to note that CalMac crews are currently employed on shore.

Contract Duration

2.5.25 The Contract will be for six years, from xxxx until xxxx, subject to the Scottish Executive's right of earlier termination under the contract Terms and Conditions. An option to extend the Contract, for a further period of 6 months or a year, may be exercised at the sole discretion of the Scottish Executive.

2.5.26 Such an option will only be considered in exceptional circumstances where the re-tendering process may be delayed and will be exercised by the Scottish Executive on or before xxxx.

2.5.27 Where the Scottish Executive exercises the option to extend the contract for a further period of six months or one year in the circumstances described above, the rate of subsidy payable to the successful tenderer will be calculated by applying the percentage change in the CPI (Consumer Price Index) to the appropriate portion (i.e. first six months or whole year) of the Year 6 subsidy rate.

Subsidy

2.5.28 The Executive will award a subsidy to the successful tenderer to supplement revenues earned for running all the routes within the network. The subsidy will be for six years and will be offered to the tenderer whose bid requires the lowest financial compensation¹⁴ to meet and comply with the service specification as set out in Schedule 3 of this document.

2.5.29 The subsidy for each year will be calculated on the anniversary of the contract start date (i.e. if the contract begins on 1 October the 'contract year' will be deemed to be 1 October to the following 30 September), taking account of expected inflation, and will be paid in 12 equal monthly instalments in arrears. Any difference in actual inflation rates will be swept up at the end of each contract year. Additional payments or deductions triggered by a material change/change mechanism will be made as and when necessary.

2.5.30 Based on current estimated timetables, the subsidy contract is likely to be awarded in 200X and for the contract to begin a maximum 12 months after that depending on implementation proposals i.e. the first payments of subsidy under the proposals outlined above will be made in the financial year 200X/0X. When completing contracts with the successful tenderer a firm start date will be finalised.

2.5.31 Tenderers are encouraged to investigate innovative ways of improving service delivery (e.g. increasing frequencies, extending the length of the operational day, etc.). However, in doing so, tenderers are reminded that the award for this contract is on the basis of minimum financial compensation.

2.5.32 The subsidy will be awarded and paid in accordance with relevant EU, UK and Scottish legislation.

Performance Regime

2.5.33 There will be a performance regime that focuses on reliability and punctuality of services on a route-by-route basis. This is summarised at Annex 20. There will be a reduction in the subsidy in the event that targets are not met. The terms and conditions of contract will set out the scheme in detail. Technical submissions should include a clear statement ( Schedule 7) confirming that the tenderer accepts the terms of the performance regime. Technical submissions should also include proposals setting out how the tenderer intends to provide the information required by the Executive in relation to punctuality and reliability ( Annexes 20 and 23).

2.5.34 The Executive will implement a system of monitoring and audit with which the successful tenderer will be expected to fully comply in order to ensure that the requirements of the performance regime are being met. Technical submissions should contain a clear statement ( Schedule 7) confirming that the tenderer accepts the application of the Executive's monitoring and audit system.

Relief Events

2.5.35 A relief event is one which allows one or other of the parties to a contract "relief" from the usual consequences of not fulfilling their part of the agreement. The occurrence of a relief event will not result in additional subsidy and the Executive will not be liable to the successful tenderer for any loss of earnings. This aspect of the contract is particularly relevant to the performance regime and dispute mechanism. The relief events that will be acceptable to the Executive are set out at Annex 21. The detailed provisions can be found in the terms and conditions issued with this service specification.

Material Change

2.5.36 A material change provision will feature in the terms and conditions of contract between the Executive and the successful tenderer, allowing for certain events that significantly affect the cost or provision of the service to be taken into account and, if necessary, for the subsidy to be revised. The material change events that will be acceptable to the Executive are set out at Annex 22. The detailed provisions can be found in the terms and conditions issued with this service specification.

Variations

2.5.37 Tenderers should note that although these services represent the minimum route network at present, the terms and conditions of contract will allow for variations to the contract to cater for unforeseen and/or changing needs during the contract period. The successful tenderer will be required to operate any additional services proposed by the Scottish Executive throughout the contract period and the arrangements in relation to calculation of subsidy in respect of such variations (change mechanism) to the contract is described at paragraph 2.5.44 below. Technical submissions should include a clear statement confirming that the tenderer accepts this requirement.

Clawback

2.5.38 The successful tenderer will be expected to make a reasonable financial return. However, in line with the EU rules in respect of maritime PSCs (that subsidy should be no greater than required), a graduated clawback provision will apply if the financial return over the whole contract period is higher than that forecast in the original bid.

2.5.39 Formulation of the clawback provision will take into account and specify certain accounting treatments that are to be used in the calculation of the financial return criteria used for clawback purposes. The detailed provisions will be set out in the contract terms and conditions. However broadly, the clawback will be based on calculation of profit before interest and tax. Where this exceeds the percentage shown in the business model of the successful bid then the excess will be shared between the Executive and the successful tenderer in a number of progressive steps. Tenderers are free to suggest an equivalent arrangement to recognise the principles of guarding against overcompensation.

2.5.40 The clawback will be applied in aggregate at the end of the contract period and will apply to the approved services as a whole. It will apply when the overall return is above that forecast. However, it should be noted that the successful tenderer will be required to provide audited reports detailing their return (on a route by route and aggregate basis). Details of services which are provided by or to other parts of the successful tenderer's Group must also be provided and the successful tenderer will be required to state the basis of any charges. The form of audited Report will be specified and must be provided by separate engagement. Technical submissions should include a clear statement confirming that the tenderer accepts these requirements.

2.5.41 There will be no clawback in respect of services the successful tenderer provides which are over and above the Minimum Approved Services.

2.5.42 In respect of TUPE considerations, an additional clawback mechanism will apply in the event that TUPE is found not to apply and savings arise. If invited to Costed Bid stage tenderers will be required to detail all staff costs on a route by route basis within their bids as well as detailing headquarter and shore staff costs. In the event that TUPE is deemed not to apply then an audited statement of comparable costs will be used as a basis to effect TUPE clawback. Technical submissions should include a clear statement confirming that the tenderer accepts these requirements.

Change Mechanism

2.5.43 There will be a change mechanism to provide for changes to the subsidy arising from variations to the contract by the Executive. This will be set out in detail in the terms and conditions. However the key principles are as follows.

• if the Executive wishes to propose a change to the Minimum Standard it will give notice of the proposal to the successful tenderer. The notice will set out in detail the particulars of the proposed changes e.g. new larger vessel on a particular route or a change in frequency. The notice will set out the date on which it is proposed the change will take effect.
• the Executive will request the successful tenderer to prepare a Financial Impact Assessment (FIA) of the proposed changes to a required timescale. (If the Executive requests the successful tenderer to prepare a FIA and the proposed change is not approved and implemented, the Executive will pay the successful tenderer its reasonable agreed costs in preparing the assessment).
• the successful tenderer will then notify the Executive of any preliminary response to any proposal/FIA e.g. higher operating and leasing costs and/or passenger throughput/revenue.
• this would then be followed by a meeting between the Executive and the successful tenderer to discuss the proposal. The Executive and successful tenderer would then agree an Implementation Plan for the relevant service change
• any consequential change in subsidy will be based on the principle of a No Net Loss No Net Gain Regime. For example, if the increase in costs is not outweighed by higher revenues then the Executive will have to compensate the successful tenderer to ensure any estimated profit level on that particular route does not decline. In the event that the successful tenderer is required to take some risk then some net gain may also be acceptable and this will be negotiated in the light of the circumstances at the time.
• it should be noted that the Executive shall be entitled at any stage to withdraw and not enter any negotiations if it involves, in the Executive's opinion, either a reduction in the level of service or the quality of any aspect of the service.

2.5.44 Technical submissions should include a clear statement confirming that the tenderer accepts these requirements.

Monitoring and Audit

2.5.45 The Executive intends to place a contract to assist with monitoring of the CHFS contract. Compliance testing and arrangements for monitoring performance in line with the service specification will be finalised as part of the contract terms between the Executive and the successful tenderer. The terms will ensure that the level of service contracted for is provided and that other key elements of the quality of service and financial monitoring are in place. In addition, Annexes 20 and 23 describes the information that the successful tenderer must provide for the purposes of monitoring performance. Tenderers must include, as part of their technical submission, a clear statement confirming that they will provide the information required in Annexes 20 and 23 and include detailed proposals setting out how they intend to satisfy this requirement.

2.5.46 In accordance with EU rules and terms and conditions of contract, the successful tenderer will be required to provide detailed monitoring and accounting information on a route-by-route basis.

Disputes

2.5.47 The contract will make provision for a dispute resolution mechanism and will involve an escalation and arbitration process. Decisions of the Arbiter will be final and binding and not subject to appeal. The successful tenderer will be squarely responsible for continued delivery of the service while any dispute is under consideration.

Transfer or Assignation

2.5.48 The successful tenderer shall not transfer or assign the contract or any part thereof without the approval, in writing, of the Scottish Ministers. Neither shall the successful tenderer sub contract the contract or any part thereof without the approval, in writing, of the Scottish Ministers.

Termination

2.5.49 Scottish Ministers may terminate the contract for breach. The detailed terms and conditions of contract will set out those items that the Executive considers are repudiatory breaches. There will be links to the performance-monitoring regime and to the dispute resolution procedure.

Consultation between the Executive, VesCo and the Successful Tenderer

2.5.50 A system of consultation will be established between VesCo and the successful tenderer which will detail a schedule of meetings to address relevant issues. The successful tenderer will be required to attend these. VesCo will provide more detailed information to tenderers about the nature and frequency of these meetings. Topics will include the following:

• capital expenditure requirements
• replacement of existing vessels / provision of additional vessels
• harbour management matters
• any other relevant matter

2.5.51 Technical submissions should include a clear statement ( Schedule 7) confirming that the tenderer accepts this requirement and details setting out how the tenderer intends to address it.

2.5.52 VesCo will take account of the successful tenderer's views but will not be bound by them. VesCo's programme of capital expenditure will be subject to the approval of Scottish Ministers.

2.5.53 The Executive also plans research during the early part of the contract in relation to route and vessel development. This research will inform the service specification for future contracts. The successful tenderer must attend and contribute to meetings in relation to this research, if asked to do so by the Executive. The Executive will meet the reasonable costs incurred by the successful tenderer in complying with this requirement. Technical submissions should include a clear statement confirming that the tenderer accepts this requirement.

2.5.54 The successful tenderer will also be required to attend regular meetings with the Executive as part of the monitoring and management of the contract. Normally this would comprise monthly meetings between relevant members of the successful tenderer's management team and the Scottish Executive contract sponsorship team.

2.6 Constraints, Risks and other Key Points to note

2.6.1 The main legal and financial constraints on the key elements of service provision are outlined in this document.

2.6.2 There are legal requirements and constraints on the way in which the Executive can provide shipping subsidies. These include European legislation about assistance to shipping operators, referred to in section 1.3 of Schedule 1. These guidelines and legislation affect, among other areas, the duration of the contract (six years) and the criteria for selection of an operator. EU State aids rules require that the successful tenderer will be the one which requires the lowest financial compensation ¹⁵ to provide the services required to meet Service Contracts. The Executive is also subject to financial constraints due to the resources available for subsidising these services.

2.6.3 Tenderers must be acutely aware of the high importance the Executive attaches to the safety of the CHFS ferry services and to the requirement for the successful tenderer to meet all applicable safety requirements for vessels, passengers and crew in operating the services. While specific safety requirements are set out in Schedule 3, it is for the successful tenderer to ensure that it complies with all relevant national and international legislation, Conventions, Directives, as well as Industry Codes and Standards. Technical submissions should include a clear statement ( Schedule 7) confirming that the tenderer accepts this requirement.

2.6.4 The Executive has analysed a number of the main risks associated with the tender exercise and has allocated the way in which these would be expected to fall between the successful tenderer, the Executive and VesCo. Annex 24 lists some of the risks and the Executive's indicative analysis of their allocation. However, this table does not represent a commitment by the Executive to accept certain risks. Further details will be provided at costed bids stage and it will be the final agreement of the terms and conditions that will establish the details of the commitments of the Executive and the successful tenderer.

2.7 New Vessel and Infrastructure Proposals (for information only)

2.7.1 The following developments do not from part of the contract. They are not necessarily inclusive and the Executive may add further or not provide them at all or to any timescale under the contract. Rather, they will be dealt with, as relevant, through the change mechanism described above. We have included them only so that tenderers are aware of possible developments:

• Scottish Ministers have instructed CalMac to build a new sheltered water vessel to serve the Wemyss Bay-Rothesay route. This will be 62 pcu/450 pax configuration and is expected to be ready to bring into service in Spring 2005. This will replace one of the Streakers currently serving the Wemyss Bay-Rothesay route.
• subject to all of the necessary legal consents being secured it is intended that a second linkspan is to be built at Oban to ease congestion in relation to the Oban services (where three or four major vessels operate from one linkspan). A new terminal building is being built and improved marshalling facilities are also planned.

2.7.2 Tenderers will also wish to note that the Partnership is committed to reviewing tolled bridges in Scotland. There will be a two phase review of tolled bridges. The first phase will deal with existing tolls and be completed in 2004. The second phase will include an examination of the broader issues, relating to the management, operation and maintenance of the tolled bridges and will be completed by the summer of 2005. The Executive is committed to ending the discredited toll regime on the Skye Bridge and we believe we can achieve our goal by the end of this year.

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